Administrative Law and the Corporate Governance Obsession

Mariana Pargendler, The Corporate Governance Obsession, 470 Stanford Law and Economics Olin Working Paper (2014).

The recent paper that has most provoked my thinking about administrative law is not a paper about administrative law at all, it is a paper about corporate governance. The Corporate Governance Obsession, by Mariana Pargendler is an account and a critique of the turn to corporate governance as a means of addressing social and economic issues that were once predominantly the concern of government regulation. By “corporate governance” Pargendler means the internal decision-making processes of corporations—in particular, the balance of power among shareholders, boards of directors, and managers. The article makes the case that internal corporate governance structures increasingly provide both the explanation for and a one-size-fits-all solution to pressing issues in policy arenas as diverse as systemic financial risk, income inequality, gender discrimination, labor rights, and environmental protection.

Why should administrative lawyers care? Because, she argues, corporate governance approaches to these issues are cannibalizing regulatory approaches that externally impose rules to influence the substance and outcomes of corporate conduct. Policy debate on the central social and economic issues of the day is no longer (or at least no longer exclusively) about how regulators should design and implement rules to shape the substance of corporate conduct in the public interest, but rather about how corporations should organize their own internal decision-making processes to address issues of public concern. This means that while we administrative lawyers occupy ourselves with our own obsessions—for instance the finer points of deference doctrine and regulatory review—the corporate governance obsession is chipping away at the substantive regulatory policies that made these issues relevant in the first place.

Pargendler provides several examples of this phenomenon. For instance, in the aftermath of the global financial crisis, legislators and commentators could not agree on the role that financial deregulation had played in causing the crash (had it gone too far? not far enough?), but a broad consensus emerged blaming corporate governance arrangements like options-driven compensation and lack of board oversight. The policy result: a regulatory regime that encourages compensation disclosures and board independence, but that places few substantive constraints on how financial institutions do business. Similarly, debate about an issue as fundamental to the nation’s social and economic fabric as rising income inequality has focused not on how tax and transfer policies affect income distribution, but rather on the ill effects of excessive executive compensation. This diagnosis of the problem has generated policy prescriptions like greater independence for board compensation committees and “say on pay” initiatives to give shareholders a voice on executive pay—entirely ignoring the inconvenient fact that the majority of Americans (and the overwhelming majority of poor Americans) own no stock. Gender inequality has become another unlikely object of the corporate governance obsession. As courts continue to narrow anti-discrimination law at the behest of corporate defendants, regulators have turned to corporate governance solutions to promote gender equity by encouraging companies to place more women on boards of directors (where they currently hold less than 20% of the seats).

Pargendler explains these developments largely as a function of deregulation and rising distrust in government. In this political climate, she says, corporate governance solutions enjoy wide support because they speak simultaneously to the reformist impulse of progressives and the conservative impulse to leave problem-solving to the private sector. For their part, corporations have enthusiastically embraced their role as shadow governments, both as a means of evading unwanted government regulation and as a means of legitimizing their increasing power in society. As one prominent Fortune 500 executive put it, companies take their obligations to govern very seriously, because when they fail to do so passably, “the terms of debate shift from how companies can best govern themselves to how regulators should govern them.” Further, by adopting institutional roles and organizational structures typically associated with democratic governments and demonstrating their attention to issues of public concern, corporations have created a sense of accountability that has legitimized their broad influence over social and economic life.

This corporate legitimation project echoes administrative law’s own longstanding legitimation project. Administrative agencies, with their questionable constitutional pedigree and their consolidation of broad governmental powers in the absence of any direct accountability to the electorate, have been variously justified based on their expertise, their control by the judiciary, and their relationship to the democratically-elected branches of government. In recent years, a consensus has emerged that agencies are sufficiently entwined with, similar to, or controlled by the elected branches (particularly the president) to drink from the font of democratic legitimacy. Unfortunately, this account utterly failed to anticipate what might happen if that font ran dry. While tethering agencies to the elected branches might have given them a measure of legitimacy as a matter of administrative law doctrine and constitutional theory, this strategy did little to politically legitimize the work that agencies do and the crucial role they play in governing.

Ironically, corporations have laid claim to the New Deal reformers’ original justification for agencies: that they are efficient and effective vehicles for governing a complex society through the application of practical experience and technical expertise to policy problems. The curious insight of The Corporate Governance Obsession is that like agencies before them, corporations too feel compelled to justify themselves not merely as useful and competent, but as democratically legitimate. This raises a host of questions about what legitimate governance means as corporations take on increasingly prominent roles in governing. These are paradigm-shifting questions that administrative law will be called upon to answer. To do so, we may need to abandon some of our own disciplinary obsessions and start thinking more broadly and deeply about how the corporate governance obsession is changing the very foundations of the administrative state.

Cite as: Jodi Short, Administrative Law and the Corporate Governance Obsession, JOTWELL (August 5, 2015) (reviewing Mariana Pargendler, The Corporate Governance Obsession, 470 Stanford Law and Economics Olin Working Paper (2014)), http://adlaw.jotwell.com/administrative-law-and-the-corporate-governance-obsession/.
 
 

The Reasons for Failures and Delays in Confirming Nominees Are More Complicated than We Think

I thought I had a good general understanding of the confirmation process until I read Professor O’Connell‘s enlightening study. Some of the findings were about what I expected. Thus, for instance, both the rate at which nominees fail to be confirmed and the time required for confirmation have increased significantly between 1981 and 2014. The failure rate was 26.4% in the George W. Bush Administration and 28.0% in the Obama Administration, compared with an average failure rate of 4.4% to 10% during the period 1885 to 2008. The average confirmation time was 127.1 days in the Obama Administration, compared with an average confirmation time of 88.5 days over the 33-year period of the study. The results of the high rate of failure and the lengthening delays are disconcerting. At any point in time, between 15% and 25% of senior agency positions are vacant.

As I would have predicted, the failure rate was four times higher in the last year of an Administration than in the first year of an Administration. Also as predicted, the 2013 reduction in the number of Senate votes required to enable an up or down vote on a judicial nominee from 60 to 50, at a time when the President’s party had a majority in the Senate, reduced both the number of failed nominations for judgeships and the average time until a nominee for a judgeship was confirmed.

Many of Professor O’Connell’s findings differed significantly from my expectations, however.

Thus, for instance, even after the 2013 change in the filibuster rules, the confirmation process was considerably slower than in the prior periods in which it took sixty votes to end debate. Moreover, the average to time required to confirm a nominee to an agency position actually increased after the change in the filibuster rule.

I was also surprised by the apparently minor role that partisan politics plays in the confirmation process. 26% of nominees fail to be confirmed when the White House and the Senate were controlled by different parties, but almost as many–21%–failed when the White House and the Senate were controlled by the same party. Similarly, the average time to confirmation was only four days longer when the White House and the Senate were controlled by different parties than when both were controlled by the same party.

