Topic: Rule of Law in the Regulatory State

[Weisshaupt]

Rule of Law in the Regulatory State

“Rule of law” and “regulation” are dangerous Big Vague Words. The rule of law is so morally powerful that the worst tyrants go through the motions. Stalin bothered with show trials. Putin put Pussy Riot on trial, and then they were “legally” convicted of and jailed for the crime of ”hooliganism.” Even Henry the Eighth had trials before chopping heads. Is this not rule of law?

No, of course, but it’s worth reminding ourselves why not as we think about bureaucracies.

“Rule of law” ultimately is a set of restrictions to keep the state from using its awesome power of coercion to force your political support. If you oppose Castro, you go to prison. If you opposed Herbert Hoover, could you still run a business? Sure. If you oppose President Obama, or the future President Hilary Clinton can you do so? If you oppose the polices of one of their regulatory agencies, now powers unto themselves, or speak out against the leaders of those agencies, can you do so? If you support candidates with unpopular positions, can you still get the regulatory approvals you need? It’s not so clear. That is our danger.

“Rule of law” is not just about the existence of written laws, and the superficial mechanics of trials, judges, lawyers, ad sentences. Rule of law lies deep in the details of how those institutions work. Do you have the right to counsel, the right to question witnesses, the right to discovery, the right to appeal, and so forth. Like laws, what matters about regulation, both in its economic efficiency and in its insulation from politics, is not its presence but its character and operation.

Regulators write rules too. They fine you, close down your business, send you to jail, or merely harass you with endless requests, based on apparently written rules. We need criteria to think about whether “rule of law” applies to this regulatory process. Here are some suggestions.

    Rule vs. Discretion?
    Simple/precise or vague/complex?
    Knowable rules vs. ex-post prosecutions?
    Permission or rule book?
    Plain text or fixers?
    Enforced commonly or arbitrarily?
    Right to discovery and challenge decisions.
    Right to appeal.
    Insulation from political process.
    Speed vs. delay.
    Consultation, consent of the governed.

One by one:

    Rule vs. Discretion?

This is really a central distinction. Does the regulation, in operation, function as a clear rule? Or is it simply an excuse for the regulator to impose his or her will on the regulated firm or person? Sometimes discretion is explicit. Sometimes discretion comes in the application of a rule book thousands of pages long with multiple contradictory and vague rules.

    Simple/precise or vague/complex?

Regulations can be simple and precise — even if silly. “Any structure must be set back six feet from the property line” is simple and precise. Or the regulation can be long, vague and complex. “The firm shall not engage in abusive practices.”

Many regulations go on for hundreds of pages. Long, vague, and complex is a central ingredient which gives the appearance of rules but amounts to discretion.

    Knowable rules vs. ex-post prosecutions?

Is the rule book knowable ex ante? Or is it, in application, simply a device for ex-post prosecutions. Insider trading rules are, at present, a good example of the latter. The definition of “insider” varies over time, and there is really little hope for a firm to read a coherent rule book to know what is and is not allowed. Much better to stay on good terms with the regulator.

    Permission or rule book?

In one kind of regulation, there is a rule book. If you follow the rule book, you’re ok. You go ahead and do what you want to do. In much regulation, however, you have to ask for permission from the regulator, and that permission includes a lot of discretion. Environmental review is a good example.

    Plain text or fixers?

Can a normal person read the plain text of the rule, and understand what action is allowed or not? Or is the rule so complex that specialists are required to understand the rule, and the regulatory agency’s current interpretation of the rule? In particular, are specialists with internal agency contacts necessary, or specialists who used to work at the agency?

As a private pilot, I often bristle at the FAA’s mindless bureaucracy and the plain silliness of much of their regulation. But to their credit, there is a strong culture that the plain text of the rule counts, and each pilot should read the rules and know what they mean. That is a system much harder to misuse. Financial, banking, environmental, health care, and housing regulation stand on the opposite end of the spectrum.

    Enforced commonly or arbitrarily?

Regulations that are seldom enforced, but then used occasionally to impose enormous penalties are clearly more open to political abuse. If Americans commit three felonies a day in “conspiracy,” internet use, endangered species, wetlands, or employment and immigration regulations (just to start), but one in a hundred thousand is ever prosecuted, just who gets prosecuted is obviously ripe for abuse.

