The new Executive Order will promote American exports, economic growth, and job creation by helping to eliminate unnecessary regulatory differences between the United States and other countries and by making sure that we do not create new ones.

As I discuss in an op-ed in today’s Wall Street Journal, the order makes clear that in eliminating such differences, we will respect domestic law and will not compromise U.S. priorities and prerogatives. Even while insisting on those priorities and prerogatives, we can eliminate pointless red tape. Today’s global economy relies on supply chains that cross national borders (sometimes more than once), and different regulatory requirements in different countries can significantly increase costs for companies doing business abroad. As the President’s Jobs Council recently noted, international regulatory cooperation canreduce these costs and help American businesses access foreign markets. Such cooperation can also help U.S. regulators more effectively protect the environment and the health and safety of the American people.

Sunstein also made the case for the E.O. in the WSJ, providing an example of the sort of harmonization the Administration has in mind:

Today’s action builds on many other administration efforts to eliminate unjustified regulatory costs and to reduce burdens by promoting international regulatory cooperation.

One example: The U.S. has long required employers to use warning symbols to inform employees of potential safety hazards. Other nations require warnings, too, but in many cases they mandate the use of different symbols. The result of the disparate requirements is to impose pointless costs on those who do business in more than one nation. Why should chemical manufacturers have to create multiple labels for the same product in different countries?

To address this problem, the Department of Labor recently harmonized its labeling requirements with those of many nations around the world, a reform that is projected to save American businesses more than $475 million each year.

This E.O. seems to be a fairly standard good-government reform that could reduce regulatory burdens and facilitate compliance without altering substantive protections. SO it should be non-controversial, right? Apparently not. As RegBlog reports, Public Citizen argues the E.O. is a “smokescreen for deregulation.” It’s almost as if any measure to reduce regulatory costs is necessarily suspect, in and of itself.

The Center for Progressive Reform, a pro-regulatory group, is likewise suspicious. It attacked the Administrative Conference of the United States for co-sponsoring an event yesterday with the U.S. Chamber of Commerce on “Next Steps & Implementation of ACUS Recommendations on: Incorporation by Reference & International Regulatory Cooperation.” Even though the ACUS has urged greater attention to international coordination, teaming with the Chamber to support a discussion of the issue is apparently “over the line” because of the Chamber’s “enormously destructive crusade against regulation.” And yet this “crusade” was nowhere in evidence on the conference program. Most of the speakers at the event were federal government officials, including Sunstein who spoke about the new E.O. (The agenda is here.) Indeed, other than C. Boyden Gray, former U.S. ambassador to the E.U., and one Chamber official who moderated one panel, there was no one on the program who could be plausibly characterized as “anti-regulation,” and neither the Chamber nor Ambassador Gray is much of an anti-regulatory zealot. So the ACUS’ offense seemed to be no more than encouraging discussion of its own recommendations with those who are affected by regulatory harmonization. Sometimes it seems groups that self-identify as “pro-consumer” or “pro-environment” could be more accurately described as “pro-regulation.”

The Court as a whole considered the case for the first time at last Friday’s Conference.  (It was originally on for the December 9 Conference, but on December 5, at least one of the Justices asked the respondents — who had waived their right to file a brief in opposition — to file a response.)  The Court has relisted it for this Friday’s Conference, suggesting that at least some of the Justices are taking a close look at it.  The briefs in the case are available through the link above.

1. The Necessary and Proper Clause. “Unlike other purchase mandates, including every hypothetical at oral argument on Tuesday, the minimum coverage provision prevents the unraveling of a market that Congress has clear authority to regulate.” This is no limitation at all. Under modern doctrine, Congress has the authority to regulate almost every market. If Congress enacts regulations that are extremely harmful to that market, such as imposing price controls (a/k/a “community rating”) or requiring sellers to sell products at far below cost to some customers (e.g., “guaranteed issue”) then the market will probably “unravel” (that is, the companies will lose so much money that they go out of business). So to prevent the companies from being destroyed, Congress forces other consumers to buy products from those companies at vastly excessive prices (e.g., $5,000 for an individual policy for a health 35-year-old whose actuarial expenditures for health care of all sorts during a year is $845).

So Siegel’s argument is really an anti-limiting principle: if Congress imposes ruinous price controls on  a market, to help favored consumers, then Congress can try to save the market’s producers by mandating that disfavored consumers buy overpriced products from those producers.

2. The Commerce Clause. “The minimum coverage provision addresses economic problems, not merely social problems that do not involve markets.” This is true, and is, as Siegel points out, a distinction from Lopez (carrying guns) and Morrison (gender-related violence). However, it’s pretty clear under long-established doctrine that the Commerce power can be used to address “social problems that do not involve markets.” E.g., Caminetti v. United States, 242 U.S. 470 (1917) (Congress can use the interstate commerce power to criminalize interstate travel by people intending to engage in non-commercial extra-marital sex); Champion v. Ames, 188 U.S. 321 (1903) (“What clause can be cited which, in any degree, countenances the suggestion that one may, of right, carry or cause to be carried from one state to another that which will harm the public morals?”). Personally, I thought that Chief Justice Fuller’s dissent in Champion had the better argument, but Champion and its progeny are well-established precedents, so proposed limiting principle number two does not work, unless we overrule a century of precedent.

Besides that, #2 does not work for the same reason that #1 does not work. If Congress forced food producers to sell products to some consumers at far below cost, then Congress could (for economic, not social/moral motives) force other consumers to buy overpriced food, so that the producers do not go bankrupt. Imagine that instead of the Food Stamp program (general tax revenue given to 1/6 of the U.S. population to help them buy food), Congress forced grocery stores to sell food to poor people at far below cost. And instead of raising taxes in order to give money to the grocery stores to make up for their losses on the coerced sales, Congress instead forced other consumers to spend thousands of dollars on food from those same stores, which would be sold to those consumers at far above its free market price.

If there’s a limiting principle, the only one seems to be that in order to mandate the purchase of a product, Congress must also inflict some other harm on the producers of the product, which the coerced purchases will ameliorate.

3. “Collective action failures and interstate externalities impede the ability of the states to guarantee access to health insurance, prevent adverse selection, and prevent cost shifting by acting on their own. Insurers operate in multiple states and have fled from states that guarantee access to states that do not.” This is really a policy argument for Obamacare. Hypothesizing that it’s a good policy argument, it’s not a limiting principle. That the advocates of Obamacare think that the policy arguments for their mandate is better than the policy arguments for other mandates does not provide courts with a limiting principle of law.

Moreover, the policy argument is wrong. It’s true that some insurance companies stop operating in states where the law forces them to sell insurance to legislatively-favored purchasers at far below the actuarial cost of the insurance, with the  legislature failing to compensate the companies for the enormous resulting losses. If you make it difficult for companies to operate profitably in your state, then they will eventually stop operating in your state. It’s not a collective action problem; it’s just a problem of several states enacting laws that prevent companies from covering their costs. Any state with guaranteed issue and other price controls can solve the problem immediately by simply using tax revenues pay compensation for the subsidy which the state law forces the insurance companies to provide to certain consumers.

Obamacare is a particularly weak case in which to argue that the federal government is riding the rescue of the states to solve a collective action problem. For the first time in American history, a majority of the States are suing to ask that a federal law be declared unconstitutional. These states are taking collective action to stop the federal government from imposing a problem on them.

4. The Tax Power. “[T]he minimum coverage provision respects the limits on the tax power. The difference between a tax and a penalty is the difference between the minimum coverage provision and a required payment of say, $10,000 that has a scienter requirement and increases with each month that an individual remains uninsured. Unlike the minimum coverage provision, such an exaction would be so coercive that it would raise little or no revenue. It would thus be beyond the scope of the tax power.”

Let’s put aside the fact that, however ingenious the progressive professoriate’s  tax arguments have been, the chances that the individual mandate is going to be upheld under the tax power appear to be at most 1% greater than the chance the Buddy Roemer will be the next President of the United States.

Presuming that Siegel’s tax justification for the individual mandate is valid, it is an anti-limiting principle. Congress can indeed mandate eating hamburgers, smoking, not smoking, not eating hamburgers, or anything else Congress wants to mandate, as long as Congress sets the “tax” at level that will raise a moderate amount of revenue, does not include a scienter requirement, and does not make the “tax” increase each month that the individual refuses to do what Congress mandates.

5. Liberty. “The minimum coverage provision does not violate any individual rights, including bodily integrity and substantive due process more generally. These rights would be violated by a mandate to eat broccoli or exercise a certain amount.” Pointing to the existence of the Bill of Rights is not an example of a limiting principle for an enumerated federal power. The Constitution does not say that Congress may do whatever it wishes as long as the Bill of Rights protections of Liberty are not violated. Ordering New York State to take title to low-level radioactive waste generated within the state (New York v. United States) did not violate any person’s substantive due process rights, but the order was nonetheless unconstitutional because it exceeded Congress’s powers. The federal Gun-Free School Zones Act did not, as applied, violate the Second Amendment rights of Alfonso Lopez, who was carrying the gun to deliver it to a criminal gang. Yet the Act still exceeded Congress’s commerce power. A limiting principle must limit the exercise of the power itself, not merely point out that the Bill of Rights protects some islands of Liberty which the infinitely vast sea of federal power might not cover.

Finally, I certainly agree with Professor Siegel that the Fifth Amendment’s liberty guarantee (and its 14th Amendment analogue for the states) should be interpreted to say that no American government can order people to consume a certain amount of healthy food, or to exercise. But there is no major case that is on point for this. The argument for a new unenumerated right “not to eat the minimum quantity of nutritious food which government scientists have  determined is essential for good health” is something that would have to be built almost entirely by extrapolation from cases that have nothing to do with food. I hope that courts would accept the argument; but if the political culture ever moved far enough so that a nutrition mandate could pass a legislature, I’m not as certain as Prof. Siegel that courts would overturn the mandate. The odds of winning a case against a nutrition mandate will be better if the judges who decide that case have not grown up in a nation where a federal health control mandate is the law of the land.

Hoteliers must have pool lifts to provide disabled people equal access to pools and whirlpools, or at least have a plan in place to acquire a lift. If they don’t, they face possible civil penalties of as much as $55,000.

There are about 51,000 hotels, according to the American Hotel & Lodging Association, and most have pools.

The lifts are required by regulations made in 2010 stemming from the Americans With Disabilities Act, a civil rights law that bans discrimination based on disability.

With just days before the deadline, some hotels are considering shutting their pools or whirlpools to avoid penalties or possible lawsuits.

Cato’s Walter Olson has more here.

My posts on the REINS Act are indexed here.

REINS is a controversial bill, in part because it effectively limits the delegation of broad regulatory authority to federal agencies, but to read some critics, REINS would usher in an anti-regulatory armageddon. While I support the legislation, for reasons detailed in these posts (and summarized in this NRO piece), I recognize that there are reasonable arguments to be made on the other side. What’s so interesting watching this debate, however, is how many opponents refuse to make them, relying instead on inaccurate and fanciful characterizations of the bill. It’s telling when opponents of legislation are unable or unwilling to describe it accurately when making their case.

To take one example, US PIRG’s Ed Mierzwinski argues that the REINS Act would lead to unsafe toys on the market and emasculate the CPSC.