One of Professor O’Connell’s findings is of particular interest to those of us who are members of the faculty of a law school in the Washington metropolitan area. Nearly 30% of nominees to agency positions live in the D.C. metropolitan area at the time of their nomination. Professor O’Connell links this phenomenon to the marked increase in the time required for confirmation. Many people are reluctant to be nominated when they expect to have to travel to and from the D.C. area many times over a several month period. Of course, the time required to be nominated has also increased significantly, so a prospective nominee from California or Florida can expect to spend almost a year flying to and from meetings with the White House and members of the Senate. That finding helps to explain why my law school has received many applications for faculty positions from chaired professors at schools outside the area in recent years. Whether or not we hire the applicant, he is usually nominated for an agency position within a year of his application to join our faculty.

Professor O’Connell’s study has scores of more detailed findings that raise many questions that should attract the attention of scholars. Thus, for instance, why are nominees to be members of Commissions or Boards rejected by the Senate five times as often as nominees for cabinet positions? This paper fulfills both of the goals of good scholarship: It answers many important questions, but it raises far more questions that legal scholars and political scientists need to explore. I would urge anyone who is interested in public law and the political process to put it on her “must read” list.

Cite as: Richard Pierce, The Reasons for Failures and Delays in Confirming Nominees Are More Complicated than We Think, JOTWELL (July 6, 2015) (reviewing Anne Joseph O'Connell, Shortening Agency and Judicial Vacancies through Filibuster Reform? An Examination of Confirmation Rates and Delays from 1981 to 2014, 64 Duke L.J. 1645 (2015)), http://adlaw.jotwell.com/the-reasons-for-failures-and-delays-in-confirming-nominees-are-more-complicated-than-we-think/.
 
 

Is Administrative Law Unlawful? NO!

Adrian Vermeule, 'No' (Review of Philip Hamburger, Is Administrative Law Unlawful?), Texas L.Rev. (forthcoming), available at SSRN.

Last year, the University of Chicago Press published “Is Administrative Law Unlawful?” by Philip Hamburger, the Maurice and Hilda Friedman Professor of Law at the Columbia University School of Law. A book by a named professor at a top-ten school published by a respected academic publisher with a provocative title would seem to be a must-read book for adlaw aficionados. His conclusion is that administrative law is unlawful, root and branch, because it is unlawful for administrative agencies to issue any rule or order that binds private parties. This is more than provocative; it is radical. Radically wrong. So wrong, one might wonder how it came to be published, and in any case so wrong that no one would take it seriously. Not so fast. In March, Justice Thomas cited it extensively in his concurrence in Department of Transportation v. Ass’n of American Railroads, 2015 WL 998536 (2015) to support his conclusion that the Passenger Rail Investment and Improvement Act of 2008 is an unconstitutional delegation of legislative authority, concluding:

We have too long abrogated our duty to enforce the separation of powers required by our Constitution. We have overseen and sanctioned the growth of an administrative system that concentrates the power to make laws and the power to enforce them in the hands of a vast and unaccountable administrative apparatus that finds no comfortable home in our constitutional structure.

In his review of the book, Adrian Vermeule, the John H. Watson Professor of Law at Harvard Law School, steps up to be the Dr. Van Helsing to drive the stake through the heart of this vampire. He minces no words:

The book makes crippling mistakes about the administrative law of the United States; it misunderstands what that body of law actually holds and how it actually works. As a result the legal critique, launched by five-hundred-odd pages of text, falls well wide of the target.

And that’s just the beginning.

As an initial matter, Vermeule notes that despite the title Hamburger does not in the book’s 600+ pages clearly define what he means by “law” or “lawful.” Hamburger does not mean that agencies are violating their statutory mandates, nor even that the statutes authorizing agency rulemaking and adjudication are unconstitutional under any reading of any Supreme Court decision. Indeed, it’s not clear Hamburger means “law” in any legal sense. He writes:

“[T]he legal critique of administrative law focuses on the flat question of unconstitutionality, and . . . this is not enough. Such an approach reduces administrative law to a question of law divorced from the underlying historical experience and thus separated from empirical evidence about the dangers [sic].

So what does he mean by “unlawful.” Vermeule concludes with good reason that Hamburger is referring to what Hamburger perceives to have been the stance of English common-law courts during the reign of the Stuarts in the 1600s regarding the struggle between the king and parliament. The bulk of the book involves a detailed history of this period and of the use and abuse of the so-called royal “prerogative.” The royal prerogative was the king’s claimed ability to make law in certain circumstances, and the victory of parliamentary supremacy by the 18th century essentially condemned the royal prerogative. It is Hamburger’s argument that the modern administrative state has recreated the discredited “prerogative” and placed it in the President’s hands. This, given English history, makes administrative law unlawful.

Vermeule does not attempt to rebut Hamburger’s historical narrative, although he suggests that it may not be as clear as Hamburger suggests. What he does demonstrate, however, is that Hamburger never effectively connects this historical narrative to the founding fathers but rather assumes that the English background was somehow implicitly included in our Constitution. And more importantly he demonstrates that Hamburger totally fails to understand modern administrative law, not a subject he teaches or does research in, and therefore completely misses the distinctions between the royal prerogative and modern agency action. In the English struggle over the royal prerogative, the common-law courts according to Hamburger determined that the king could not make law that bound subjects; this legislative power was reserved to parliament. From this Hamburger deduces that agencies cannot make rules that bind private persons, because then they would be exercising legislative authority, and they cannot issue orders that bind private persons, because that would be exercising judicial authority. Thus, administrative law is unlawful.

Vermeule explains, however, that agencies do not claim to exercise any “prerogative,” that is, inherent power to make law, as was the case of the king during the reign of the Stuarts. Indeed, it is hornbook administrative law that agencies do not possess any inherent power; they only have the power granted to them by statute. Hamburger would reply that Congress cannot grant agencies the power to bind private persons, because to do so would be the subdelegation of legislative authority to agencies or placement of judicial authority in agencies, both of which, he would say, are prohibited by the Constitution. According to English law at the time, delegatus non potest delegare – the delegate cannot delegate. Because the Constitution delegated the lawmaking and judicial powers to the Congress and Judiciary respectively, those powers cannot be exercised by anyone else. Executive power, at least domestically, Hamburger argues, is limited to going to a court to enforce the law or giving orders to its own employees (or to non-subjects); it has no power to exercise coercive authority over subjects.

Vermeule is willing for the sake of argument to acccept Hamburger’s description of “what the deep principles of Anglo-American constitutional history actually are (assuming arguendo that such principles exist.” Instead he attacks the disconnect between those principles and modern administrative law as it exists. He focuses on three topics: delegation, taxation, and separation of powers. As to delegation (or subdelegation as Hamburger characterizes it), Vermeule repeats the black letter law that Congress indeed cannot delegate legislative power, but it can make laws for agencies to execute that may require interpretation or the exercise of discretion, so long as there are “intelligible principles” to guide that interpretation or discretion. Now one may argue that the Court has failed to police adequately those intelligible principles, but Vermeule’s point is that Hamburger would not allow any exercise of discretion or interpretation. Where Hamburger would read any such ability out of the executive power, Vermeule argues that it is the nature of the “executive power” to be able to fill in the details of legislation. It is not just an argument from necessity but that “to execute a law inevitably entails giving it additional specification, in the course of applying it to real problems and cases.” Moreover, one might add, and so it has always been and will always be. Thus, agencies are not exercising any subdelegated legislative power; they are exercising executive power.