    Right to discovery, see evidence, and challenge decisions.

Do you have the right to know how a regulatory agency decided your case? Step by step, what assumptions, calculations, or interpretations did it use? Often not, and even in high profile cases.

For example, the Wall Street Journal’s coverage of Met Life’s “systemic” designation reports

    The feds ..still refuse to say exactly which [threats] make MetLife a systemic risk or what specific changes the company could make to avoid presenting such a risk.

and continues

    …MetLife says that..the government’s decision is based on mere speculation and “undisclosed evidentiary material.”

Since the case is still being decided, the point here is not the correctness or not of these charges. But the charges are a clear example of the kind of regulation that can go wrong

(In fact, the miracle of the MetLife case is that the company had the chutzpah to sue. They are taking a big bet that FSOC doesn’t believe in revenge.)

    Right to appeal.

And not just to the same agency that makes the decision! In law, the right to appeal is central. In regulation, the right to appeal is often only to appeal to the same agency that made the decision. The Chevron doctrine severely limits your ability to appeal regulatory decisions (and the regulations themselves) to any outside entity. As an example, continuing the above MetLife coverage,

    The … stability council “lacks any separation in its legislative, investigative, prosecutorial, and adjudicative functions.” That combined with MetLife’s inability to see the full record on which the decision was based made it “impossible” to get a fair hearing.

As in law, secret evidence, secret decisions, secret testimony; and legislature, prosecutor, judge, jury, and executioner all rolled in to one are classic ingredients for subverting rule of law. And, eventually, for using the machinery of law to silence political opposition.

    Insulation from political process.

There are many structures in place to try to ensure the “independence” of independent agencies. There is also a tension that we live in a democracy, so independent agencies can’t be too independent if they have great discretionary power.

These important structures try to limit explicit party politics’ use of the regulatory state. They are less successful at limiting the bureaucracy’s use of its regulatory power to prop up its own separate fiefdom. They are also less successful at limiting unwitting political cooperation. When vast majorities of the bureaucracy belong to one political party, when government employee unions funnel unwitting contributions to candidates of that party, and when strong ideological currents link decisions across agencies, explicit cooperation is less necessary.

And, though it was ever thus, the enormous expansion of the size, power, and discretion of the regulatory state makes the insulation structures more important, just as they are falling apart.

    Speed vs. delay.

The regulatory process can take years, and a canny regulator need not explicitly rule against a political foe. Delay is enough. Lois Lerner herself didn’t deny applications. She just endlessly delayed them. The FDA similarly sits on applications, sometimes for decades.

A central element of a new Magna Carta for regulatory agencies should be a right to speedy decision. If a decision is not rendered in, say, 6 months,  it is approved.

    Consultation, consent of the governed.

The process by which rules are written needs to be reformed. Congress writes empowering legislation, usually vague and expansive. The agencies undertake their own process for rule writing. They usually invite comment from interested parties, but are typically free to ignore it when they wish. We are as supplicants before the King, asking for his benevolent treatment.

And that was before the current transformation. As exemplified by the EPA’s decision to brand carbon dioxide a pollutant (coverage here), to extend the definition of “navigable waters” to pretty much every puddle, HHS’ many reinterpretations of the ACA, and the Education Department’s “Dear Colleague” letters, even the barely-constrained rule-making process now proceeds beyond its previous mild legal and consultative constraints.

A structure with more formal representation, and more formal rights to draft the rules that govern us, is more in keeping with the parliamentary lessons of the Rule of Law tradition.

The ACA, AKA Obamacare

The ACA is 2,700 pages, and the subsidiary regulation is so convoluted that there is an active debate on the page count of its actual regulations. Justice Scalia invoked the eighth amendment against cruel and unusual punishment as protection against actually reading it.

The Heritage foundation counted 1,327 waivers. Clearly, someone needing a discretionary waiver shouldn’t be a big critic of HHS or the law.

The cartelization of health insurance and health care under the ACA is almost a textbook case of corporatism. The big hospitals doctors, and insurers get a protected small cartel. In return for political support for the ACA, HHS, state exchanges, and so on. And, the ACA itself being an intensely partisan question, that support already leaks into major party politics.

