Topic: General

A Key Reform for Budget Process Reform

Senate Budget Chairman Judd Gregg’s “Stop Over-Spending” (SOS) plan, announced last week aims at reinstating tight fiscal controls — after letting them erode over many years by gutting pay-as-you-go budget rules and pushing through massive supplemental spending outside of the regular budget process.

The proposal includes a line-item veto for the President to cut wasteful spending and a bipartisan commission for devising solutions to entitlement program shortfalls. 

Its main focus, however, is to set deficit caps tied to mandatory spending cuts similar to the Gramm-Rudman-Hollings Deficit Control Act from the mid-1980s.  That act, however, proved ineffective and had to be revised multiple times.

The key to whether lawmakers are really serious about budget process reform is whether proposed changes are based on short-term deficit measures or forward-looking long-term unfunded obligation measures. 

Spending control laws based on short-term budget measures are likely to mislead policymakers into adopting inadequate or inappropriate reforms.  Imagine if we were to determine the need for Social Security reform based on its net cash flow today–which is in surplus.

And we’ve been here before–we thought the pay-as-you-go constraints from the Budget Enforcement Act had done their job and turned them off in 2002–only to see a federal spending spree like never before.  If adopted (which appears unlikely) SOS may work for a time, but history is likely to repeat itself.

The key to a budget process is the budget measures on which spending constraints are based.  Using the same old budget measures will not deliver a new process.  It’s time to make fundamental changes by adopting more appropriate fiscal yardsticks.  Unless budget measures fully reflect the budget problems that lie ahead and correctly reflect the consequences of policy changes, we will continue to lurch from one reform to the next without making any improvement–at best.

The Common Law Court and Other Myths

I’ve posted my latest law review article on SSRN.  The article argues that some of the same rules that apply to executive branch agencies, like the SEC and EPA, should apply to “class action lawmaking” in ordinary courts.  A warning:  much of it will seem rather dry and esoteric to non-lawyers.   

Even so, I hope it will help highlight a serious blind spot of many Hayek-flavored policy proposals advanced by fellow libertarians.  These flawed proposals go like this:  “Agency A has identified a regulatory problem and offered a command-and-control solution.  But command and control solutions often have unanticipated consequences.  By contrast, the incremental case-by-case approach of common law courts allows regulation to adapt to unexpected problems as they arise. Hence, it’s better not to regulate and leave the issue to the common law process.”  (If you search through Cato policy analyses, you may find a few arguments that fit this mold.) 

Here’s the problem with that argument:  Over the last 50 years, courts have rejected the utility of incremental case-by-case decisionmaking, now seen as too “costly” for a mass industrial economy, and have instead patterned their proceedings after administrative agencies.  Now trial judges use procedures like the class action and mechanisms for case consolidation to put hundreds of thousands of recurring disputes raising similar facts before a single “expert” judge or special master tasked with sheparding these disputes into one global settlement.   As a result, in many cases, a choice between courts and agencies is a Hobson’s choice:  both courts and agencies are forums for the sweeping, centralized, one-shot regulation that Hayek so distrusted. 

Unfortunately, many libertarians ignore the sea change in the way our courts run themselves, envisioning that beyond the hulking canyons of Southwest D.C.’s alphabet gulch, there is a pristine land of 19th century “common law” courts, preserved in amber, waiting to rescue us from our zest for central planning.  The persistence of this myth shields us from the difficult libertarian trade-offs between modern-day judicial and administrative regulation. 

My article doesn’t venture an answer to these complicated trade-offs.  (I’m just a humble caveman lawyer.)  Instead, I  suggest a far more modest first step:  That courts start talking about class action law and administrative law in the same legal language, using the same legal concepts, putting us all on notice about the essential similarity between modern judicially managed and agency-managed regulation. 

Budget Mission Accomplished?

The crew over at National Review Online authored an editorial today in which they suggest that President Bush might soon be able to take a victory lap. Why? Because the deficit is shrinking faster than anyone thought it would.