As for taxation, while Hamburger reserves a special place for the evils of delegating the power to tax, Vermeule points out once again that Congress does not delegate the power to tax to agencies, but it does occasionally authorize an agency to set the level of a tax imposed by Congress on the basis of standards contained in the statute. Vermeule cites to Skinner v. Mid-America Pipeline, 490 U.S. 212 (1988), in which a unanimous Court “examined the text and structure of Article I, and the history of legislation from ‘[Congress’] earliest days to the present,’ and found no reason to treat taxation differently” from any other congressional authorization to agencies. That case cannot be found in Hamburger’s book.

Hamburger explains the value of the separation of powers in terms of sequencing and specialization. He writes that it “forc[es] the government to work through specialized institutions with specialized powers . . . forcing it to work in a sequence of legislative, executive and judicial power.” The problem with the administrative state is that:

Rather than follow the Constitution’s orderly stages of decisionmaking, an agency can blend these specialized elements together — as when it legislates through formal adjudication [sic], or secures compliance with its adjudicatory demands by threatening severe inspections or regulation.

Vermeule counters this by noting that:

The institutionally specialized process of lawmaking that Hamburger likes, with its sequence of legislative, executive and judicial action, is itself the source of the combined functions that Hamburger abhors. Agencies exercise combined functions when, and only when, an institutionally specialized decision, an exercise of lawmaking through sequenced and separated powers, has concluded that they should, and enacted a statute to that effect.

More importantly, however, Vermeule points out that while agencies to some extent do combine these functions, they do so under particular constraints precisely intended to guard against the evils that otherwise might flow from a combination of functions. And it is these constraints that Hamburger almost entirely overlooks, relying on simplistic overstatements. In short, Hamburger never really addresses administrative law as it actually operates.

Vermeule suggests that Hamburger’s book might be viewed simply as “interestingly wrong, in an unbalanced sort of way, . . . interesting, if only because it is so hagridden by anxiety about administrative law.” Unfortunately, however, Vermeule concludes that the book is “merely disheartening.” Or worse,

No, the Federal Trade Commission isn’t much like the Star Chamber, after all. It’s irresponsible to go about making or necessarily-implying such lurid comparisons, which tend to feed the tyrannophobia that bubbles unhealthily around the margins of popular culture, and that surfaces in disturbing forms on extremist blogs, in the darker corners of the Internet.

It’s especially irresponsible to go around saying that the administrative state is “unlawful,” whatever that may mean, without understanding what administrative law says, and seemingly with little idea about what exactly is being attacked — little idea about the intellectual architecture that underpins administrative law, and that many generations of the legal profession have labored to build up.

Indeed, Hamburger seems to fall back on ad hominem arguments, saying that American administrative law abandoned the constitutionalism of English common law in favor of French and German legal theory, leading to the “Prussification” of our society, whatever that means. But how is that? English law today essentially has no separation of powers between the executive and legislature, something completely antithetical to American constitutionalism, whereas, for example, continental systems generally reject the American concept of adjudication by administrative agencies in favor of specialized courts. In short, each developed “democratic” nation has its own form of government, but they all have in common a bureaucracy that has the power to make law pursuant statutory authorization with judicial review of such laws to safeguard liberty.

So, Hamburger’s book is bad scholarship. Most bad scholarship ends up in the circular file and quickly forgotten, but regrettably that is not the likely result for Hamburger’s book. Because it plays into the hands of those who tear down the administrative state for their own ideological or selfish reasons, it will be praised and cited as the new wisdom. As Vermeule says:

The effect of such books, if accepted, is to quietly delegitimate the administrative state, to tear out its intellectual struts and props while leaving the building itself teetering in place — a dangerous game. The indirect and long-run effect of Hamburger’s thesis on the intellectual culture of the legal profession, and perhaps even of the broader public, might be pernicious and worth opposing, even if there are no direct and short-run effects.

Vermeule’s analytical rebuttal of Hamburger’s thesis is convincing, but it is not the stake in the heart of the beast. This is not because of any fault by Vermeule, but because the appeal of Hamburger’s thesis ultimately is not analytical, but emotional. Those who cite it most loudly are unlikely to have plowed through its 600 pages of dense history and hysterical rants. They will cite it because they want to believe that the administrative state is somehow un-American. Trying to rebut that belief is like trying to convince climate-change deniers. It may be impossible, but it must be attempted. Vermeule has given us an admirable first start.

Cite as: William Funk, Is Administrative Law Unlawful? NO!, JOTWELL (June 8, 2015) (reviewing Adrian Vermeule, 'No' (Review of Philip Hamburger, Is Administrative Law Unlawful?), Texas L.Rev. (forthcoming), available at SSRN), http://adlaw.jotwell.com/is-administrative-law-unlawful-no/.
 
 

Getting from “May We?” to “Should We?” at the NSA

Margo Schlanger, Intelligence Legalism and the National Security Agency's Civil Liberties Gap, 6 Harv. Nat’l Sec. J. 112 (2015).

Margo Schlanger’s article, Intelligence Legalism and the National Security Agency’s Civil Liberties Gap, is an important contribution to both administrative and national security law. She explains in illuminating detail how the NSA, the hub of so much controversial electronic surveillance activity, is not a rogue enterprise, but deeply enmeshed in and committed to a complex regime of legal compliance. The question she poses is why so elaborate a compliance system is seemingly ineffective in advancing civil liberties values more robustly. Her argument is thematically related to an earlier and equally thoughtful paper, Offices of Goodness: Influence Without Authority in Federal Agencies (reviewed here), which likewise explored the difficulties for administrative agencies in honoring overarching values that are relevant to their programs, but which may appear as orthogonal to a particular agency’s specific primary objectives. (Think about the Department of Transportation promoting park land conservation or the Army Corps of Engineers protecting endangered species.)

Professor Schlanger argues that, within the NSA, the applicable legal rules are insufficient to induce a proper balance between the likely security gains from a particular surveillance initiative and the privacy and civil liberties risks and costs entailed in that initiative. Constitutional restrictions won’t produce the optimal balance between costs and benefits because the scope of constitutional rights doesn’t turn on that balance. Policy is not a major factor driving constitutional interpretation concerning the scope of individual privacy rights, especially where courts may not fully grasp the privacy implications of programs under review. (And, of course, private lawsuits are likely to exert little leverage over the intelligence community because the state secrets doctrine will insulate many government practices from effective—or any—judicial challenge.)

Statutes don’t fill the normative gap because the relevant provisions, chiefly embodied in the Foreign Intelligence Surveillance Act (FISA), as amended, are procedural, not substantive. There is no statutory requirement for a careful calibration of surveillance versus privacy.