Writing on the consolidation of health insurance into two or three big companies, the Wall Street Journal quotes Aetna CEO Mark Bertolini that the federal regulators “happen to be, for most of us now, our largest customer,” adding

    “So there is a relationship you need to figure out there if you’re going to have a sustained positive relationship with your biggest customer. And we can all take our own political point of view of whether it’s right or wrong, but in the end-analysis, they’re paying us a lot of money and they have a right to give us some insight into how they think we should run our business.”

The Journal opined that “such domestication is part of ObamaCare’s goal of political control,” echoing my fear.

United Health wanted to join the California exchange Covered California. Many areas of California have only one or two insurers now, so competition and choice are clearly needed. But participation in the exchange needs prior regulatory approval, and United Health was denied. Why? The LA Times wrote

    Peter Lee, executive director of Covered California, said established insurers shouldn't be free to come in right away. Those insurers, he said, should not be allowed to undercut rivals who stepped up at the start and made significant investments to sign up 1.2 million Californians during the first open enrollment.

and quoting Lee further,

    We think the health plans that helped make California a national model should not be in essence undercut by plans that sat on the sidelines.

You can’t ask for a clearer example of a regulator, using discretionary power to cartelize his industry, protect incumbent profits, and punish a business for failure to support political objectives. He said nothing about United Health’s ability to serve California customers, or to abide by any regulation.

Again in California, reported by the Wall Street Journal, the Daughters of Charity Health system wanted to sell six insolvent hospitals to Prime, which agreed to take on their debt and and a $300 million pension liabilities. Under state law, Attorney General Kamala Harris must approve nonprofit hospital sales or acquisitions, with only a vague guideline that such transactions must be “in the public interest.” But only four of Prime’s 15 California hospitals are unionized, so the Service Employees International Union was against the merger. Ms. Harris torpedoed the merger, despite a positive report form her own staff.

Was the event a political cave to unions, as represented by the Journal? Perhaps; perhaps not. What matters here is that it certainly could be, as the Attorney General has enormous discretionary power to approve or disapprove hospital mergers. Hospitals are well advised to stay on her good side.

3. A Magna Carta for the Regulatory State
The power of the regulatory state has increased steadily. And it lacks many of the checks and balances that give us some “rule of law” in the legal system. (A system which has its own troubles.) The clear danger we face is the use of regulation for political control. Each industry gets carved up into a few compliant oligopolies. And the threat of severe penalties, with little of the standard rule-of-law recourse, keeps people and businesses in line and supporting the political organization or party that controls the agencies.

We’re not there yet. The Koch Brothers are not on the EPA “crucifixion” list, an investigation of every plant they own, or probes by the DOJ, NLRB, EEOC, OSHA, and so on and so on. They could be. The Hoover institution retains its tax-exempt status despite writings such as this one. A free media still exists, and I can read all my horror stories in the morning Wall Street Journal, and the free (for now) internet.

But we are getting there. What stops it from happening? A tree ripe for picking will be picked.

The easy answers are too easy. “Get rid of regulations” is true, but simplistic like “get rid of laws.” What we learned in the 800 years since Magna Carta is that the character of law, and the detailed structures of its operation that matter. Law is good, as it protects citizens from arbitrary power.

It is time for a Magna Carta for the regulatory state. Regulations need to be made in a way that obeys my earlier bullet list. People need the rights to challenge regulators — to see the evidence against them, to challenge decisions, to appeal decisions. Yes, this means in court. Everyone hates lawyers, except when they need one.

People need a right to speedy decision. A “habeas corpus” for regulation would work — if any decision has not been rendered in 6 months, it is automatically in your favor.

A return to economic growth depends on reforming the regulatory state. But the deeper and perhaps more important preservation of our political freedom depends on it even more.

Read, as they say, the whole thing.

[Glock32]

I think perhaps we should borrow aspects of the parliamentary system, with MPs serving as ministers elsewhere in the government.  Instead of "civil service" appointees heading up these agencies, why not a member of Congress?  It would be part of their congressional responsibilities.  That would also introduce some badly needed direct influence from voters.