Fresh data from the Congressional Budget Office shows that the deficit-to-date for the current fiscal year is $50 billion smaller than it was this time last year. Since President Bush declared that one of his second-term goals would be to cut the deficit in half (as a share of GDP) by 2009, the NRO editors all-but-suggest that it might soon be time for the White House to recycle those old “Mission Accomplished” banners.

Yes, the economy is growing faster than anyone anticipated, and that’s very good (if underreported) news. This has led to a larger-than-expected boost in tax revenue, too – so unexpected, in fact, that Congress and the President haven’t been able to find ways to spend it all, although that’s not for lack of trying. Ergo, the budget deficit shrinks.

But if you look beyond the self-congratulation, you might notice how far Republicans have retreated from the battle for limited government (as I explain in my forthcoming book). When Republicans won control of Congress in 1994, they promised elimination of the budget deficit in seven years – a promise they were able to make good on in just three years. Now the GOP’s fiscal Maginot line has been drawn at merely halving the deficit in five years. That this less-than-impressive goal might be achieved sooner than later is really a tiny consolation.

Besides, a single-minded focus on the yearly budget deficit causes the GOP to draw their eyes off what should be the real prize: A reduction in the size of government altogether. Is there a good reason, for instance, why supporters of limited government should prefer a balanced budget that swallows up 20% of the U.S. economy to one that eats 18.4% as it did in 2000?

It looks like we might just have to settle for the former. According to the most recent data available, gross domestic product grew by 6.8% since last March. But federal spending ballooned by 9% over the same period. The U.S. economy has substantial ground to cover to make this a competitive race.

Or, think of it this way: If the federal budget had grown from the day George W. Bush was inaugurated at the same annual rate it had for the six years before he came to office, the federal budget would consume only 17% of GDP today. And it would be balanced, even after taking into account the tax cuts. Instead, the budget is still unbalanced today and government spending hovers around 20%.

This fall, Republicans will likely trumpet the news of the incredible shrinking deficit as an unsung victory for small-government conservatives. That the economy is getting better is something to which the mainstream press should be paying more attention. But the news on the deficit is only a very small victory, however, and one that hardly proves that the GOP is still a party of small government.

Rapanos, Raich, and Agency Discretion

One interesting question lurking in the background of some recent Supreme Court cases is the scope of discretion executive agencies receive when they assert very broad power over areas that are traditionally committed to state authority. Traditionally, under the Court’s landmark 1984 decision in Chevron v. Natural Resources Defense Council, courts are supposed to defer to an agency’s “reasonable” interpretation of its authority when the statute does not clearly speak to the question at issue. The question is, what happens when an ambiguous statute buts up against the outer boundaries of federal constitutional power?

After Gonzales v. Raich, the question was all the more pressing. Raich held that Commerce Clause concerns are at a low ebb when Congress regulates an interstate market “comprehensively.” In that context, when Congress finds that regulating local conduct is essential to the larger regulatory scheme, the majority in Raich said it will defer to Congress’s judgment. As Cato’s amicus brief in Rapanos argued:

If, after Raich, agencies can use legislative history, statutory purpose, or context to manufacture ambiguity nowhere apparent from the text of a statute, and if, in turn, agencies interpreting their power under “ambiguous” statutes are granted both the full quantum of deference owed to Congress under Raich and under Chevron, the potential for agency aggrandizement is immense, indeed.

In light of these and other concerns, we argued, Congress (at a bare minimum) must clearly state in the text of the statute that it intends to push the envelope of federal power before agencies can assume the power and discretion to step into an area traditionally regulated by states.

Scalia appears to take these concerns seriously. First, he notes: “Even if the phrase ‘the waters of the United States’ were ambiguous as applied to intermittent flows, our own canons of construction would establish that the Corps’ interpretation of the statute is impermissible.” In other words, the Court’s constitutional concerns trump agency discretion under an ambiguous statutes–even one that constitutes comprehensive regulation under Raich. This is an important qualification of the traditional Chevron test, one that reigns in the worst excesses of Raich.

Second, in footnote 9, Scalia underscores that before an agency can reach local conduct under a comprehensive regulatory program, Congress must clearly authorize it to do so in the statutory text. Only then will the Court consider whether the agency’s authority is consistent with the Constitution’s division of power between the federal government and states.