FISA’s minimization requirements— “rules ‘designed to protect, as far as reasonable, against the acquisition, retention, and dissemination of nonpublic information which is not foreign intelligence information’ that ‘concern[s] unconsenting United States persons’” —do have the impact of subjecting the NSA to a degree of judicial oversight via the Foreign Intelligence Surveillance Court (FISC) that is unusual for a federal agency. These rules, however, are likewise procedural. They do not entail a case-by-case assessment of whether the government is risking more privacy than is necessary to achieve a valid security goal or whether the anticipated privacy and civil liberties risks and costs associated with a particular program are too great to justify the projected set of security gains.

Professor Schlanger’s worry, however, is not simply that law does not do the normative work that ought to accompany the design of surveillance programs. She worries that the ethos of intelligence legalism actually crowds out the normative evaluation that is necessary to achieve optimal surveillance policy. The devotion of so much time and effort and staffing to legal compliance induces a kind of complacency about underlying policy wisdom. She writes: “Legalism legitimates liberty-infringing programs. And its relentless focus on rights and compliance and law (with a definition of law that includes regulation, executive orders, court orders, etc.) has obscured the absence of what should be an additional focus on interests, or balancing, or policy.”

What Professor Schlanger means by intelligence legalism has three elements. First, surveillance planning is governed by substantive rules that are treated as laws demanding compliance, not initiative-by-initiative policy judgment. Second, judicial enforcement of the rules is narrowly limited. There is thus little oversight by authorities who do not feel some kind of deep allegiance to the agency program. Finally, the implementation of the applicable rules empowers lawyers to make the key legitimating decisions, which, in turn, heightens the importance of reasoned justification why proposed courses of action satisfy the procedural rules—but not policy analysis justifying or challenging any particular surveillance initiative. This legal activity, which involves a sizable contingent of lawyers spread among a labyrinth of offices, is most likely, in Schlanger’s judgment, “to move an organization towards [a] kind of nearly symbolic compliance than to effect any more significant constraint on executive activity, particularly with respect to a program important to the President.”

What the intelligence community needs, she argues, is some way of institutionalizing within the executive branch an effective means of insuring that policy makers confront the “Should we?” question, not just the “May we?” question when gathering private information in the name of national security. She reviews and applauds current efforts along these lines, such as the authorization within the NSA, as well as in the Office of Management and Budget and National Security Council staff, of individuals charged with advocating for privacy and civil liberties. She approves recommendations for the conduct of privacy and civil liberties impact assessments for various programs, as well as privacy-and-liberty-focused program reviews by the Intelligence Community’s Inspector General. She is hopeful also for positive impacts if some form of adversarial process were introduced to the FISC, through the creation of some kind of official advocate empowered to challenge the government’s applications for surveillance warrants.

There is yet much more food for thought in Professor Schlanger’s article than can be easily summarized in any brief précis—her lengthy and detailed description of what she calls the NSA’s “compliance and oversight ecosystem” is itself of enormous value. Especially thoughtful, however, is Professor Schlanger’s nuanced analysis of the subtle contextual factors likely to shape the success (or lack of it) of any of the institutional design improvements she champions. She has revealed why, regardless of good intentions, it will be tough to move from “ensuring that the NSA’s activities comply with the rules system that exists” to “assessing,” on an ongoing institutional basis, “whether the rules are appropriate, or whether conduct that is compliant with the rules might nonetheless be ill advised.”

Cite as: Peter Shane, Getting from “May We?” to “Should We?” at the NSA, JOTWELL (May 5, 2015) (reviewing Margo Schlanger, Intelligence Legalism and the National Security Agency's Civil Liberties Gap, 6 Harv. Nat’l Sec. J. 112 (2015)), http://adlaw.jotwell.com/getting-from-may-we-to-should-we-at-the-nsa/.
 
 

The Place of Permits in the Quiver of Administrative Action

Those of us who write in administrative law often get stuck in the ruts created by the categories set out in the Administrative Procedures Act—especially rulemaking, adjudication and judicial review. Therefore, it is refreshing and often path breaking when an article appears that delves into an important aspect of administrative action that cuts across those ruts rather than following them. That is all the more true when the article is as well executed as The Permit Power Revisited: The Theory and Practice of Regulatory Permits in the Administrative State by Eric Biber and J.B. Ruhl.

Nominally, The Permit Power Revisited is a response to a piece Richard Epstein wrote, almost twenty years ago, lambasting administrative permitting as a “racket” rife with agency abuse.1 But the article does not so much respond to that piece; rather it lays out what the permit power encompasses and how agencies use it to fill gaps that otherwise would exist in regulatory schemes. In doing so, The Permit Power Revisited categorizes permits along a continuum and demonstrates how judicious choice of permitting along that continuum can contribute to effective and responsive regulation.

Biber and Ruhl define a permit as administrative action allowing particular conduct that would otherwise be prohibited. Using this definition they begin their inquiry into the role of permits by placing them on a line between administrative exceptions (general administrative classifications of conduct that is permitted) and prohibitions (general administrative classifications of conduct that is prohibited). They then distinguish between two types of permits—general and specific. General permits are very close to exceptions—for example they may allow an entity to engage in conduct simply by registering its intent to do so with the agency. Specific permits focus on the precise situation of the actor, and grant permission after a detailed examination of the specific facts that ensure that permitting the specific conduct is warranted.

The authors are clear to recognize that actual permits fall somewhere on the continuum between the two archetypes they describe. In fact they provide five characteristics that distinguish between permit programs that are general and specific in nature. Most significantly, they note that the distinction between a permit program that is general in nature and one that is specific is usually of greater significance than the distinction between each archetype and the non-permit action with which it abuts. Having set out these ideal types of permits, the authors illustrate how various agencies use permits effectively to administer regulatory programs, paying special attention to the Army Corps of Engineers’s use of both general and specific permits under section 404 of the Clean Water Act to regulate dredging and filling of waters of the United States.

The guts of The Permit Power Revisited is its discussion of the potential benefits that permits can provide. Biber and Ruhl identify six such benefits: permits as barriers to entry; permits as tools for revealing or developing information; permits as tools for tailoring regulation to specific circumstances; permits as political tools, permits as enforcement tools, permits as constraints on administrative discretion, and permits as means of easing administrative burdens. They proceed to describe how choices between permits that are more general or specific can further those benefits more effectively, while reducing opportunities for agency abuse. The final part of the article argues that, because general permits are better suited to distributed activity by many, when each person’s activity causes limited social harm that nonetheless adds up to significant levels, we should look to increase the use of general permits in the future.