One bill, the REINS Act, would not only allow but require congressional meddling in the implementation of all public health and safety rules. A single member of Congress, at the behest of some powerful special interest or campaign contributor, could block the public database, block science-based lead standards for children’s products, block crib safety rules or any number of protections that provide a safer consumer marketplace.

The idea that REINS would allow a single member of Congress to block new regulations is a common claim. The Center for American Progress makes it here. It’s also false. The bill expressly limits debate, waives procedural objections, and requires a vote on the merits. Under REINS, if some members of Congress wish to block needed safety rules at the behest of a special interest, they will have to do it out in the open, and will only succeed if they can win a majority vote. How could this undermine legislative accountability? It’s true REINS requires that legislative approval occur within a set period of time, but it also ensures the vote occurs before the deadline expires.

The NYT worries REINS will “undermine the executive branch.” Really. Why? Because it will be too easy for a majority in either House to prevent a President from rewriting regulatory requirements. The NYT also argues REINS is “deeply undemocratic.” Got that? Requiring legislative votes on major regulations — that two or three of the most consequential regulatory decisions made by federal agencies — is “undemocratic,” whereas allowing agencies to rely upon decades-old statutes to remake industries and reconfigure whole sectors of the economy is not.

The REINS Act would dramatically alter how major rules are made, but it would do so by making sure the people’s representatives have a greater say on — and greater accountability for — the major regulatory actions our federal government takes. If the public wants greater regulation of environmental or other problems, REINS won’t stand in the way. Only if the public is skeptical of such regulations, or unconcerned by legislative vetoes of proposed rules, will REINS slow down the adoption of new rules. And perhaps that’s what the REINS Act’s opponents are truly afraid of: A regulatory process that more accurately reflects what the public wants.

UPDATE: For unhinged commentary on the REINS Act, it’s hard to do better than this piece which, among other things, claims the Act would “essentially return environmental regulation to 1890s standards – when corporations polluted with impunity.” That’s an astounding charge given that REINS a) does not have any effect whatsoever to regulations already on the books and b) would apply equally to deregulatory initiatives, such as any effort by a future President to repeal existing regulations.

Sen. Collins op-ed opens with a storied example of regulatory excess:

Last year, the Food and Drug Administration issued a warning to a company that sells packaged walnuts. Believe it or not, the federal government claimed the walnuts were being marketed as a drug. So Washington ordered the company to stop telling consumers about the health benefits of walnuts.

It is true that the FDA sent a warning letter to Diamond Food in 2010 accusing the company of marketing walnuts as a drug by highlighting the potential health benefits of omega-3 fatty acids. But adopting a regulatory moratorium would not do anything to help Diamond Food, nor prevent the FDA from taking similar actions in the future. As the FDA made clear, the warning letter was based upon Diamond Food’s alleged violation of existing regulations already on the books. No new rules, major or otherwise, were necessary for the federal government to go after Diamond Food’s marketing claims, and a regulatory moratorium would not keep the FDA at bay going forward.

The other alleged example of regulatory excess cited by Sen. Collins is the EPA’s proposed rule governing emissions from industrial boilers.

Meanwhile, the Environmental Protection Agency proposed a new rule on fossil-fuel emissions from boilers that—by the EPA’s own admission—would cost the private sector billions of dollars and thousands of jobs. The owner of a small business in Maine told me the proposed rule would require him to scrap a new, $300,000 wood waste boiler he recently installed. . . .

According to a recent study by the American Forest & Paper Association, if the rule went into effect as written it could, along with other pending regulations, cause 36 American pulp and paper mills to close. That would put more than 20,000 Americans out of work—18% of that industry’s work force.

Once those mills close, the businesses that supply them also would be forced to lay off workers. Estimates are that nearly 90,000 Americans would lose their jobs, and wages would drop by $4 billion—just because of over-regulation.

Even if one assumes all of Sen. Collins claims about the boiler rule are true, I don’t see how this supports her call for a regulatory moratorium. If the proposed boiler rule would impose disproportionate economic costs in relation to its environmental benefits, as Sen. Collins suggests, then it is a bad idea, and should not be adopted at all. Delaying the rule’s adoption by a year would not make it a better deal. Conversely, if the proposed boiler rule is a good idea, it’s not self-evident that delaying adoption of the rule — and the inevitable litigation that would follow — does much to improve the regulatory climate for investment. Insofar as regulatory uncertainty plays a role in discouraging economic investment, it would make more sense for Sen. Collins to support legislation that either kills the rule altogether. Indeed, legislation directly enacting the boiler rule into law would do more to reduce regulatory uncertainty than Sen. Collins’ proposed moratorium.

According to Sen. Collins:

American businesses need pro-growth economic policies that will end the uncertainty and kick-start hiring and investment. American workers need policies that will get them off the sidelines and back on the job.

Fair enough, but this requires more than a temporary halt to new rules. Kicking the regulatory can down the road does not reduce uncertainty, nor does it improve the investment climate. If Sen. Collins thinks existing and proposed regulations are unduly restricting job creation and economic growth, she should set her planned moratorium aside and deal with the problem directly: Identifying those rules that are unnecessary or excessive and targeting them for elimination. Instead she has proposed a solution that is more symbol than substance.

Viewed together, these decisions suggest the Obama Administration is making a conscious effort to moderate its regulatory policy, particularly in the environmental area. If so, why would this be? Could it possibly make political sense for the Obama Administration to acquiesce to GOP attacks on environmental protection? After all, as Ann Carlson noted at Legal Planet, environmental protection remains popular,and polls suggest relatively few Americans believe environmental regulation costs jobs (though it can).

It is inconceivable that the Obama Administration believes that these moves will placate Tea Party opposition or win plaudits from across the aisle. But that’s not the point. Nor is aggregate popular opinion on these questions particularly relevant to the political calculus. Rather, as I noted in comments to Ann Carlson’s post, what matters are the views of marginal voters and, in particular, marginal voters in politically significant states. That is, the opinions of moderates and independents in Ohio, Pennsylvania and West Virginia matter more than the views of environmental activists in San Francisco or Washington, D.C.

Viewed in this light, the political rationale of these decisions is easier to understand. Insofar as these moves are politically inspired, it would appear the aim is to placate those potential constituencies in battleground states most sensitive to the costs of new and impending environmental regulations. Think coal and power company unions, small businesses in what remains of the industrial midwest, and moderate Democrats in state and local governments whose enthusiasm is essential for voter turnout. These sorts of groups are more likely to notice whether the Obama Administration appears to be moderating the EPA’s regulatory zeal or tightening the screws, and such issues may influence their votes.  There’s a reason Joe Manchin (D-WV) ran against environmental regulation, and the White House is certainly understands where proposed environmental rules would have the greatest economic effect.

None of this means that the Obama Administration’s decisions were politically driven — I have no deep inside sources — or that they are politically wise.  The ozone NAAQS decision was almost certainly political, but the latest decision may well have been influenced by other concerns.  But if the Obama Administration is deliberately trimming the EPA’s sails, the political calculus is easy to understand.

ACA Section 1401 provides that eligible taxpayers may receive income tax credits for purchase of insurance “through an Exchange established by the State under Section 1311.” Section 1311 calls upon states to establish health insurance exchanges. It does not provide for the federal government to create health care exchanges. Rather, a separate provision of the act, Section 1321, provides that if a state does not “elect” to create an exchange that meets federal requirements, the federal government shall then “establish and operate” an exchange. Thus, under a plain reading of the text, the ACA only provides for tax credits for state-run exchanges, and if states fail to create exchanges, there are no tax credits for insurance bought on a federally run exchange.

This is potentially significant for several reasons. The individual mandate requires all Americans to purchase health insurance. Even if the mandate is successful at reducing adverse selection, health insurance premiums are still expected to rise due to other provisions in the law.   Higher premiums could make it difficult for many Americans to comply with the mandate. For this reason, Congress not only called upon states to create exchanges, it also authorized tax credits to offset the cost of health insurance premiums for those with incomes between 100 and 400 percent of the poverty level.   But if these tax credits are only available for insurance purchased through state-based exchanges, many will be left high-and-dry in states that don’t create their own exchanges — and this could be a big problem. According to one recent report, only ten states had passed legislation to create qualifying exchanges through August 2011. (See also here.)

As David Hogberg reports in IBD, this has led some to believe the limitation of tax credits to state-based exchanges is a mistake. Under this theory, Congress meant to provide tax credits for any exchange-purchased insurance, because Congress wanted lower-income individuals to be able to purchase health insurance (and comply with the mandate). This may be true. As Vanderbilt’s James Blumstein tells IBD (and I discussed in this paper), the exchange-related provisions of the law were not written all-that-carefully. Nonetheless, federal agencies lack the authority to unilaterally revise statutory mistakes. (A point Cato’s Michael Cannon also makes here.)  Congress may have wanted to make tax credits more widely available — just as it may have wanted those making less than poverty-level income to be eligible for exchanges as well — but that is not what Congress did.

The IRS may be inclined to argue that the failure to include a reference to federally run exchanges or Section 1321 in Section 1401 was a “scrivener’s error” that should be disregarded. But this is a difficult argument to make in this case for several reasons. First, a “scrivener’s error” is supposed to be that – a purely clerical error that could be attributed to a failed transcription or something of that sort. An example would be mistaking the relevant subsection in a statutory cross-reference – say mistaking “(i)” for “(ii)” or “Section 36B(B)(I)(b)” for “Section 36(B)(I)(b),” or screwing up punctuation. The alleged error here is more significant, however. Not only did Congress forget to include any reference to Section 1321, it also expressly stated that the tax credits were for insurance purchased through “an Exchange established by the State.” So a legislator reviewing the relevant language could not claim that they did not realize the statutory cross-reference excluded federal exchanges because the clear text of the statute does as well. In other words, any legislator who actually bothered to read the bill before voting would have seen the limitation.

Another problem for the “scrivener’s error” argument is that it is usually dependent on showing that it is implausible, and not merely unlikely, that the statutory provisions were a mistake. As the Supreme Court explained in U.S. Nat. Bank of Oregon v. Independent Ins. Agents of America, Inc., 508 U.S. 439 (1993), this will be shown in the “unusual” case in which there is “overwhelming evidence from the structure, language, and subject matter of the law” that Congress could not have consciously adopted the language in the statute. Similarly, in Appalachian Power Co. v. EPA, 249 F.3d 1032 (D.C. Cir. 2001), the D.C. Circuit explained that:

We will not . . . invoke this rule to ratify an interpretation that abrogates the enacted statutory text absent an extraordinarily convincing justification because . . . the court’s role is not to correct the text so that it better serves the statute’s purposes, for it is the function of the political branches not only to define the goals but also to choose the means for reaching them. . . . Therefore, for the [agency] to avoid a literal interpretation . . ., it must show either that, as a matter of historical fact, Congress did not mean what it appears to have said, or that, as a matter of logic and statutory structure, it almost surely could not have meant it. [internal quotations and citations omitted]

Given what’s in the ACA, this is a showing that the IRS and HHS would have a hard time making. While it is certainly plausible – perhaps even likely – that many in Congress wanted tax credits for the purchase of health insurance to be broadly available, there is also ample evidence that the ACA was designed to induce states to create exchanges of their own. For example, Section 1311 directs states to create exchanges. Further, as Blumstein notes, under the ACA the federal government could sue to force a state to create an exchange. As in other policy areas, the federal government can’t force states to comply, so it uses a combination of positive and negative incentives – in this case, subsidies for creating exchanges and the threat of a federally run exchange if a state does not create one on its own. In this context, limiting the availability of tax credits to insurance purchased in state-run exchanges can be seen as just an added inducement. Much like the Clean Air Act threatens states with the loss of highway funds if they fail to adopt sufficiently stringent pollution control programs, the ACA as written threatens states with the loss of tax credits for state residents if they do not create an exchange. Such a policy may not be wise or fair – and may undermine the goal of getting more people insured – but it takes far more than that to justify ignoring a statute’s plain text.