The troubling thing about Roberts’ concurrence is that, on one reading, he would appear to take a far more expansive view of agency discretion. He says:

Agencies delegated rulemaking authority under a statute such as the Clean Water Act are afforded generous leeway by the courts in interpreting the statute they are entrusted to administer. See Chevron U. S. A. Inc. v. Natural Resources Defense Council, Inc., 467 U. S. 837, 842-845 (1984). Given the broad, somewhat ambiguous, but nonetheless clearly limiting terms Congress employed in the Clean Water Act, the Corps and the EPA would have enjoyed plenty of room to operate in developing some notion of an outer bound to the reach of their authority.

The proposed rulemaking went nowhere. Rather than refining its view of its authority in light of our decision in SWANCC, and providing guidance meriting deference under our generous standards, the Corps chose to adhere to its essentially boundless view of the scope of its power. The upshot today is another defeat for the agency.

Its far from 100% clear what kind of test Roberts envisions here. But the best reading is this: If the agency deliberates about its constitutional and statutory authority in a “limiting way” in the context of public notice and comment procedures, he would give the agency “generous” deference, even the EPA would draw lines different (and more expansive) than those that Scalia’s plurality opinion draws. In effect, Roberts would give an agency treading close to the constitutional boundary the same deference that the Court grants to Congress under Raich if the agency draws any limits, no matter how slight, on its authority–precisely the interpretive method we raise red flags about in our brief.

Supreme Court Trims Reach of the Clean Water Act, For Now

As noted, the Supreme Court decided the much anticipated consolidated Commerce Clause-flavored challenges to the Clean Water Act, Rapanos v. United States and Carabell v. United States, trimming back the scope of federal wetlands regulation. (Cato filed an amicus brief in support of the petitioners in Rapanos, which you can access here.) The decision is a mixture of equal parts good news and not-quite-so-good news.

The good news is Justice Scalia’s opinion for the court, joined by three other justices: the Chief, Justice Thomas, and Justice Alito. The not-quite-so-good news is the concurrence, written by Justice Kennedy–the all important fifth vote–which significantly qualifies Justice Scalia’s plurality decision, and the concurrence written by Chief Justice Roberts.

First, a bit of background.

 The Clean Water Act, among other things, regulates point source pollution (pollution discharged through a drain of some sort). The Act says regulators can impose criminal sanctions for any pollution into “navigable waters,” defined as “waters of the United States.” But one bit of the Act, imposing reporting requirements and such on state dredging programs, refers to federal waters “adjacent to” navigable water. Federal environmental regulators suggest, based on this apperance of the word “adjacent,” that the Act covers some non-navigable waters.

Indeed, federal regulators go much, much further than that. They argue that any land with a “hydrological connection” to navigable water is within federal regulatory authority. That means even a trickle of surface water or ground water that might eventually wend its way off a land-locked piece of property, trickling drops into a navigable body of water scores of miles away, or more, is within federal power. Hence, the prosecution of John Rapanos: A Michigan commercial developer, Mr. Rapanos dumped sand on one parcel of land in preparation for a real estate development. He was slapped with criminal charges–and threatened with jail time–because grains of that sand may be carried by rainwater through on old run-off drain and, after an epic journey through culverts, creeks and ditches, end up in the Kawkawlin River, twenty miles or so away.

Needless to say, this reading of the Clean Water Act stretches its text past the breaking point. Says Scalia’s opinion:

The extensive federal jurisdiction urged by the Government would authorize the Corps to function as a de facto regulator of immense stretches of intrastate land-an authority the agency has shown its willingness to exercise with the scope of discretion that would befit a local zoning board. We ordinarily expect a “clear and manifest” statement from Congress to authorize an unprecedented intrusion into traditional state authority. The phrase “the waters of the United States” hardly qualifies.