Biber and Ruhl understand that the theory of permits, and the application of that theory to suggest normative improvements in the structure of regulation, is a vast topic well beyond the purview of any article to cover comprehensively. The Permit Power Revisited, however, provides a good start. Its distinction between general and specific permits goes a long way toward providing the road for evaluating the promise of permit programs to improve regulation. I did not agree with all of its analysis of the benefits that can be provided by general and specific permit programs. In particular, I found its discussion of specific permits as a barrier to entry a bit off base. Rather than providing a signal of activities that generate sufficient private benefit to warrant incurring the costs of specific permitting, as Biber and Ruhl argue, I think those costs are better viewed as a tax on activity that generates external social costs. As a Pigouvian tax, the costs should be tied to the external social harm not to the level of private benefit generated. What is more, the costs would be better imposed as a tax, rather than as an increase in transaction costs, which creates social waste rather than a transfer of wealth. But I am picking nits here. The more important point is that Biber and Ruhl have pointed in the right direction by describing the breadth of permit programs and their promise to allow more efficient and responsive regulation. By doing so they have more than responded to Epstein’s oversimplified excoriation of permit programs. They have shown not only that permits can provide sound means of regulating, they have suggested how to assess permit programs to try to get the most out of them with the least chance of inefficiency or abuse.



  1. Richard A. Epstein, The Permit Power Meets the Constitution, 81 Iowa L. Rev. 407 (1995). []
Cite as: Mark Seidenfeld, The Place of Permits in the Quiver of Administrative Action, JOTWELL (April 9, 2015) (reviewing Eric Biber & J.B. Ruhl, The Permit Power Revisited: The Theory and Practice of Regulatory Permits in the Administrative State, 64 Duke L.J. 133 (2014)), http://adlaw.jotwell.com/the-place-of-permits-in-the-quiver-of-administrative-action/.
 
 

New Wine, Old Bottles, and a Do-Nothing Congress

Jody Freeman & David B. Spence, Old Statutes, New Problems, 163 U. Pa. L. Rev. 1 (2014).

The Rivers and Harbors Act of 1899 was adopted to protect against hazards to and interference with navigation. It prohibited “creation of any obstruction to the navigable capacity of any of the waters of the United States” or altering or filling navigable waters (§10) and also made it unlawful “to throw, discharge, or deposit . . . any refuse matter” into navigable waters “whereby navigation shall or may be impeded or obstructed,” although the Corps of Engineers could permit such a discharge if “anchorage and navigation will not be injured thereby” (§13). For two-thirds of a century, those provisions operated as one would expect. Then came the modern environmental movement, and in short order the courts and the executive branch turned these provisions about obstruction to navigation into a water-pollution control regime. As President Nixon drily put it in issuing an executive order that created a sweeping new pollution permit program under §13, the Act’s “potential for water pollution control has only recently been recognized.” Richard Nixon, Statement on Signing Executive Order Establishing a Water Quality Enforcement Program (Dec. 23, 1970).

This striking repurposing of a 19th century statute to solve 20th century problems is not unique. EPA’s current reliance on the Clean Air Act to regulate greenhouse gases can be seen as another example, this time using a 20th century statute to solve a 21st century problem (though the gap between the original conception of the statute and its repurposing is much less dramatic in this later instance). Jody Freeman and David Spence have now provided a valuable, and quite sympathetic, analysis of the technique of using “old statutes” to address “new problems.”

The authors’ analysis is very much situated in the present day, which is characterized by profound congressional gridlock. Part II explains current congressional dysfunction and inaction, focusing in particular on the fact that “the ideological middle is unprecedentedly weak and growing weaker.” The parties’ respective means are further apart, and there are fewer moderates of either party in Congress. Absent a highly salient crisis, Congress is frozen. (An Appendix lays out a formal model of congressional politics in such circumstances.) This means that older statutes go unamended; if they are to be adapted to contemporary challenges, it will be agencies, not Congress, who do so.

And do so they have. The bulk of the article is devoted to two case studies of this phenomenon. One is the aforementioned regulation of climate change via the Clean Air Act; the other is FERC’s effort to modernize electricity policy through new approaches to its authority under the Federal Power Act. While not identical, both settings raise the same basic questions about the legitimacy and consequences of aggressive interpretations of longstanding statutes to address problems unanticipated by the enacting Congress. These are deep dives, and the level of detail may be more than some readers feel they need. But the discussion is helpful in understanding the brass tacks of how, on the one hand, these agencies have engaged in “interpretive jujitsu” to adapt the statute to contemporary imperatives, but, on the other hand, are undeniably and genuinely constrained by the statutory regime within which they are working.

The final part of the article discusses the consequences of agencies’ stepping into the vacuum created by congressional paralysis, exploring how “the de facto removal of Congress from this game changes the strategic environment for the other actors,” producing relatively bolder action. This will be particularly so where the president’s priorities and the agency’s mission align. Still, boldness may be tempered by (a) what credible threats of nonlegislative congressional checking exist, (b) honest readings of statutory constraints, (c) the specter of judicial review (which matters both for the individual matter and for the agency’s credibility and long-term reputation with the courts), and (d) regulatory review by OIRA.

The authors conclude with some reflections on judicial review in this era of congressional dysfunction. The core concern is whether courts giving agencies a relatively free hand will enhance or undermine democratic accountability. On the one hand, the standard assumption is that constraining agencies and thus relying on Congress for policy change is more “democratic.” But the authors point out that if Congress is utterly polarized, it will often be unable to act, and when it does act it will be unable to move to the center. In those circumstances, the agency may have the edge in democratic legitimacy. This is particularly true if agencies are addressing problems not anticipated by the enacting Congress.

It is in this last section that the authors’ largely implicit normative position—which is one of approval of muscular agency updating in the face of congressional dysfunction—becomes most explicit. It is a theory of the second-best. Faute de mieux, agencies should ensure that regulatory regimes are up to the task.

This brings me back to where I started. The 1970 permit regime created by what Richard Nixon referred to as a “more activist utilization of” the Refuse Act never quite took hold. But it presaged, and just two years later was supplanted, by the NPDES program created in the 1972 Clean Water Act. That sort of sensible, centrist, bipartisan congressional reaction to legal and real-world problems is exactly what, as Freeman and Spence convincingly explain, simply does not occur four decades later. And their essential point is that that reality will, and should, lead to more aggressive agency implementation of old statutes in light of new problems.

Cite as: Michael E Herz, New Wine, Old Bottles, and a Do-Nothing Congress, JOTWELL (March 11, 2015) (reviewing Jody Freeman & David B. Spence, Old Statutes, New Problems, 163 U. Pa. L. Rev. 1 (2014)), http://adlaw.jotwell.com/new-wine-old-bottles-and-a-do-nothing-congress/.
 
 

Privileged Delegations

Mila Sohoni, The Power to Privilege, 163 U. Pa. L. Rev. (forthcoming, 2015), available at SSRN.

When Associate Justice Ruth Bader Ginsburg visited Berkeley Law in 2013, she expressed surprise when students in my Civil Procedure class advocated the passage of the Open Access to Courts Act (which would have imposed the Conley “no set of facts” standard on Rule 12(b)(6) motions), even though she had dissented in Twombly and Iqbal. She asked: “You want Congress to change the Rules of Civil Procedure?” She would, I think, agree with Professor Mila Sohoni’s skepticism of allowing executive agencies to change the Rules of Evidence. Both laud the rulemaking process through the Judicial Conference instead.