Neither the IRS nor HHS has addressed these concerns as far as I’m aware, nor has anyone else. I’ll certainly do a follow-up post if such arguments are out there. I noted that the ACA’s text limits subsidies to state exchanges at a conference on health care reform and the states last fall, and no one suggested I was in error, but that does not mean I am right. It’s also possible there’s some other overlooked provision of the ACA that could be used to solve this problem. If so, I couldn’t find it, but I’ll also post an update if such a provision is found. In the meantime, the limitation of tax credits to those who purchase their insurance in state-run exchanges could be unwelcome news to those in the majority of states yet to create exchanges of their own.

I should also note that I have not addressed what would happen if the IRS were to just go ahead and finalize regulations providing for tax credits beyond those authorized by the ACA’s text. Under such a scenario, standing to challenge the IRS’ action in court would certainly be a big issue. As a general matter, there is no standing for a taxpayer to challenge a tax benefit conferred upon someone else. But the IRS, like all federal agencies, has an independent obligation to comply with the law, and I do not know of anyone who has argued that the IRS may create tax credits at will just because it thinks that’s what Congress meant to do and such actions are not easily challengable in court. Just imagine the sorts of mischief such a doctrine could unleash.

Part of the problem in evaluating the costs of regulation is that there have been few systematic studies of such costs after regulations are imposed.

“Regulations are put on the books and largely stay there unexamined,” said Michael Greenstone, an economist at the Massachusetts Institute of Technology. “This is part of the reason that these debates about regulations have a Groundhog’s Day quality to them.”

Mr. Greenstone has conducted one of the few studies that actually measure job losses related to environmental rules. In researching the amendments to the Clean Air Act that affected polluting plants from 1972 and 1987, he found that those companies lost almost 600,000 jobs compared with what would have happened without the regulations.

But Mr. Greenstone has also conducted research showing that clean air regulations have reduced infant mortality and increased housing prices, and indeed many economists argue that job losses should not be considered in isolation. They say the costs of regulations are dwarfed by the gains in lengthened lives, reduced hospitalizations and other health benefits, and by economic gains like the improvement to the real estate market.

The NYT story did not provide links to Prof. Greenstone’s research, so I added them above. For those interested in the subject, a third paper by Greenstone looks at the extent to which air quality improvements can be attributed to the federal Clean Air Act. Prof. Greenstone is, among other things, the former chief economist of President Obama’s Council of Economic Advisers.

The story closes with a quote from current Obama Administration “regulatory czar” Cass Sunstein, who’s in leave from the Harvard Law School.

“My view is that the Republican claim that ‘job-killing regulation’ is a redundancy is as ridiculous as the left-wing view that ‘job-killing regulation’ is an oxymoron,” said Cass Sunstein, head of the White House Office of Information and Regulatory Affairs. “Both are silly political claims that have no place in a serious discussion.”

I agree with Professor Sunstein that the debate over whether regulation kills or creates jobs is not very productive. As a general matter, when a firm is forced to spend money complying with environmental regulations, such expenditures are likely to take the place of more productive investments.  Some of these expenditures may benefit other firms, such as those which sell products or services that assist with compliance, but are still unlikely to offset the negative effects of the initial diversion.  As a consequence, whether or not there are net economic benefits from environmental regulation will usually depend on the magnitude and nature of the other benefits the regulation provides — benefits that may or may not translate into job creation. Even if an environmental regulation generates net economic benefits, this does not necessarily translate into increased employment.  But whatever the effect of regulation on jobs, and even assuming the effect could be predicted with any accuracy, this is only one factor to be weighed when considering the desirability of regulation.

UPDATE: Matt Kahn notes that Clean Air Act regulation is not uniform across the nation, and insofar as regulations adopted pursuant to that law have reduced employment in some parts of the country, this has been offset by greater job creation elsewhere.  Indeed, this differential effect is one reason why the Clean Air Act was amended to impose greater restrictions on “cleaner” areas, as B. Peter Pashigian documented in a 1985 paper.

Another interesting aspect of Clean Air Act regulation, relevant to President Obama’s recent decision, is that the economic consequences of tightening a NAAQS may be severe, but they are anything but immediate.  Once a new NAAQS is finalized, state and local governments have many years to develop plans to come into compliance, so no direct regulatory burden would have been imposed on private firms for many years.  Thus whatever the merits of withdrawing the NAAQS revision proposal, and deferring any tightening to 2013, it will not do much for the economy in 2011, except insofar as one believes the prospects of tighter environmental regulations in the future is a significant impediment to investment and job-creation in the present.

The text of the  President’s statement released by the White House is below the jump.

Over the last two and half years, my administration, under the leadership of EPA Administrator Lisa Jackson, has taken some of the strongest actions since the enactment of the Clean Air Act four decades ago to protect our environment and the health of our families from air pollution. From reducing mercury and other toxic air pollution from outdated power plants to doubling the fuel efficiency of our cars and trucks, the historic steps we’ve taken will save tens of thousands of lives each year, remove over a billion tons of pollution from our air, and produce hundreds of billions of dollars in benefits for the American people.

At the same time, I have continued to underscore the importance of reducing regulatory burdens and regulatory uncertainty, particularly as our economy continues to recover. With that in mind, and after careful consideration, I have requested that Administrator Jackson withdraw the draft Ozone National Ambient Air Quality Standards at this time. Work is already underway to update a 2006 review of the science that will result in the reconsideration of the ozone standard in 2013. Ultimately, I did not support asking state and local governments to begin implementing a new standard that will soon be reconsidered.

I want to be clear: my commitment and the commitment of my administration to protecting public health and the environment is unwavering. I will continue to stand with the hardworking men and women at the EPA as they strive every day to hold polluters accountable and protect our families from harmful pollution. And my administration will continue to vigorously oppose efforts to weaken EPA’s authority under the Clean Air Act or dismantle the progress we have made.

The traditional case for private competitive markets goes back to Adam Smith (and even earlier writers). It is mainly based on abundant evidence that most of the time competitive markets work quite well, usually much better than government alternatives. The main reason is not that individuals in the private sector are intrinsically better than government bureaucrats and politicians, but rather that competitive pressures discipline market behavior much more effectively than government actions.

The lesson is that it is crucial to consider whether government regulations and laws are likely to improve rather than worsen the performance of private markets. In an article “Competition and Democracy” published more than 50 years ago, I said “monopoly and other imperfections are at least as important, and perhaps substantially more so, in the political sector as in the marketplace. . . . Does the existence of market imperfections justify government intervention? The answer would be no, if the imperfections in government behavior were greater than those in the market.” . . .

Government regulations and laws are obviously essential to any well-functioning economy. Still, when the performance of markets is compared systematically to government alternatives, markets usually come out looking pretty darn good.

At one level this argument is self-evident — no set of institutional arrangements operates as well in practice as in theory — but it is regularly forgotten in policy debates. As Becker observes:

The widespread demand after the financial crisis for radical modifications to capitalism typically paid little attention to whether in fact proposed government substitutes would do better, rather than worse, than markets.

Indeed, when many policymakers see a potential market failure, they almost inevitably call for government intervention to restrain market excesses. Yet when government fails, interestingly enough, the proposed policy solution is often the same: more government intervention. The point here is not that government intervention is never justified — Becker himself believes some government regulations are “essential” — but that it must be justified with serious comparative analysis considers the possibility government may fail as well.

If Kysar’s ultimate concern is for a greater recognition of and reaching toward the environmental values he holds dear, his complaint should be less with CBA and utilitarian calculus than with the centralized regulatory structure in which they are used to impose one-size-fits-all policies. In selecting the wrong target, Kysar embarks on a journey to the wrong destination. Were we to take Kysar’s advice, we would no longer “regulate from nowhere,” but we would still regulate from nowhere good.

The full text of the review has just been made available online here.

In agreeing to hear the case, the Supreme Court accepted cert on the following two questions: 1. May petitioners seek pre-enforcement judicial review of the administrative compliance order pursuant to the Administrative Procedure Act, 5 U. S. C. §704? 2. If not, does petitioners’ inability to seek pre-enforcement judicial review of the administrative compliance order violate their rights under the Due Process Clause? While this case focuses on the Clean Water Act’s ACO regime, the cert grant makes clear that it will have broader application to laws that employ similar enforcement mechanisms, including the Clean Air Act and Superfund. In particular, this case could have a significant influence on regulatory enforcement, where traditional notions of Due Process often get short shrift.

Richard Frank and Holly Doremus have more on Sackett at Legal Planet, as do the folks at the Pacific Legal Foundation who brought the case.

I received this week a letter from the EPA regarding a letter I’ve written them about some of their rules and they wrote here, quote, “Thus, the agency is prohibited from considering costs in setting these standards.” Now in business we do a cost benefit analysis before we make policy changes. Washington should as well.

Rep. Hartzler is right to be concerned about the consequences of tightening the ozone NAAQS any further, but the EPA can’t be faulted for not considering costs. As EPA Assistant Administrator Gina McCarthy explained in a letter to Rep. Hartzler:

Under the Clean Air Act, decisions regarding the National Ambient Air Quality Standards (NAAQS) must be based solely on an evaluation of the scientific evidence as it pertains to health and environmental effects. Thus, the agency is prohibited from considering costs in setting the NAAQS. But cost can be – and is – considered in developing the control strategies to meet the standards (i.e. during the implementation phase).

McCarthy is correct. The EPA has been prohibited from considering costs when establishing NAAQS for the past three decades. The U.S. Court of Appeals for the D.C. Circuit first interpreted the Clean Air Act to preclude such cost consideration in Lead Industries Association v. EPA in 1980, and the Supreme Court reaffirmed this interpretation of the Act in Whitman v. American Trucking Associations in 2001. As noted regulatory zealot Justice Scalia explained for a nearly unanimous court:

Section 109(b)(1) instructs the EPA to set primary ambient air quality standards “the attainment and maintenance of which … are requisite to protect the public health” with “an adequate margin of safety.” 42 U.S.C. § 7409(b)(1). Were it not for the hundreds of pages of briefing respondents have submitted on the issue, one would have thought it fairly clear that this text does not permit the EPA to consider costs in setting the standards. The language, as one scholar has noted, “is absolute.” D. Currie, Air Pollution: Federal Law and Analysis 4—15 (1981). The EPA, “based on” the information about health effects contained in the technical “criteria” documents compiled under §108(a)(2), 42 U.S.C. § 7408(a)(2), is to identify the maximum airborne concentration of a pollutant that the public health can tolerate, decrease the concentration to provide an “adequate” margin of safety, and set the standard at that level. Nowhere are the costs of achieving such a standard made part of that initial calculation.