Likewise, the Corps’ interpretation stretches the outer limits of Congress’s commerce power and raises difficult questions about the ultimate scope of that power. Even if the term “the waters of the United States” were ambiguous as applied to channels that sometimes host ephemeral flows of water (which it is not), we would expect a clearer statement from Congress to authorize an agency theory of jurisdiction that presses the envelope of constitutional validity.

In sum, on its only plausible interpretation, the phrase “the waters of the United States” includes only those relatively permanent, standing or continuously flowing bodies of water “forming geographic features” that are described in ordinary parlance as “streams[,] … oceans, rivers, [and] lakes.” The phrase does not include channels through which water flows intermittently or ephemerally, or channels that periodically provide drainage for rainfall.

Read by itself, the upshot of Scalia’s opinion is a significant victory for federalism. It rejects environmental regulators’ “hydrological connection” test for federal jurisdiction over wetlands and, furthermore, requires that regulated wetlands have a continuous, standing surface connection to navigable water. It recognizes, moreover, that the Clean Water Act is at the periphery of federal commerce power.

Unfortunately, the Chief Justice’s and Justice Kennedy’s concurring opinions muddy the water (bad puns not intended).

First Kennedy. Kennedy says the Clean Water Act doesn’t raise difficult questions of federal commerce power. Instead, based on a simple interpretation of the Act’s text and legislative purpose, he contends only that regulators lack control over any water–surface or ground, continually running or intermittent–without a “significant nexus” to navigable water. What this means exactly we don’t know. Kennedy wants the lower courts to come up with a significant nexus text–one more bite at the apple, in other words.

Chief Justice Roberts, moreover, invites the EPA to engage in formal notice and comment rulemaking (that’s legalese for a regulatory proceeding that announces a new rule after public input) about the scope of federal power over wetlands and suggests that if it engages in such rulemaking, it would deserve great leeway in the lines it draws. This is a very significant qualification, as it suggests he would be less inclined to second-guess the agency in such a case, even if it draws lines around federal authority that are different than the Court’s preferred lines. Roberts’ concurrence deepens my suspicion that he is more committed to a broad theory of agency discretion than any other justice on the Court, including Scalia.

Just a Bit of Harmless Schadenfreude?

In today’s “L.A. Story” editorial (subscription barrier), the Wall Street Journal criticizes Democratic legislators and teachers’ union officials for blocking an educational power grab by Democratic L.A. Mayor Antonio Villaraigosa.

Just a bit of harmless schadenfreude over Democratic infighting? Not really. In the process of painting Villaraigosa as victim and protagonist, the article perpetuates a dangerous myth: that mayoral or state takeovers of failing school districts are a worthwhile education reform.

The editorial points to districts like Boston and Chicago – widely regarded as successful takeovers – but ignores cases like Detroit and Paterson that were clear failures.

And how successful is Chicago, anyway? The “poster district” for takeovers, Chicago has not exactly become an educational Mecca over the past 11 years. A study of teacher quality released just last week found that “Chicago Public Schools fared particularly poorly…, with three-quarters of the campuses landing on the bottom of the pile.”

And how about the ultimate test? What share of entering Chicago high-school students are likely to go on to graduate from college by the time they’re 25? An April 2006 University of Chicago paper provides the answer: 6.5 percent. For African American boys, the figure is 2.5 percent.

What the children of Chicago, L.A., and every other American city and town need is not more central planning from the mayor’s office or the statehouse. What they need is the ability to easily kiss bad schools goodbye and transfer to better ones.

Private Schools Will Always Bail Out Public Schools

Picking up on a Washington Post article I blogged about a couple of weeks ago, in today’s New York Times columnist Brent Staples calls for public schools to get on the ball and provide a decent education for disabled kids. He also notes, though, that even if the public schools do markedly improve, “some severely disabled children will always need to be educated outside the public system.”

To many people, such a statement is practically heresy: Not only doesn’t Staples buy the rubbish dispensed by public schooling apologists that government schools must take all comers, he writes that public institutions will always need a private safety net to catch the most needy children.

This kind of reality-based heresy could easily get Mr. Staples rhetorically stoned by public school zealots. It’s also the kind of heresy that needs to be repeated over, and over, and over again.