Sohoni’s forthcoming article, The Power to Privilege, is a rare and insightful article that examines the intersection of the rules of litigation and the administrative state. The article takes a seemingly obscure and ignored provision of the Patient Protection and Affordable Care Act (ACA)—authorizing the Secretary of Labor to issue regulations that “provide[] an evidentiary privilege for, and provide[] for the confidentiality of communications between or among” a plethora of federal and state officials and organizations—and persuasively demonstrates the likely costs of such a delegation.

The ACA provision that motivates the article (Section 6607) amends the Employee Retirement Income Security Act (ERISA) to allow the Labor Secretary to define an evidentiary privilege so long as it “is appropriate for the purposes of enforcing” ERISA. It is not an ordinary statutory provision. As Sohoni writes: “Section 6607 bestows on federal regulators a power that they have never before held: the power to write rules of privilege from the ground up.” Ordinarily, while agencies do claim various privileges in litigation, the common law and sometimes Congress itself establish privileges. Agencies have promulgated so-called Touhy regulations to limit their disclosures in the face of a subpoena but since 1958, the power of these regulations basically “ends at the courthouse doors.” The case law does appear to permit Congress to delegate clearly to agencies the power to set privileges, and Congress has done that with Section 6607, which would apply to federal and state court proceedings.

After deftly explaining its uniqueness, Sohoni turns to three primary risks of Section 6607. The potential ramifications are largely negative, though she does acknowledge that such delegations can foster “efficient enforcement of the law and efficient coordination between agencies.” First, delegations to establish privilege to agencies could undermine agency accountability. Agencies often want “to cloak . . . communications from external scrutiny” to “insulate themselves from accountability in courts and to the public.” Sohoni nicely draws on the national security context to buttress her claims here. Second, these delegations could harm state interests by restricting access to information, mostly through preempting state public records acts. The federal entities doing the preempting by regulation “are unlikely to be attuned to state policy interests.” For this point, Sohoni turns to the Securities and Exchange Commission’s arguments in state courts (largely rejected) that documents provided to it by investigated parties should be privileged, and also notes the policies reflected in expansive state sunshine laws. Third, such delegations could threaten state sovereignty. In Sohoni’s framing, this is a concern about commandeering. Because Section 6607 applies to “communications of state agencies and state agents” (and presumably applies to state court proceedings), any federal regulations could “undercut the accountability and credibility of states as independent political institutions” because critical information may not get disclosed to voters.

The picture Sohoni paints is grim. But as with Justice Ginsburg and the Rules of Civil Procedure, the judicial rulemaking process, an “off-the-shelf solution,” is a better model. It is “transparent, apolitical, and adept at considering constitutional values, such as federalism” and is “accessible to federal agencies, states, and the public.” I am a bit nervous thinking of the courts and the judicial rulemaking process as apolitical institutions. But for Ginsburg, Sohoni, and many others, the trumpets should begin.

Sohoni provides not only a perceptive descriptive and normative account of delegating the power to privilege to the administrative state in the ACA and beyond, but also offers a causal and temporal account. The last section of Sohoni’s article should be read carefully to appreciate its sophistication. In her terms, “Congress did not merely select a delegate; it swapped in a new delegate —a politically accountable executive agency—for an old delegate—politically unaccountable federal courts.” Little of political science and administrative law scholarship contemplates changes in delegation over time. Sohoni posits that Congress made this switch in delegates because of partisan motivations. Specifically, in Section 6607, “Congress named as its delegate the Department of Labor, a non-independent executive agency over which Congress and the President could exert control, and thereby replaced a delegate—the federal courts—that is far more insulated from partisan political control.” The ACA was enacted “during a brief interval of time where one party controlled both houses [and in the case of the Senate, could pass a cloture motion] and the Presidency.”

Sohoni’s party competition story could explain why Congress has not given similar authority to the SEC, despite the agency’s extensive lobbying (to Congress, state courts, and the federal judicial rulemaking process), as the SEC has more independence from the White House. On the other hand, partisan dynamics are not just horizontal. With the White House all but certain to change hands at some point in the future, a Democratic Congress and White House might not want to delegate considerable authority to an executive agency. Indeed, other parts of the ACA that delegate considerable authority to the states could be seen as counterbalancing a future Republican White House. This is a minor quibble in an excellent piece, and I have no better story for the change in delegate on which Sohoni focuses.

In sum, the decision to examine why Congress might change delegates (or, I would add, change the scope of delegation or the process of agency decision-making) over time as well as the intersection of civil litigation and administrative law are both areas deeply worthy of more scholarly attention. Sohoni has set the bar high with her forthcoming article, but I very much hope others will follow suit.

Cite as: Anne O'Connell, Privileged Delegations, JOTWELL (February 9, 2015) (reviewing Mila Sohoni, The Power to Privilege, 163 U. Pa. L. Rev. (forthcoming, 2015), available at SSRN), http://adlaw.jotwell.com/privileged-delegations/.
 
 

We Found Out That Counting Lizard Poop Is Not A Good Way To Count Lizards: Now What?

Adrian Vermeule, Rationally Arbitrary Decisions (in Administrative Law), Harv. L. Sch. Pub. L. & Legal Theory Res. Paper Series (2013), available at SSRN.

Professor Vermeule has a knack for giving irresistible titles to articles that ask deep questions about administrative law—as demonstrated by the essay that is the subject of this little jot, Rationally Arbitrary Decisions (in Administrative Law). The apparent oxymoron grabs attention: Aren’t arbitrary decisions, by administrative-law hypothesis, irrational? Where reasoned decision-making stops, there arbitrariness begins, no?

There is a problem with this neat dichotomy. If you will forgive a tautology, a reasoned explanation for an action, if actually reasonable, shouldn’t depend on reasons that can’t reasonably be given. Sometimes, agencies must act, and they must do so in the teeth of genuine uncertainty. Embedded in the preceding claim is a distinction often drawn between risk and uncertainty. Risk allows for rational assignment of probabilities to outcomes (e.g., there is a 50% chance that a fair coin will turn up heads). Where genuine uncertainty exists, no such assignment of probabilities is possible—e.g., “[no] human actor … has any epistemic justification for attaching probabilities to events that may or may not occur eons in the future.” (P. 4.) When confronting uncertainty, “reasons run out and a relentless demand for further reason-giving becomes pathological.” (P. 2.)

But, according to Professor Vermeule, courts with some frequency unreasonably insist on reasons anyway. When they do, one might say that they violate their own judicial duty to engage in reasoned decision-making. He also contends that courts sometimes make the substantive mistake of requiring that agencies respond to genuine uncertainty by assuming worst-case scenarios—i.e., if we really have no idea what is going to happen, we should assume the worst.