One may quarrel with Justice Scalia’s interpretation of the Clean Air Act — I, for one, did some work for parties advocating a different interpretation in this litigation — but it is the law of the land, and the EPA is not to be faulted for following the law. If members of Congress do not like this, they have but one solution: Amending the Act.

This is not an isolated example. The EPA is frequently attacked for doing what they are required to do by existing federal statutes or judicial interpretations thereof. Numerous members of Congress and outside groups have accused the EPA of a “power grab” for proposing to regulate greenhouse gas emissions under the Clean Air Act. The EPA’s GHG regulations will be quite costly and extensive, while producing minimal environmental benefits (as I detail here). Yet such regulation is clearly authorized, if not required, by the Supreme Court’s decision in Massachusetts v. EPA.

Senator Sherrod Brown (D-OH) wrote the EPA in February urging it to “reconsider” the regulation of GHG emissions from utilities and other large stationary sources under the Clean Air Act. Senator Brown may have avoided the inflammatory rhetoric of his Republican colleagues, but his error was the same. Given the EPA’s conclusion that GHG emissions contribute to global warming that may be reasonably anticipated to threaten health or welfare, it has no choice but to impose the regulatory measures to which Senator Brown objects. Here again, there are plenty of reasons to oppose the EPA’s initiatives, but the EPA is not to blame. Rather, the Agency is doing what the Clean Air Act (as interpreted by the courts) requires.

If members of Congress disapprove of the EPA’s emission-control initiatives, they need to take responsibility for the laws on the books, and not scapegoat the EPA. However overzealous the EPA may be sometimes, most of its recent Clean Air Act initiatives are plainly authorized, if not required, under federal law. Indeed if the agency is to be faulted, it is for rewriting the Act to allow for less expansive regulation than the statutory text clearly requires. It was Congress that delegated expansive regulatory authority to the EPA, and Congress that enacted provisions making some regulatory initiatives obligatory. If members of Congress don’t like that, it is up to Congress to fix it.

Let’s take it from the top. Professor Sachs begins his article with a question:

Imagine if the board of a Fortune 500 company required the company’s vice presidents to obtain board approval before implementing any decision. Now imagine that the board is highly polarized and its members are at each other’s throats. A recipe for corporate gridlock, right?

Of course it does. And if this were analogous to what the REINS Act proposes, it would be a bad idea. But it’s not. Imagine instead if the board of a Fortune 500 company required the company’s vice presidents to obtain board approval before implementing the two or three percent of decisions that are most important and potentially costly. That’s not so crazy, is it?  We would expect a board to take an interest in such major decisions and not simply delegate them to underlings or agents.  That is all the REINS Act would do.  The approval requirement only applies to “major rules,” which are those rules expected to cost over $100 million annually and represent less than five percent of the federal regulations promulgated in any given year.

Sachs continues:

Since the Progressive era, U.S. administrative law has operated from the premise that agency action should be somewhat insulated from political pressure and horse trading. The REINS Act would mark a radical abandonment of that goal, an attempt to correct an oversight problem that doesn’t even exist. It would deliver a body blow to the already-sluggish agency rulemaking process by politicizing it and entangling it in the congressional morass. And, over the long term, it would do serious damage to American health and prosperity—stopping agencies from promulgating important rules that, among other things, would help prevent bank failures, ensure the safety of the food we eat, and control toxic pollution in the air we breathe.

This paragraph contains numerous misleading or outdated premises. The Progressive era ideal of administrative law was that experts should be insulated from political pressure because this would free them to arrive at the objective “right” answer to any given policy problem. This idea has long been discredited. Sachs argues that “agency decisions . . ., ideally, should be data-driven technical judgments,” but I don’t think he means it (and I suspect it would come as a surprise to his colleagues at the Center for Progressive Reform).  Indeed, it is one of the ideas many progressives are rightly critical of cost-benefit analysis. Regulations cannot be made on expertise alone, as regulatory measures inevitably involve the adoption of value judgments that are inherently subjective and inevitably political – as they should be.  Whether to allow a one-in-a-million or one-in-eight-hundred-thousand risk and how to punish irresponsible industries are not “technical” decisions but policy choices, and no level of technical expertise ensure the “right” answer is reached.

As for what the REINS Act would do, it would not introduce any more horse trading than already occurs in the regulatory process, but it would force it into the open. The Act is careful to eliminate the opportunity for Congressional interference in the details of rules. All it asks is that Congress confirm that an agency action is consistent with current Congressional intent. Nor would the Act subject regulations to the “congressional morass” because the Act prevents interest group factions from bottling up resolutions of approval in committee or using any of the other legislative tricks that can hold up legislation.

But would the Act “stop[] agencies from promulgating important rules”? Only if one believes that such rules are unpopular, that corporate power is so extensive that it can control a majority in either house, and that “important rules” could only ever be adopted by attenuating political accountability for such regulatory decisions. Sachs may believe this, I do not.  Indeed, as David Schoenbrod’s publications on delegation have shown, Congressional delegation to regulatory agencies is often about serving corporate interests by delegating authority to captured agencies or insulating regulatory decisions from public view.  It’s much harder for a member of Congress to be a corporate lackey if he has to do it in public view.

Sachs argues the Act is unnecessary because the regulatory state is not “out of control.” For evidence he cites OMB estimates that the benefits of federal regulations outweigh their costs. This may be so, but it is irrelevant. That a government analysis concludes that given rule is net beneficial does not, by itself, mean that it is good policy.  Regulations commandeer private resources, forcing them to be allocated to one purpose or another. Sometimes this is necessary or wise, but a simple cost-benefit analysis alone does not demonstrate this fact, nor can such studies show that one regulatory approach was superior to available alternatives. We cannot afford every net beneficial idea, any more than the federal government or a private firm can afford to make every investment that is expected to yield a positive return. Moreover, cost-benefit analyses are notoriously manipulable and imprecise, as progressives like to remind us, and they cannot account for normative concerns, such as the distribution or other impact of rules.

Sachs raises the specter that the REINS Act would enable a single house to silently veto a new regulation by simply failing to act. It is true that the REINS Act requires Congress to pass a joint resolution of approval within 70 legislative days, but the Act also prevents either house from refusing to Act within that time period. Resolutions are automatically introduced upon a major rule’s completion and automatically discharged from committee to the floor. Such resolutions are privileged motions and debate is limited. So it is true that one house would have “veto” power, but that veto would have to be exercised with a majority vote.

Comparing the process for approving REINS Act resolutions with enacting traditional legislation, appropriations bills, or even judicial nominations, as Sachs does, is highly misleading, as the traditional means of legislative delay are available in all these instances, but not under the REINS Act. Even were each house of Congress to debate the maximum two hours of floor debate to every major rule, a year’s worth of major rules could be considered in a few weeks. In reality, however, many major rules would be expedited, much like many judicial nominations are once they (finally) reach the floor. Many major rules are uncontroversial or overwhelmingly popular and, as such, are unlikely to be delayed.
Despite all this, Sachs argues the “likely” results of the REINS Act would be “devastating” – again based on the assumption that a majority of either house would not support necessary rules.

Sachs also fears the bases upon which members of Congress would base their votes:

unlike a federal agency, which will always have to publicly justify its decisions with scientific and economic data, Congress could use the REINS Act to kill rules on virtually any premise it wanted—and do so behind closed doors or without much substantive debate. Politics, not sound policy, could rule the day.

The claim that Congress could kill a rule “behind closed doors” is simply false, as the REINS Act forces resolutions to the floor, and an up-or-down vote in the body of the whole is far more open and transparent than the typical regulatory agency proceeding. But could Congress kill a regulation on “any premise it wanted”? Yes, and this is how it should be. The EPA’s scientific analysis may help quantify the relative cancer risk posed by differing contaminant levels in drinking water, but it can’t tell us which level is the “right” one. In short, it can’t definitively answer how “safe” is “safe enough,” or what level of safety is justified by what level of cost. Again, this is a policy judgment for which those who authorize such regulations – the Congress – should be responsible and accountable.

I don’t disagree with all of Sachs’ piece.  In noting that Congress is the ultimate source of all regulatory power, Sachs implicitly acknowledges that most constitutional objections to the REINS Act are without foundation.   Although I disagree with his analysis, it is to Sachs’ credit that he focuses his efforts on questions of policy, and does not erect faux concerns about the law’s constitutionality.

The ultimate effect of the REINS Act will not be to ensure more or less regulation — it would apply to a future President’s major deregulatory initiatives as well — but to ensure a closer fit between popular preferences and federal regulatory measures.  The more one reads of REINS Act critics, this seems to be what they are actually afraid of.

The purpose of the REINS Act is to prevent the imposition of major regulatory initiatives without Congressional approval. Because of Congress’ long history of delegating broad rulemaking authority to administrative agencies, there is relatively little legislative control of, and accountability for, the regulations agencies impose on the American people. The best way to ensure greater legislative accountability is to require members of Congress to vote “yea” or “nay” on new major rules. This will prevent unpopular rules from being adopted, but also ensure that Congress is accountable for those new major rules that are imposed. If the public wants more regulatory protections in particular areas – and it may well – the REINS Act will not stand in the way. Environmentalist groups and progressive academics see the REINS Act a bit differently. See, for instance this post by the NRDC’s David Goldston or this article from The New Republic by Noah Sachs.

This post on the ACS Blog by University of Michigan law professor David Uhlmann is representative of the arguments being made against the REINS Act, but they are not particularly persuasive. Uhlmann labels the REINS Act “a cynical attempt to block further environmental, public health, and safety protections,” and yet makes few substantive arguments against it.  Throughout the post he insinuates that industry groups will be able to block regulations in in Congress the same way they block substantive bills, but Uhlmann never quite makes this claim because he can’t.  The REINS Act creates an expedited legislative procedure that prevents concentrated minority interests from blocking resolutions of approval.  It ensures a straight up-or-down vote on the floor, so industry can only block a regulation if it can command a majority in at least one house of Congress.

Uhlmann begins noting some of the most significant safety and environmental measures adopted in the past several decades. “It is unlikely that any of the health and safety gains we have enjoyed would have been possible” had the REINS Act been the law. This is a striking claim – it is “unlikely” we would have “any of the health and safety gains we have enjoyed” – and one that is readily refutable.

First, the REINS Act only applies to regulations, not the statutory requirements. So every statutorily mandated measure to improve health and safety, such as the federal vehicle emission standards or the CFC phaseout Congress enacted into law, would have been completely unaffected by the REINS Act. Second, Uhlmann’s claim, as applied to regulations, could only be true if a) all of the relevant regulatory measures that produced meaningful health and safety gains were among the less-than five percent of federal regulations issued each year that qualify as “major” rules; and b) none of these measures could have obtained majority support in Congress. To state the underlying premises is to refute them. Major rules are not the only source of “health and safety gains,” and not all major rules are so unpopular that they could not survive straight-up-or-down votes in Congress.   Again, it’s worth remembering that under the REINS Act, resolutions of approval cannot be held, stalled, or filibustered, and an up-or-down vote in the body of the whole is required.)