[Weisshaupt]

I think perhaps we should borrow aspects of the parliamentary system, with MPs serving as ministers elsewhere in the government.  Instead of "civil service" appointees heading up these agencies, why not a member of Congress?  It would be part of their congressional responsibilities.  That would also introduce some badly needed direct influence from voters.

Personally I don't see a need for these agencies at the Federal Level at all. If it isn't important enough for congress to pass a law themselves, then it isn't important enough for the Federal government to be doing it.  Some standardization across states can be beneficial, and having bodies that create and publish such standards might be appropriate for the Federal government, but such standards should be non-binding - to be adopted in part or in total by each State according to their own needs and situations. Further, if we need to have these regulatory bodies,  they must be prevented from having their own enforcement arms, and from running their own tribunals. IF the EPA, or IRS, etc come after you , you should be entitled to the same protection of trial by jury, protection from seizure, speedy trial etc that you have in cases of criminal law. If the IRS doesn't think you paid your taxes, before they can do ANYTHING to your bank accounts or wages,  they must win in a regular court of law, and satisfy a jury of wrong doing.  Made too many cash deposits, then prove the cash is part of a criminal operation before a jury - such trial to be held within 30 days of freezing an account.   But we have none of the protections we should have.

[Libertas]

That is a dizzying read...but it is comprehensive and worth the effort.  And I had almost forgotten that Pebble Mine schmuckery by the EPA, same game plan for Keystone too...and the recent Gold King mine is the latest in full-frontal tyranny perpetrated by rogue government bureaucrats!

As to the discussion above by Glock & Weisshaupt, the Founders never envisioned, never even contemplated there would be a need for a large over-bearing Federal government (They properly feared a strong central government and anything that could concentrate too much power into so few [or one] persons hands!  It's why they created the Republican Representative model and all the checks and balances!), they wanted the states to take the lead in most everything, the Federal government existing only to manage the national day to day needs of conducting foreign policy and if necessary the defense of the nation.  And the early "cabinet" Secretaries were the stewards to manage executive policy in adherence to Constitutional limitation and legislative instruction.  There is just no going back to that basic idea, certainly not using the corrupt and terminal system of today.

[Glock32]

The trouble with the bureaucracy is that it's officially non-partisan, but in reality is anything but.  It's a similar situation with the media.  In some ways that makes both of those entities more dangerous than any elected official, because at least an elected official is explicitly partisan.  Lois Lerner is no exception in the bureaucracy.  I would bet you at least 75% of bureaucrats at her level are Left wing activists.  They take decades to work themselves up to that level, and multiple Republican administrations can come and go during that time.  That just underscores how untouchable the bureaucracy is, and a big part of why nothing ever seems to change even when we "win."

[Pandora]

The trouble with the bureaucracy is that it's officially non-partisan, but in reality is anything but.  It's a similar situation with the media.  In some ways that makes both of those entities more dangerous than any elected official, because at least an elected official is explicitly partisan.  Lois Lerner is no exception in the bureaucracy.  I would bet you at least 75% of bureaucrats at her level are Left wing activists.  They take decades to work themselves up to that level, and multiple Republican administrations can come and go during that time.  That just underscores how untouchable the bureaucracy is, and a big part of why nothing ever seems to change even when we "win."

Paraphrasing something I read elsewhere:  Democrats get into power; Republicans take office.

[whimsicalmamapig]

An unelected, unionized, partisan bureacracy sounds rather unconstitutional to me or at least a major conflict of interest. Perhaps if we could just eliminate this situation it would allow for the beginning of the death of the great leviathan.

[Libertas]

An unelected, unionized, partisan bureacracy sounds rather unconstitutional to me or at least a major conflict of interest. Perhaps if we could just eliminate this situation it would allow for the beginning of the death of the great leviathan.

Amen.

I just don't think we can get there...in this system.

[whimsicalmamapig]

I totally agree, a change of that nature is not one for the ballot box, it is a major realignment of the society. It could be done over the same long process used to install it, but we were not paying attention to their agenda, but the reversal of this would be noticed by those being disenfranchised. perhaps, like removing that bandaid affixed to the scab, one big yank is what we need.

[Libertas]

And I am that one big Yank...heh!

I need more me's!   

[Pandora]

Gotcher mini-"me" right here!

[Libertas]