Professor Vermeule builds his argument around several judicial opinions typifying various types of uncertainty (“brute,” “strategic,” and “model”) that in his view can justify rational arbitrariness by agencies. Let’s take a quick look at his example of “brute uncertainty,” Tucson Herpetological Society v. Salazar, 566 F.3d 870 (9th Cir. 2009). This case, which by 2009 had been proceeding for 16 years, revolved around whether the “flat-tailed horned lizard,” which is a “small cryptically colored iguanid . . . that is restricted to flats and valleys of the western Sonoran desert” should be listed as a threatened species under the Endangered Species Act (ESA). A threatened species is one that “is in danger of extinction throughout all or a significant portion of its range.” 16 U.S.C. § 1532(20). The Secretary first proposed listing the lizard as threatened back in 1993. Since then, the Secretary has repeatedly issued decisions withdrawing the proposed listing, and non-profit environmental groups, such as the Tucson Herpetological Society, have persuaded courts to vacate these withdrawals. In support of a 2006 withdrawal, the Secretary “quantified the lizard’s lost range [and] explained why that range is not ‘significant’ within the meaning of the ESA.” Id. at 875. The Secretary based this conclusion in large part on a finding that “lizard populations persist across most of the species’ current range despite habitat loss and fragmentation.” Id. at 877.

But there was a very basic problem with this finding of persistence. Studies of lizard populations used to rely on “scat counts,” but all sides now agree that counting lizard poop is not a good way to count lizards. And the only available “capture-mark-recapture” study included a warning from the study’s author that it was based on “sparse data” that “should be viewed with caution.” In short, whether lizards were persisting was genuinely uncertain. Nobody but the lizards knew, and they weren’t telling. This left the agency in a bind—the administrative record did not support a finding that the lizard population was viable or non-viable. Either might be regarded as arbitrary.

Given this problem, Professor Vermeule contends that the court of appeals was wrong to throw out the agency’s finding—“[t]he Secretary had to decide in which direction to take a leap of faith, and it is a kind of pathological hyper-rationalism to demand that the Secretary give reasons for taking it one direction rather than the other.” (P. 7.) Also, targeting precautionary attitudes toward decision-making, he maintains that courts should avoid the temptation to impose conservative default rules, e.g., erring on the supposed side of “caution” to assume a low number of lizards. (PP. 7, 10-13.)

Instead, we should all “cheerfully concede[ ]” space for agencies to make findings that are “arbitrary at the first order.” Such decisions, where an agency cannot avoid making them, should not be regarded as “legally arbitrary” so long as they rest on “valid second-order reasons.” (PP. 7, 10-13.) Among other ways, agencies might make rationally arbitrary decisions by extrapolating the future from the past (even though past performance does not guarantee future results), adopting a default rule of sticking to the status quo (even though the status quo is often not so good), following conventional judgments (which are often wrong), or even randomizing. (P. 17-18.) The last approach has the virtue of guaranteeing neutrality but would be particularly hard for agencies to adopt given the courts’ “implacable hostility.” (P. 20.) Still, courts, notwithstanding their biases, should respect agencies’ rationally arbitrary decisions rather than impose deadweight losses on society by “forc[ing] the agency to cough up an epistemically unjustified rationale for what is essentially an arbitrary decision, and rationally so.” (P. 20.)

So far, this little jot has only scratched the surface of a few of the many ideas explored in Professor Vermeule’s engaging essay. To find out what he has to say about strategic uncertainty, model uncertainty, precautionary approaches to arbitrary decisions, the problem of uncertainty as applied to agency information gathering (i.e., figuring out when to stop investigating and start deciding), determining where uncertainty genuinely exists, etc., you will just have to follow the link at the top of the jot.

Before closing, however, here are a few questions, which I hope are not too cute by half, which Professor Vermeule’s essay raised in mind. Professor Vermeule observes that deeply ingrained judicial attitudes are a roadblock to adopting his approach:

The culture of law, which celebrates reason-giving; a related and entirely misguided assumption that the rule of law requires first-order reasons for every choice; the need to justify decisions in the language of reason to officials in other branches, and to the general public; and the aversion to uncertainty and ambiguity that judges share with other humans—all these conspire to produce judicial hyperrationalism. (P. 19.)

Put another way, a very “human” aspect of this culture of law, which agencies share to a large degree, demands or at least encourages a kind of lying where law and reason run out but power has not. Do these lies, so deeply embedded in the system, carry benefits of their own? Might telling the truth about rationally arbitrary decisions undermine these benefits? Is the truth something that should be optimized rather than maximized in this context? Compare Adrian Vermeule, Optimal Abuse of Power, Nw. U.L. Rev. (forthcoming, 2015), available at SSRN. Is the better path uncertain?

Cite as: Richard Murphy, We Found Out That Counting Lizard Poop Is Not A Good Way To Count Lizards: Now What?, JOTWELL (January 6, 2015) (reviewing Adrian Vermeule, Rationally Arbitrary Decisions (in Administrative Law), Harv. L. Sch. Pub. L. & Legal Theory Res. Paper Series (2013), available at SSRN), http://adlaw.jotwell.com/we-found-out-that-counting-lizard-poop-is-not-a-good-way-to-count-lizards-now-what/.
 
 

Safe at Any Speed: Robert Ahdieh’s Take on Cost-Benefit Analysis in Financial Markets

When I saw the title of Robert Ahdieh’s recent article, Reanalyzing Cost-Benefit Analysis: Toward a Framework of Function(s) and Form(s), I thought, “oh no, not another article about CBA.” Knowing Professor Adhieh’s work, I took a flyer and read it anyway, and boy was I happy with my decision. This is a great article which should be of interest to anyone involved in administrative law, securities regulation and policy analysis more generally. Cost-benefit analysis has become an important regulatory tool, and Professor Adhieh’s article makes a valuable contribution to the literature on the special analysis required under Section 106 of the National Securities Market Improvement Act of 1996, 15 U.S.C. § 77b (2012) and to the literature on cost-benefit analysis more generally.

Ahdieh’s jumping-off point, section 106 of the National Securities Market Improvement Act of 1996, requires the Securities and Exchange Commission (SEC) to consider, in all of its actions, including rulemaking, “in addition to the protection of investors, whether [an] action will promote efficiency, competition, and capital formation.” As Ahdieh observes, on its face, this provision has little bite—it requires only consideration of the effect on markets and it does not impose any substantive standard such as the efficiency requirement imposed by Congress in other regulatory contexts. Despite the moderate nature of Congress’s language, as Ahdieh reports, when the SEC promulgated a regulation expanding shareholder access to corporate proxies to nominate corporate directors, “[c]onsidering SEC rulemaking unsafe at any speed, . . . the Business Roundtable and the Chamber of Commerce challenged the new rule . . . invoking the language of Section 106 . . . [arguing] that the SEC’s assessment of the costs and benefits of mandatory proxy access had not met the requirements of Section 106.”

Surprisingly, in Business Roundtable v. SEC, 647 F.3d 1144 (D.C. Cir. 2011), the DC Circuit agreed with the challengers’ arguments, and in effect construed Section 106 as imposing a rigorous cost-benefit analysis requirement on the SEC. As Ahdieh notes, “most surprising was Business Rountable’s dramatic departure from the deference the courts had previously shown agency evaluations of costs and benefits.”