Uhlmann’s argument is further undermined by some of his own examples. It is true that “the indelible image of the Cuyahoga River on fire, which burned as it passed through Cleveland during the 1960′s, is now a distant memory,” but federal regulation had nothing to do with. As I have documented at length, industrial river fires were once rather common, on the Cuyahoga and elsewhere. By the 1960s, however, this is a problem that had been solved due to a combination of state, local, and private action. The federal government banned lead from gasoline, but as former NRDC attorney David Schoenbrod has argued (see, e.g. here), the practice of legislative delegation made this take longer than necessary. Had Congress been forced to take greater responsibility for measures to control lead pollution, the phaseout would likely have occurred much earlier.

Uhlmann’s central claim is that it would be terrible to let Congress decide whether to impose federal regulations on the private sector.

Do we want the Congress, with all of its partisan influences, to be the arbiter of sound science and best practices in areas as complex as toxicology, engineering, ecology, and pharmacology? Do we believe that we would have more efficient and more effective regulation if we empowered Congress, rather than scientists and engineers, to decide fundamental questions about environmental protection, public health, and motor vehicle safety?

This misses the point. The question is not whether we would have “more efficient and more effective regulation” but whether we would have regulations that more closely follow the value preferences of the American people. Existing regulatory decisions are not made by “scientists and engineers” who have regulatory authority due to their independent expertise, but by executive and independent agencies that are headed by political appointees who are granted regulatory authority by Congress. Their regulatory decisions are informed by scientific and technical information, but the ultimate regulatory choices are based on normative judgments – whether it is worth imposing X amount of costs for Y benefits, whether it is fair to impose particular costs, risks or burdens on particular segments of the population, whether environmental gains in one area are worth safety or environmental losses in another, and so on. These are legislative policy judgments for which legislators should be held accountable.

If environmental regulation is as popular as environmentalist groups claim, then there is really nothing to fear from the REINS Act. Even if the Act allows conservatives in Congress to vote down some new major rules – a plausible scenario now that Republicans control the House of Representatives – anti-regulatory members of Congress will suffer for opposing the regulatory protections Americans want. The REINS Act forces major regulatory decisions onto the floor of Congress, and into the open, which provides greater popular accountability than backroom dealmaking or the administrative rulemaking process.

Uhlmann also suggests that the REINS Act could have constitutional problems, but does not elaborate. Perhaps because the constitutional complaints border on the frivolous. As I explained in my Congressional testimony, the REINS Act is modeled on a proposal made by then-Judge Stephen Breyer as a constitutional alternative to the unicameral veto. Even those who think a Congressional approval requirement would be bad policy, such as Harvard Law’s Laurence Tribe, admit it would be constitutional.

Uhlmann ends his post with soaring rhetoric:

Our greatness as a Nation reflects our willingness to hold ourselves to high standards and to pursue lofty ideals, including the notion that we can be effective stewards of the environment and promote public health and safety in an economy that is flourishing.

I agree, and would add that holding ourselves to high standards means demanding that our elected representatives take a stand on major regulatory initiatives, cast their votes in the open, and be held accountable for the decisions they make which will effect our economic and environmental future. The REINS Act is a way to make this happen.

It was a rather short hearing, but the questioning was fairly aggressive, particularly from the Democrats on the subcommittee, including Rep. John Conyers, who attended as the ranking minority member of the committee even though he is not on the subcommittee. During the hearing I was struck by how many of the questions from members were premised on a misunderstanding (or misrepresentation) of the bill, both structurally and substantively. I recognize members of the minority may not have had the most time to prepare for a Monday hearing for which there had only been several days official notice. Nonetheless, I was surprised how unprepared  (or unwilling) some of the committee seemed to be to address the bill on its own terms.  Perhaps I’ve just lived in Ohio too long.

Several members of the subcommittee suggested the REINS Act imposed unconstitutional constraints on executive power, particularly the executive’s responsibility to faithfully execute and enforce federal laws.  Therefore, they suggested, the REINS Act could conflict with Article II, Section 1 of the Constitution.  Set aside the curiosity of House Democrats, including Rep. Conyers, defending executive power.  This objection is based on a fundamental confusion about the nature of executive power. The power to “enforce” the laws – that is, the power to take action to see that legal rules are complied with – is distinct from the power to make the rules pursuant to a delegation of authority from Congress. So, for instance, the EPA’s power to impose fines or other sanctions on companies that violate emission limitations is distinct from the EPA’s power to set the emission limits. A requirement that federal regulatory agencies obtain Congressional approval before major rules may take effect requires Congressional assent for the latter, but has no effect on the former.

Sally Katzen raised a more nuanced separation of powers concern, but one that I also find unconvincing, and for largely the same reasons. She noted that under Morrison v. Olson, “a statute is suspect if it ‘involves an attempt by Congress to increase its own powers at the expense of the executive branch,’” and it is reasonable to see the REINS Act as an effort to constrain the executive. Just look at the bill’s full title and findings. The problem with her argument is that it ignores the distinction between executive and legislative functions.

The powers to investigate and prosecute are core executive functions. Any effort by Congress to limit such powers and aggrandize its own is problematic.  This point was made not only in Morrison v. Olson (in which the Court upheld the statute in question, despite its intrusion on executive power), but in other cases as well.  The executive power is distinct from the power to adopt legislative-type rules, however.  The latter is not a core executive function. Rather it is a quasi-legislative power that must be delegated by Congress. As the Supreme Court has stressed time and again (and as I noted in my testimony), federal agencies have no authority to promulgate regulations beyond that which has been given by Congress. And what Congress has given, it may take back. Restraining the exercise of such authority, whether by adopting rules for the exercise of regulatory authority (as under the Administrative Procedure Act or the Congressional Review Act) or limiting the scope of such authority is perfectly acceptable, so long as other Constitutional requirements (such as bicameralism and presentment) are satisfied. As the REINS Act satisfies such requirements, there is no problem. The REINS Act does not curtail executive power so much as it places limits on the legislative-like power delegated by Congress.

For more recent comments on the REINS Act, see David Zaring’s posts here and here.  I’ll have more to say on the Act, and the arguments for and against it, in the days to come.

The primary purpose of the Act is to ensure greater political accountability for major regulatory initiatives.  Federal regulatory agencies only have that power delegated them by Congress, but regulatory agencies are not always particularly responsive to Congressional concerns.  Nor are members of Congress always willing to take responsibility for how the power they have delegated gets exercised.  Requiring a straight up-or-down vote on new major regulations is a way to address both problems and the expedited procedures ensure that traditional legislative logjams and special interest obstruction won’t prevent consideration of significant regulatory initiatives.  This is why I believe the REINS Act is more about transparency and political accountability than anything else.

I have no idea whether the REINS Act has much hope of passage.  The bill was part of the Republican leadership’s “Pledge to America” and was just introduced in the House, where I would think its prospects are good.  The Senate presents a more significant challenge, as does the White House.  At present, most support for the REINS Act appears to come from those who believe federal regulation is out of control and needs to be restrained.  Given that the REINS Act does not offer a mechanism to bottle up regulations with holds, filibusters or other roadblocks, supporters have adopted the implicit assumption that federal agencies are engaged in more aggressive regulation than the public supports.  From what I’ve seen of the other side (and I have not seen much as of yet), some opposed to the REINS Act likewise assume that regulatory initiatives they would support could not command majorities in Congress.  I don’t know whether this assumption is accurate, but it would say something if there were to be widespread agreement that federal agencies are regulating in a manner the American people do not support.

Additional posts on this legislation, my testimony and the hearing will follow.

UPDATE: My testimony is available here.

This order requires that federal agencies ensure that regulations protect our safety, health and environment while promoting economic growth. And it orders a government-wide review of the rules already on the books to remove outdated regulations that stifle job creation and make our economy less competitive. It’s a review that will help bring order to regulations that have become a patchwork of overlapping rules, the result of tinkering by administrations and legislators of both parties and the influence of special interests in Washington over decades.

Where necessary, we won’t shy away from addressing obvious gaps: new safety rules for infant formula; procedures to stop preventable infections in hospitals; efforts to target chronic violators of workplace safety laws. But we are also making it our mission to root out regulations that conflict, that are not worth the cost, or that are just plain dumb.

For instance, the FDA has long considered saccharin, the artificial sweetener, safe for people to consume. Yet for years, the EPA made companies treat saccharin like other dangerous chemicals. Well, if it goes in your coffee, it is not hazardous waste. The EPA wisely eliminated this rule last month. . . .

We’re also getting rid of absurd and unnecessary paperwork requirements that waste time and money. We’re looking at the system as a whole to make sure we avoid excessive, inconsistent and redundant regulation. And finally, today I am directing federal agencies to do more to account for—and reduce—the burdens regulations may place on small businesses. Small firms drive growth and create most new jobs in this country. We need to make sure nothing stands in their way.

The Executive Order is here.  It reaffirms the basic principles outlined in President Clinton’s Executive Order 12866, issued in September 1993, and continues to require agencies to conduct cost-benefit analyses of proposed rules.  As noted in the President’s op-ed, it also requires agencies to engage in  ”retrospective analysis” of existing rules so as to accelerate the pace at which outdated regulations are revoked.  Specifically, it requires all agencies to develop a plan for such retrospective review within 120 days.  If the White House Office of Information and Regulatory Affairs ensures such reviews are meaningful, this could be a significant and positive step.

Flying to and from meetings this week at the Hoover Institution, I re-read David Skeel’s brand-new book, The New Financial Deal: Understanding the Dodd-Frank Act and Its (Unintended) Consequences (Wiley 2011), for a second time. I am even more impressed with this book the second time around, and I believe that it is one of the short list of essential books on the financial crisis and the regulatory aftermath. If you have any interest at all in these topics, this is a book to give serious consideration to reading.

The New Financial Deal is very far from being a dense, specialist book readable only by a lawyer, or law professor, or bankruptcy or finance expert. You might guess from the title that the book is a technically useful, but, for the general reader, impenetrable commentary on the Dodd-Frank bill. After all, the bill itself runs several thousand pages of impenetrable legislative language and Skeel himself one of the country’s leading bankruptcy scholars. It might seem from the title that it is simply an unpacking – at the technical level – of what Dodd-Frank says. Technical experts can benefit enormously from such unpacking, but not so much the policy person or general reader.

But it’s not that. On the contrary, Skeel’s considerable achievement in this book is to write accessibly and persuasively about the Dodd-Frank bill. Skeel is an an admirably clear and graceful writer on very difficult topics; it shows in the sentence by sentence prose, but equally in the overall organization and selection of topics for discussion. It doesn’t seek encyclopedic analysis of the zillions of legislative provisions, but instead makes a judicious and profoundly informed selection of the main achievements (and lack thereof) of the legislation. It then succeeds better than anything I’ve read on the topic of financial regulatory reform at placing this in the context of “political economy.”  I don’t mean politics in the day to day sense, but instead the interaction of these financial rules with the political process and the intended and unintended consequences.

II

Corporatism and Brandeis-ism, and the New Resolution Authority

The fundamental reform measures of the Dodd-Frank bill correspond roughly to financial institutions and financial markets. As to institutions, Skeel examines the new mechanisms designed to address systemic risk and the mechanisms created to address supervision of those institutions both before a crisis and after the effective failure of an institution.

The political economy of this institutional supervision is given as two alternative tendencies in American economic regulation. One is the “corporatist” tendency to create a quasi-partnership between government and the largest corporations, so that government is able to exercise in some respects closer control over those corporations but also bending them to its political will – but losing the distance between regulator and regulated that usually makes regulation more effective and more importantly ensuring that those privileged institutions will not be allowed to fail, at least if they play political ball.

The other is what Skeel astutely calls the “Brandeisian” tendency to break up the largest financial institutions so that they cannot become too big, or too interconnected, to fail. He notes – this might surprise some readers – that the New Deal, however empowering government in many matters, was essentially Brandeisian on the treatment of banks, insisting on confining them in function (Glass Steagall, etc.) and in many other ways.

The tendency adopted by both the Bush and Obama administrations has been firmly corporatist. It is evident in the definitions in the Dodd-Frank bill of institutions formally designated as systemically important, but also thereby too big to fail. The corporatist tendency is also a founding feature of Freddie and Fannie, and the extraordinarily politicized activities of both firms as integral to their business models – both buying off Congress and yet chanelling the political will of administrations and bureaucracies – is what Skeel suggests will result from the corporatist model, quite apart from the problem of a lack of moral hazard leading to a regime of permanent bailouts.  (Too big to fail is sometimes correctly criticized as really meaning “too systemically interconnected to fail.”  This is right, but that translates to systemically interconnected firms that, with respect to this feature of risk, are “cartelized” as though they were a gigantic, if loosely, connected enterprise.)

Skeel’s other fundamental point concerning institutions is that the nature of regulatory authority is essentially unconstrained discretion. It is not discretion of the kind exercised by a bankruptcy judge – gap filling and interpretive and discretion existing only for defined issues, existing yes, but within a tightly bound box. It is, instead, one single non-discretionary norm – that certain institutions are too big to fail – but that everything else is discretionary (I exaggerate some, but it helps illustrate the point). It is discretion not as filling in the inevitable gaps, but instead deliberately widening discretion to cover as much as possible. Though Skeel does not frame it this way, I would describe it as “discretion as strategic ambiguity” in which the rule of law is set aside for the purpose of making it impossible to know how you will be treated: allowed to fail in some cases, taken over in others, not allowed to fail and not taken over, with no standards for knowing what results in what. This is the criticism that Skeel makes of the new “resolution authority” for institutions.

Skeel’s deepest normative point, however, is that the regulatory model deliberately undermines the rule of law – particularly the careful establishment of judicial discretion contained with bankruptcy’s special rules of law. Instead, the Dodd-Frank model finds predictable rule-based regulation inapposite to the task at hand and seeks to displace it by deliberate uncertainty, on the one hand, infused with government’s political preferences, on the other. The political preferences are analyzed against one of the most provocative but also, to my mind, persuasive turns of Skeel’s argument: to show how the auto bailouts are the template for the future bailout regime of the financial institutions. The short, accessible yet expert discussion of the treatment of senior creditors in the auto bailouts is outstanding – but most important is how Skeel shows that this, rather than the earlier bailouts in the financial services industry, is the template for future behavior under Dodd-Frank. That, and Fannie and Freddie.

III

Discretion and the Rule of Law

With respect to the question of unfettered, radical discretion, Skeel spends less time, so I want to extend the analysis a bit. As Skeel notes, the exercise of radical discretion by Paulson, Geithner, and Bernanke in the financial crisis raises questions of executive power and authority. The discretionary response in the economic crisis naturally invites comparison to national security crises, with regards to the power of the executive. Eric Posner and Adrien Vermeule have offered the strongest view that in moments of emergency, the executive is and must be unconstrained and unbound, whether in national security or the economy.

To be clear here – what I say in this next two sections concerns the kinds of purely discretionary actions taken by Paulson, Geithner, and Bernanke at the moment of high crisis, what Davidoff and Zaring called “regulation by deal.”  Dodd-Frank, in Skeel’s view (as I read him and in mine), goes quite a ways toward enshrining that discretion, particularly with regard to what the alternative bankruptcy regime would do.  It’s also true that in response to criticism, the final version of the bill cut back some of the discretionary elements, along with some of the more obvious invitations to enshrine the bailout regime. I’m not suggesting that Dodd Frank enshrines pure discretion to the full extent that Paulson et al. exercised it during the most crucial moments of the crisis – but that it moves further that direction than back toward a rule of law based system of which bankruptcy is exemplary.

So, to return to Posner and Vermeule’s thesis, I do not think that it is true of the executive in matters of the economy, and it does seem to me that the comparison of national security and the economy in moment of crisis is fundamentally inapt.  Why?

In the briefest terms, the actors in the national security crisis are fundamentally enemies, to whom we want to do damage. In the economy, they are friends, whom we want for all our sakes to prosper, but within a structure of the rule of law; we wish them regulated, not harmed as such. It is a category mistake to treat together executive discretion to inflict harm intended to destroy people and an organization, and enforcing regulations that will allow a firm to “fail” and “be destroyed.” The nature of the discretion exercised is different because “destroy” means something utterly different in these two contexts; they are not both instances of executive discretion in a usefully similar way.

(Moreover, in a sense, the national security executive who seeks to harm the enemy is conceptually constrained in a way that is not true of the “national economy executive.” Why? Deliberately inflicting harm (I might change my mind about this) is inherently less discretionary than trying to do the right thing by the economy, which is supposed to be in the hands of largely private actors. One does not wage war upon those private economic actors; one stands above them to create a set of neutral market structures. If one gives the executive unfettered discretions at moments of meltdown, that discretion – because the nature of economic stability and recovery and growth is inherently more contested and contestable, legitimately so, by all these parties, than national security, which is a far more “one way” activity in time of crisis. But I might well change my mind about this.  Added:  I probably am changing my mind about this as I write, but I’ll leave it in nonetheless.)

IV

Permanent Radical Uncertainty and Strategic Ambiguity as Discretionary Policy

In describing Skeel’s complaint about discretion displacing the rule of law, the point is not that emergencies set aside rule of law rules, as Posner and Vermeule’s model both describes and urges. It is, rather, in the nature of the discretion sought.  In the economy, in order to influence parties with utter discretion, you want the absolutely contingent nature of that discretion known in advance; it is not a power that you invent in the emergency, it is, instead, that all parties know (in advance, from the very beginning, as a permanent feature of the system), that in an emergency, all bets are off.  It comes to the surface and asserts itself only in an emergency, but the basic norm authorizing this radical contingency behavior is known in advance.  That’s part of what gives it its bite, and the slogan might be … “Radical uncertainty – you can plan on it!”

Is it consistent with the rule of law to have a “rule of law” that applies in an emergency, although announced as a rule in advance, to say: “Here’s our rule … there is no rule”?  I don’t think so, at least not in matters of the economy.  National security raises different issues, as noted above and expanded in the discussion below.

So to summarize this observation.  It’s not that the executive must have power to respond, however circumstances might dictate. That is not the nature of financial crisis and its response. It is, rather, that the response to the crisis requires (and to be really successful requires long before the crisis, as a permanent contingency) radical uncertainty about how the executive will act. Induced, strategic uncertainty is the point. The problem, in other words, is not simply one of the “unfettered executive” or, in Posner and Vermeule’s words, the “executive unbound.”  It is that the nature of the discretion requires, in order to do what it is designed to do, that it be strategic and radical uncertainty, not merely at the moment of crisis, but permanently, during the times before, so as to constrain economic actors through fear of uncertainty.

In the case of national security, where the actors are the “bad guys,” this might often be a good idea. Uncertainty raises costs of action and makes advance planning much more difficult. Strategic ambiguity with regards to enemies is often a useful strategy. But the reason is that they are enemies, and the purpose is to inflict costs. In the case of the economy, the actors are different. They are friends. We want them to grow and flourish and do well – and to regulate them to those ends. The regulation is important, but the purpose is not to damage them. We don’t want uncertainty, because we want to lower costs to them as economic actors in making forward planning. The rule of law enables that by providing greater certainty – assuming, as is hard to assume now in important financial matters, that it will be followed in the future.

I am putting Skeel’s point differently from how he does and extending it in important ways. In particular, I am emphasizing the reliance upon strategic uncertainty as the regulatory mode. I believe he would agree, but would certainly be interested to get his reaction. In any case, national security and law theorists have many compelling reasons to read this book, alongside Posner and Vermeule’s Executive Unbound, about which I’ll write more once I’ve read the final version.

V

Markets and Derivatives

The book’s second main substantive topic is the regulation of markets, and in this he focuses upon derivatives. This is astute, because amidst the welter of financial markets one could talk about many things.  But by taking derivatives in a broad enough sense, and by narrowing upon the Dodd-Frank bill’s principal regulatory move with respect to them – exchange clearing – he gets to the heart of the markets questions.

Herein lies the central problem of Dodd-Frank in a nutshell, however. The bill establishes a requirement of both exchanges upon which standardized derivatives will be traded, and a clearinghouse requirement to centralize clearing and create a centralized counterparty to the trades. By itself, and leaving aside various arguments over ways in which it will raise costs to Main Street bread-and-butter hedgers, most (nearly everyone but Highly Interested Parties) would agree this is a sensible reform. But in the context of the overall provisions of Dodd-Frank, the effect, Skeel carefully explains, is likely to be creating more bailouts, not fewer.

As I think I said in some earlier post on this, a sensible reform on its own becomes, in the context of Dodd-Frank’s embrace of too big to fail, a doubling down on risk. It provides a central address to which players can send their risk, and know that the government will have to stand by the clearinghouse. The clearinghouse, intended to force market players to internalize their risks by forcing them to monitor one another and set realistic levels of margin and other insurance, instead offers yet another avenue to a government bailout. Instead of containing risk, the specific provisions of Dodd Frank, in the context of an embrace of too big to fail overall, leverage rather than reduce risk in the financial system.  Skeel’s discussion of how a clearinghouse failure might occur and what it would mean is sobering.

VI

The Consumer Protection Provisions and Securitization

Skeel is sympathetic to the consumer protection features of the bill – perhaps more so than one might have anticipated. I don’t understand those aspects very well, so I will skip over them. However, it is noteworthy that this section addresses the question of securitization as such, and primarily to make the point that modification of individual loans is darn hard to do, in part because of the technical process of “slicing and dicing” the mortgages underlying the rest of the edifice.

My colleague Anna Gelpern and Adam Levitin have analyzed this phenomenon in their “Frankenstein Mortgages” article.  The end result, as many news accounts have observed, is that only a tiny handful of mortgages have in fact been modified at the retail level. I believe Skeel’s basic observation about securitization can be summed up by saying that it is not, by itself, the leading problem. Far more consequential is the structure of derivatives built on top of (MBSs), but also used to insure (CDSs), all the rest. Which is to say, it is not the securitizations as such, but leverage (and a variety of other problems I skip over). However, securitization reform requires balancing off two considerations.  Diversification is an enormous benefit; but it does entail the loss of an actor with a clear incentive to deal with the underlying credit issues in issuance or monitoring. The requirement that the securitizer keep some skin in the game is a good one, even if it is hard to figure out how high to set the amount.

VII

La vida es sueno

The New Financial Deal is peppered throughout with important, but deliberately not sweeping, ways to improve the Dodd-Frank bill. These are crucially important, but I won’t try to run through them here.  Although one merits special attention – removing the special exemptions for derivatives in bankruptcy.  In general, as Skeel notes, his proposals for reform can be called “bankruptcy to the rescue.”