So, what’s so great about Ahdieh’s article? Many things. I’ll list a few of them. First, Ahdieh takes a fresh look at the development and application of cost-benefit analysis in American administrative law, with excellent analysis and biting critique along the way. Second, Ahdieh conducts an extended, in-depth analysis of the enactment, text, and application of Section 106. This is a first-rate case study of a regulatory statute, worthy of inclusion in a course on Legislation or Securities Regulation. Third, Ahdieh explores the values advanced by cost-benefit analysis including enhancing efficiency, reducing cognitive bias, forcing rational priority setting, reducing regulation, and increasing transparency through clearer analysis and enhanced monitoring of agencies. Fourth, Ahdieh explores different forms of cost-benefit type analysis based on the unique language of each regulatory statute imposing analytical requirements. He persuasively argues that Section 106 is best understood as imposing a purely procedural obligation, similar, I guess, to the National Environmental Policy Act’s (NEPA) requirement that agencies “consider” the environmental effects of their actions.

In my view, this discussion contains a devastating critique of the Business Roundtable decision which Ahdieh, in his typically modest and even-handed style, soft-peddles a bit too much for my tastes. Ahdieh’s conclusion is that “[j]udicial review under Section 106 should be circumspect . . . and highly deferential. Such deference is consistent with the traditionally limited judicial constraints on the SEC . . . [and] is in line with the Commission’s significant expertise and its stature as an independent agency.” No kidding. This critique could be applied across a wide swath of the D.C. Circuit’s administrative law decisions.

Ahdieh’s article was a joy to read and contains lessons that transcend its context. Anyone interested in cost-benefit analysis, securities regulation, judicial review, statutory construction and the regulatory process will benefit from the time spent reading this article. It’s the type of article that gives administrative law scholarship a good name.

Cite as: Jack Beermann, Safe at Any Speed: Robert Ahdieh’s Take on Cost-Benefit Analysis in Financial Markets, JOTWELL (November 26, 2014) (reviewing Robert B. Ahdieh, Reanalyzing Cost-Benefit Analysis: Toward a Framework of Function(s) and Form(s), 88 N.Y.U.L. Rev. 1983 (2013)), http://adlaw.jotwell.com/safe-at-any-speed-robert-ahdiehs-take-on-cost-benefit-analysis-in-financial-markets/.
 
 

Salarization’s Impact on Governmental Legitimacy

As a member of the ABA Administrative Law and Regulatory Practice Section’s Scholarship Award Committee, I would like to recommend this year’s winning submission, Professor Nicholas Parrillo’s book, Against the Profit Motive: The Salary Revolution in American Government, 1780-1940. Not only did the book win the ABA Administrative Law Section’s award for the best work of administrative law scholarship published in 2013, it also won the 2014 Law and Society Association’s J. Willard Hurst Prize for the best book on socio-legal history. The book focuses on a seemingly mundane, but ultimately decisive topic: how government compensates its employees. Understanding why the government moved to a salary-based pay structure is actually fundamental to understanding how the modern administrative state became viable, functional, and—critically—legitimate.

For much of the eighteenth, nineteenth, and even the twentieth, centuries, public officials were paid in ways that today we might find shocking:

Judges charged fees for transactions in the cases they heard. District attorneys won a fee for each criminal they convicted. Tax investigators received a percentage of the evasions they discovered…. Policemen were allowed rewards for recovering stolen property or arresting suspects. Jailors collected fees from inmates for permitting them various privileges, and the managers of penitentiaries had a share of the product of inmates’ labor. Clerks deciding immigrants’ applications for citizenship took a fee for every application. Government doctors deciding veterans’ applications for benefit did the same, as did federal land officers deciding settlers’ applications for homesteads. Even diplomats could lawfully accept a “gift” from a foreign government upon finalizing a treaty. (P. 1.)

Professor Parrillo usefully sorts these surprising compensatory arrangements into two categories he calls facilitative payments and bounties. He defines facilitative payments as sums that public officers received for performing a service that a citizen wanted or needed, such as issuing a permit. He defines bounties as sums that officers received for performing a service that the citizen did not want, such as arresting someone or finding a tax discrepancy. These two types of payments gave rise to different social relationships between the public officials and those they regulated. On the one hand, the facilitative payment system fostered a customer-seller relationship, rather than a public service relationship. Because not everyone could afford to pay public officials or pay the same amounts, the facilitative payment system fostered inequality, leading many to view the system as corrupt. On the other hand, bounties fostered an adversarial relationship between the public official and those who were targeted. Bounties directly conflicted with the voluntary nature of most governmental compliance. Ultimately, salaries replaced both compensation systems because the systems failed to promote democratic principles and legitimacy. Citizens will only cooperate with a government they believe to be legitimate; Professor Parrillo shows how facilitative payments and bounties undermined legitimacy.

While Against the Profit Motive is certainly of historical significance, it offers a cautionary tale about moving towards privatization (and the for-profit business model) and moving away from salarization. If we fail to remember lessons from the past, we may be doomed to repeat them. Privatization permits service contractors working for profit to handle duties previously entrusted to salaried government workers, thus, bringing monetary incentives to the forefront. Should employees have a financial stake in how governmental programs are run? According to Professor Parrillo, the answer to that question is a resounding “no”; however, arguments have recently been made to privatize government functions from education to prison management to national security. Moreover, some federal programs, such as Medicare, contain facilitative payment-like incentives. Such arguments neglect the teachings of our past.

Against the Profit Motive is well written, extensively researched, and offers interesting insights into a once-common approach to remuneration, which has now been, wisely, abandoned. At a time when local, state, and even the federal governments are considering privatization, Professor Parrillo’s historical examination cautions us against embracing profit as motive for government function. It is an impressive work of legal scholarship that without a doubt has relevance for contemporary debates about agency structure and incentives. While there is much to commend the book, it is imperfect. Professor Parrillo could have been much more instructive regarding how the historical implications of his work relate to contemporary administrative structure and practice. In other words, he fails to fully explore the relevance of the past to the possibilities of the future, leaving it to the reader to make those connections. In addition, the book is highly repetitive and overly detailed. Had Parrillo used a more critical editing pen, he would have had significantly more room to develop the relevance of his topic to the modern administrative state.

In sum, the book is an interesting, albeit comprehensive, read. It is an exhaustively researched and sophisticated analysis of the transformation in the way public officials are paid. Notably, the conclusions Professor Parrillo draws offer an important cautionary tale for using economic incentives to motivate public officials in modern times. He teaches that if we believe in a professional and politically insulated government service and if we want broad participation in administrative government, then we must fight against those who argue that government should be run like for-profit businesses.

Cite as: Linda Jellum, Salarization’s Impact on Governmental Legitimacy, JOTWELL (October 31, 2014) (reviewing Nicholas R. Parrillo, Against the Profit Motive: The Salary Revolution in American Government, 1780-1940 (2013)), http://adlaw.jotwell.com/salarizations-impact-on-governmental-legitimacy/.