That perspective is consistent with something I should have observed back at the beginning – viz., the book’s starting point is that the “received wisdom” for how we came to have a financial crisis is dead wrong. The CW says that it began with the terrible mistake in not rescuing Lehman; everything fell apart from there.

Skeel says that this gets it exactly backwards – the real problem lay in rescuing Bear Stearns before it. Bear could easily have been handled in bankruptcy, he says, and the signal sent, and reinforced by regulators, that Lehman’s managers had to work out a sale immediately or face collapse with no rescue. This is a compelling re-conceiving of the usual wisdom, and one that I find persuasive.

I would add to Skeel’s account that the regulators were themselves living in a bubble, in a dream. As Bear Stearns unfolded they seem to have believed that it, the crisis, was the dream and a bad one.  Whereas the parties themselves were all living in a dream.  It led them to think that if they simply did what they had been doing since the 1990s, flood the place with money, undertake some rescues, call a do-over and a re-set and a re-boot, we could would awaken back to a normalcy of low hills and gentle valleys.  Whereas the longer run reality is that the ups and downs are steeper, and more brutal – something more like the Sierra Nevada, the Owens Valley, and the chasm of Yosemite, deep in snow, over which I have just flown.  Actually, what I have just flown over, I see below me, is Donner Pass.  Where otherwise pretty good people get desperate and  … eat each other.

Though air travel is often no picnic, and the  industry is more turbulent than it was in the days of price regulation, it’s much cheaper thanks to Kahn’s efforts.  By some estimates, airline deregulation saves consumers as much as $20 billion per year and helped democratize air travel.  Airfares have climbed of late but, as this WSJ editorial notes, “fares are still lower today in real terms than they were in the 1970s.”

Kahn leaves an important legacy that illustrates the pro-consumer side of deregulation. He understood that deregulation is often the best way to help the “little guy.”  Regulatory agencies may be erected to advance the public interest, but are often “captured” and serve incumbent firms instead.  Competition, on the other hand, can discipline industry participants and help protect consumers.  Kahn also counseled care in deregulatory efforts.  He discovered the devil is in the details, and that partial deregulation can be worse than staying put.  A “mixed system” of partial deregulation, he warned, can be the “worst of all possible worlds” — a lesson regulators and deregulators alike would do well to remember.

The legal powers of the Fed – and their limits, regulatory, statutory, and Constitutional – are obviously a question of importance today.  The financial crisis, the response, and the continuing unemployment rate make the question of the Fed’s mandate, independence, and limits germane in a way that has only rarely been true in the economic history of the US since creation of the Federal Reserve.  Consider one of the latest arguments – will the Fed move to monetize the fisc, meaning the fiscal deficits of states and municipalities, as a source of – not liquidity of last resort – but instead as a provider of solvency?  A George Will column expressed the concern, set against public pension issues, this way:

People seeking backdoor bailouts hope that the fourth branch of government, a.k.a. Ben Bernanke, will declare an emergency power for the Federal Reserve to buy municipal bonds to lower localities’ borrowing costs. This political act might mitigate one crisis by creating a larger one – the Fed’s forfeiture of its independence.

Will obviously has a side in this debate, but that is not what interests me; it is that the law governing central banking is up for serious debate in a way that is historically not often true.  Please leave aside any comments as to the policies involved, good or bad.  I am interested in understanding the underlying sources of law and regulation at issue here.  If the Fed were so to act, are there legal limits on the ability of the Fed to act in this way – and does it matter one way or another, as a matter of law, if Congress has declined to provide a fiscal bailout?

I am also particularly interested in anything offered somewhere in the law school curriculum on comparative central banking, in universities here in the US or elsewhere.  Again, same interest in curricula, syllabi, readings, etc.

Update:  Thanks for the responses below, they are very helpful, and I’ll be in touch with Eric and some others mentioned below.  I’ve deleted some comments that are not relevant to my inquiry; I’d like the comment thread to be useful to people who are searching for the same materials I mention in the post, and don’t want other things there.  Also, I should add that I’m not actually contemplating teaching a class on this topic – I don’t know whether there is enough material for a course on the law of the Fed or not, although I do think that a comparative central banking course surely offers sufficient materials.  Rather, I would like to know more about the area substantively, and this seemed like an easy way in.  As well as helpful to others looking for materials in the field.  Thanks everyone.

Nevertheless, both the article and most other discussions of the issues still have two important weaknesses: failure to consider the underlying quality of the two sides’ arguments in “pro” and “anti” business decisions, and the use of a crude definition of what counts as pro-business.

I. A Pro-Business Bias Relative to What?

Liptak discusses at some length the result of a recent study showing that “business” interests won 61% of “economic” cases in the Roberts Court, compared to 46% during the last few years of the Rehnquist Court. But this proves the existence of a pro-business bias only if unbiased decision-making would have led to a lower win rate for business. What percentage of these cases would business have won if the judges were totally unbiased? How good were the legal arguments on each side? If, for example, business “deserved” to win 80% of these cases on the merits, then the 61% win rate would reflect an anti-business bias rather than a pro-business one.

During his tenure as head of the NAACP Legal Defense Fund in the 1940s and 50s, Thurgood Marshall won 29 of the 32 civil rights cases he argued in the Supreme Court. Was that because the Court was “biased” in favor of civil rights plaintiffs or because many state governments in that era abused civil rights so severely that it was easy for skilled litigators at the NAACP to find egregious instances of discrimination that were very hard to defend in court? The justices of that era really were sympathetic to Marshall and the NAACP, but it would be a huge mistake to underrate the nature of the cases he argued. Obviously, “business” is not an oppressed class in the sense that southern blacks were prior to the 1960s. But the vast size and scope of the modern regulatory state makes it easy for skilled business lawyers to find cases where regulators or lower courts have overstepped their authority. That may explain the impressive recent 68% success rate of the Chamber of Commerce, cited by Liptak. Like Thurgood Marshall, the Chamber’s highly competent lawyers try hard to pick winners and steer clear of losers.

None of the studies and experts Liptak quotes address this problem. In fairness, doing so would be difficult. The question of how various cases “should have” come out is itself debatable, with experts often disagreeing among themselves. But the issue is unavoidable if one wants to prove the presence of bias as opposed to merely show that some group won or lost X percent of its cases.

II. What Counts as a Pro-Business Decision?

The second problem with the arguments cited by Liptak is that they rely on a very crude definition of what counts as a “pro-business” decision. In general, they count any case where a business has prevailed on a regulatory, antitrust, employment, or environmental issue as “pro-business,” and the reverse as “antibusiness.” This approach has a variety of weaknesses, some of which I previously covered here and here.

One problem is that many such cases have business interests on both sides. For example, a victory for antitrust defendants is counted as “pro-business.” But most antitrust plaintiffs are businesses themselves who are suing their competitors, usually for the purpose of increasing their own profits. I don’t see any reason to assume that the plaintiffs in these cases are any less “pro-business” than the defendants.

Even in regulatory decisions where there are no business interests directly involved on one side of the case, there are often outside business interests who will benefit if the business litigant loses to the government or a private individual. For example, businesses often benefit from increased regulation that increases their competitors’ costs or makes it difficult for new entrants to come into the market. Increased regulation of the oil industry benefits businesses that produce other types of energy. Increased labor regulation often benefits big business at the expense of small businesses that compete with the larger firms (because big businesses can more easily deal with larger regulatory burdens). Sometimes, business interests are heavily affected by a decision even if none of the parties to a case were commercial firms. For example, Ricci v. DeStefano, the famous 2009 case where the Supreme Court curtailed affirmative action in employment testing, made life hard for many businesses by making it more difficult for them to use race-conscious measures to avoid Title VII disparate impact litigation. Yet none of those who claim that the Court displays a “probusiness” bias count Ricci as a pro-business decision.

Overall, the pro-business vs. anti-business frame is a lot less useful for understanding legal decisions than many people believe. Very few important legal issues pit an undifferentiated business interest against an undifferentiated consumer, employee, or “Main Street” interest. In most cases, some important business interests will gain and others will lose no matter which way the Court comes out.

The widespread contrary belief is mostly due to an unjustified conflation of “pro-business” with pro-free market or anti-regulatory outcomes (I previously criticized this error here, here, and here). Once one recognizes that there are many business interests that often benefit from greater regulation and many non-business interests that are often harmed by it, the pro- vs. anti-business model starts to collapse of its own weight.

UPDATE: Ted Frank makes some related points here.

In dismissing the rumor last night, though, Senate Banking Committee Chair Chris Dodd — who authored the law — claimed he’d never heard of the interim appointment power.

“I don’t know what it is. I never heard of it before,” said a flabbergasted Dodd to TPMDC. “It’s kind of unique isn’t it?”

Yes it is somewhat unique — the interim appointment would be different than, say, a recess appointment — but the Dodd-Frank legislation provides for interim stewardship of the agency. From TPMDC:

The authority for the Treasury Department to grant an interim appointment — distinct from a “recess appointment” — comes from the financial reform law itself.

To be fair to Senator Dodd, the law does not use the phrase “interim appointment,” but it expressly authorizes the Treasury Secretary to “perform the functions of the Bureau . . . until the Director of the Bureau is confirmed by the Senate.”  This authority would entail naming someone to head the agency until an official director could be confirmed by the Senate.  Presumably this provision was included for a reason, such as to ensure that the new agency could begin work even if either the President or the Senate drags their feet in naming or confirming a new agency head.  But don’t ask Senator Dodd about it.  Even though he was lead sponsor on the bill, he can’t be expected to know everything that’s in it.

(Hat tip: Daniel Foster at NRO)

I follow the systemic risk discussions pretty closely, as part of a current writing project, but I realized that I had not been tracking the FOIA requests surrounding some of the US government actions – in part because the government doesn’t seem to be much interested in responding to them.  The general point of the FOIAs is to try and get an understanding of what particular government agencies, and the Fed and FDIC in particular, believed constituted systemic risk, along with an account of how the concept was applied in practice in 2007-2009.  The conclusion of the editorial is, I think, right in the question it poses:

Two years after the bailouts and more than a month after President Obama signed into law new authority for the government to prevent “systemic risk,” Washington still won’t tell us what this term means. Releasing the history of 2008 would at least allow us to know what regulators thought it meant at the time, with lessons for the future.

I agree that the question takes on more importance given the new legislation that confers even more discretionary authority on the Fed to address questions of systemic risk.  What the Fed understands by that term as applied in particular circumstances – which is to say, as a concrete regulatory term, and not just as a matter of a conceptual economic term – is far from irrelevant.  Call it (maybe!) the ‘regulatory casuistry’ of systemic risk, how it gets worked out as a practical term in a run of particular circumstances.

(A useful discussion of the term as a regulatory concept is in Steve Schwarcz’s Georgetown law journal article from midway through the financial crisis, “Systemic Risk,” parts of which are being incorporated into a book Steve and I are doing on financial regulatory reform; the FOIA requests remind me that the concrete ways in which agencies interpret an abstract term that grants them a great deal of discretionary authority matters a lot, and not just the abstract concept denoted by the term.)

Call for Papers Announcement

AALS Section on Financial Institutions and Consumer Financial Protection

Beyond Financial Reform:  Mapping Regulatory Objectives, Institutional Forms, and Accountability in the Post-Crisis Landscape

Friday, January 7, 4-5:45 pm

2011 AALS Annual Meeting

San Francisco, California

The AALS Section on Financial Institutions and Consumer Financial Services will hold a panel presentation of selected papers during the AALS 2011 Annual Meeting in San Francisco, California.

Program Summary:

Three years into the deepest financial crisis in decades, debates rage on about the core objectives of regulating finance, the relative importance of competing objectives and the relative competences of competing local, national and global regulators.  This program will assess the recent reform efforts in context, to shed light on the choices inherent in determining who gets to regulate whom, how, and for whose sake.  What, if any, tradeoffs must be made between systemic stability and growth?  … safety and soundness and consumer protection?  … risk management and innovation?  … home country, host country, and multilateral regulation?  … regulatory effectiveness and accountability?

Leading policy makers, academics and market participants have staked out positions on the merits; yet others contend that reform has been mired in false choices.  The program will address the competing claims; explore the relationships among regulation, finance, and its economic, political and social context; and try to shift the terms of theoretical and policy debates to chart the path ahead.  Of particular interest are papers that:

Engage with economic and political thought on urgent policy problems,  such as macroprudential and countercyclical regulation;

• Address the challenges of compliance, regulatory arbitrage, and regulatory capture;
• Contribute to the debate about the institutional structure of regulation and the competing bases for allocation of regulatory authority; and
• Explore insights for financial regulation from other law disciplines, including bankruptcy, international law, and administrative law, as well as institutional and behavioral fields outside the law.

Call for Papers:

Law teachers and other scholars are invited to submit a manuscript or précis on any aspect of the foregoing topic.  Junior faculty members are particularly encouraged to submit.  A review committee consisting of Section officers will select one or more papers or proposals and will invite the author(s) of each selected submission to make a presentation at the program panel.  A précis should be comprehensive enough to allow the review committee to evaluate the likely content and quality of the proposed paper; however, complete drafts will receive preference in the selection process.  Please send submissions to the Program Chair–Anna Gelpern, American University Washington College of Law, agelpern@wcl.american.edu–no later than August 1, 2010. Please forward this Call for Papers to anyone who might be interested.

Eligibility:

Faculty members of AALS member and fee-paid law schools are eligible to submit papers for this panel presentation. Foreign, visiting and adjunct faculty members, graduate students, and fellows are not eligible to submit for this panel presentation; however, any such submissions may be considered for other parts of the Section program at the Annual Meeting.

Registration Fee and Expenses:

Call for Paper participants will be responsible for paying their annual meeting registration fee and travel expenses.

How will papers be reviewed?

Papers will be selected after review by members of the Executive Committee of the Section.

Deadline date for submission:

August 1, 2010

Contact for submission and inquiries:

Anna Gelpern, American University Washington College of Law,

agelpern at wcl dot american dot edu

Authors of accepted papers will be notified in September 2010.

I have spent a lot of the weekend reading summaries – I grant, I have not yet read the text of more than a couple of bits and pieces in the derivatives materials – of the financial regulation reform bill.  (Here is a pretty good summary from the front page of the New York Times, Saturday, June 26, 2010, by Edward Wyatt and David M. Herszenhorn.  But if you are looking for a good graphic summary of the highlights, see this graphic, “The Hope and the Worry,” that accompanies the article at page A12.)

With regard to the bill overall, well, I share the concerns raised by the editors of the Wall Street Journal and many others.  Far from eliminating too big to fail, or too systemically connected to fail, etc., the bill instead enshrines it and all the moral hazard accompanying it.  Much of the important systemic risk stuff is left in the discretionary authority of the Fed, however.  This leads me to a particular question about it.

In a certain way, this seems like a return to the phenomenon that Steven Davidoff and David Zaring identified in an article early on in the crisis – the so-called crisis response of “regulation by deal.”  Meaning by that, regulatory actions taken on a deal by deal, firm by firm basis, running through, of course, Bear, Fannie-Freddie, and so on.  Does this new discretionary authority amount to a return to the policy of regulation by deal?  A certain amount of ‘regulation by deal’ seemed justified at the moment of crisis.  But very soon into the process of regulation by deal, everyone had to consider its limitations.

What was it, from a downside view?  There was already a toxic combination of liabilities in existence – triple whammy, simultaneously massive; yet widely diffused throughout the financial system; and yet also interconnected with one another so that one failure might trigger another in unforeseen directions – based around the assumption that in any moment of crisis, they would be put to the Fed. That is, lingering moral hazard and its mis-leveraged fruits, on the one hand.  And yet completely discretionary behavior by governmental authorities as to how they would respond to crisis in any particular firm  at that particular moment, on the other.  Presumably the freedom to respond to Bear but not to Lehman would choke off the moral hazard.  The problem was, given that the liabilities and the leverage that the moral hazard had permitted had already created rafts of really-existing securities with really-existing obligations, things could not be stuffed back into Pandora’s box simply by a policy that eliminated (supposedly) the moral hazard.

Even if the regulation by deal policy was the right way to re-center the market players around risk, that policy would have to act into the future, not the past.  The result was that, at least for purposes of addressing the crisis as it was then unfolding, it merely increased uncertainties without addressing the already-ripened fruits of moral hazard.  (I’m sure if I worked at it, I could come up with a One Ring LOTR metaphor here.  But I will refrain.)  Regulation by deal could not address the moral hazard, because the externalities comprising it had been created by a vast number of deals over years; suddenly putting back in the “threat” of not getting bailed out did not make any of that go away.  At the moment of crisis, it merely increased the uncertainty.  If you were a firm, you didn’t know whether or not you would get bailed out – but since you could not really unwind all the moral hazard assuming risks all at once, in the moment of crisis, there was no “compliance” behavior that could respond to the supposed incentive.  The only result would be the same risk as before since the relevant securities had already been created – and a new dollop of uncertainty.

My question is, does the discretion now handed off to the Fed return us to “regulation by deal”?  And is this a good idea or a bad idea?  After all, in favor of it is that if it truly resolved the moral hazard problem by introducing genuine strategic uncertainty as to the Fed’s actions for any particular firm, then if this is supposed to be regulation for the future, maybe it is a good idea.    Against it?  Well, to start with, the markets would have to believe it – and believe it in the context of everything else that is in the bill.  I don’t believe it.  In fact, I think the bill should have been titled, The Dodd-Frank Put.  I think it’s a bad idea.  But do you?

(I leave aside, for now, certain public choice consequences that seem to me highly problematic with regard to the Fed role.  I also leave aside the topic in this that I follow most closely, the details of derivatives.)

If David Zaring (David blogs at The Conglomerate, but I don’t see anything from him on the new bill as yet) has any views on this, I would be delighted to post them here as a guest post.

The article focuses on the activities of the Saint Consulting Group and its founder, P. Michael Saint, and their astroturf efforts  on behalf of SuperValue, Giant and other supermarket chains.

For the typical anti-Wal-Mart assignment, a Saint manager will drop into town using an assumed name to create or take control of local opposition, according to former Saint employees. They flood local politicians with calls, using multiple phones to make it appear that the calls are coming from different people, the former employees say.

They hire lawyers and traffic experts to help derail the project or stall it as long as possible, in hopes that the developer will pull the plug or Wal-Mart will find another location.

“Usually, clients in defense campaigns do not want their identities disclosed because it opens them up to adverse publicity and the potential for lawsuits,” Mr. Saint wrote in a book published by his firm.

Mr. Saint says he “encouraged” his employees not to use their real names in campaigns in order to protect the client’s identity and “to protect our employees, who have been followed, threatened and harassed by the opposition.”

Safeway, a national chain based in Pleasanton, Calif., retained Saint to thwart Wal-Mart Supercenters in more than 30 towns in California, Oregon, Washington and Hawaii in recent years, according to a Saint project list and interviews with former employees. Former Saint employees say much of the work consisted of training Safeway’s unionized workers to fight land-use battles, including how to speak at public hearings. . . .

In Pennsylvania, Saint’s work roster in August 2007 listed 53 projects, almost all directed at stopping Wal-Mart on behalf of client Giant Food Stores, owned by Amsterdam-based supermarket company Ahold. Saint documents from 2007 say it had lost one battle in Pennsylvania, defeated 13 projects and delayed the remaining ones from four months to four years.

This sort of thing is nothing new.  Many corporations have been known to fund community activism against their competitors.  One of my favorite examples was when hazardous waste incinerator companies created and funded an offshoot of a local grass-roots environmental group to oppose waste-burning by cement kilns.  The plot was only discovered after the cement kilns noticed this little group was represented by high-priced attorneys — attorneys who also represented their incinerator competitors. This all serves as a healthy reminder that not all “grass-roots” activism is what it seems.

The American Power Act is an agglomeration of complex regulatory measures and corporate subsidies. In an effort to provide something for everyone, the bill provides little for the American people. As it stands, the bill is not in the economic nor environmental interest of the United States. Erecting an ever-more complex cap-and-trade scheme on an industry-by-industry basis invites rent-seeking and corporate gamesmanship at the expense of meaningful reductions. Directed subsidies and grants may reward powerful constituencies, but they won’t encourage the innovation and deployment of transformative environmental technologies. A partial directed rebate of the revenues from carbon allowances is half of a good idea. A far better, and much simpler, approach would be the adoption of an economy-wide carbon tax from which all revenues are directly rebated to American taxpayers, with no strings attached. This is the simplest and fairest way to provide marginal incentvies for increased efficiency and carbon-use reductions without hampering economic growth.

While the bill is bad, the EPA’s plans are not much better. This week the EPA finalized rules purportedly designed to fulfill the agency’s statutory obligation to regulate greenhouse gases as pollutants under the Clean Air Act. The rule EPA issued, however, is patently illegal and a flagrant violation of the plain text of the Act. The statute sets clear numerical thresholds for the imposition of PSD and Title V permitting requirements, and provides EPA with no authority to re-write these thresholds — turning 250 tons-per-year into 75,000 tons-per-year — by administrative fiat. The EPA may believe that the it is not practicable to apply the express terms of the Clean Air Act to GHGs, but that is not the agency’s call to make, especially not after the Supreme Court’s decision in Massachusetts v. EPA, which expressly rejected the argument that the CAA was unworkable for GHGs. If the EPA would like to follow a different course, it must go to Congress — and let’s hope Congress can come up with something better than the APA.

Indeed, if we want to follow Prof. Krugman’s argument to its logical conclusion, given that we have had two administrations in a row that have believed in big government and have proven incompetent, maybe having the government run by believers in government causes incompetence.

Or perhaps government just has some structural flaws that transcend the ideology of whatever party happens to be in power.

UPDATE: Amusingly, some commenters are insisting that the Bush Administration failed because it was composed of bad people who hated government but (a) the Obama Administration hasn’t failed with regard to the rig (how about Nashville, then?); or (b) the failure was a result of corporate malfeasance, which somehow makes it different from a failure that resulted from a natural disaster; or (c) the Bush Administration failed because its members just didn’t care about the people who lost their lives and homes under Katrina, whereas, apparently because empathy is an inherent part of being a liberal Democrat, the members of the Obama Administration really, really care.

Putting aside the partisan component, this does demonstrate a difference in mindset between (many) liberals and libertarians. Liberals tend to believe that government fails because the wrong people are in power, or the right people were not given enough power to do good. Libertarians tend to believe that government failure is a result of poor incentives and other structural problems that can sometimes be mitigated, but are always looming over government action.