Topic: Government and Politics

Government Must Honor Its Contracts

Virtually every aspect of government’s work depends on contracts, whether they be with manufacturers of naval ships, civilian contractors, the companies that sell office supplies, or the landlords who lease the office space that houses the vast bureaucracy. These contracts, like any contract, only work when both parties have legal certainty; each must be able to depend on the promises made by the other.

That said, federal contractors do have to assume less certainty when dealing with the government because the Supreme Court has held that contracts can’t bind Congress from passing new legislation, or agencies from adopting new regulations. For example, while the government could enter into a contract promising to buy 100 widgets, Congress could pass a law making it illegal to manufacture or sell widgets—effectively voiding the agreement.

In the case of Century Exploration v. United States, an energy company leased the rights to an oil field in the Gulf of Mexico owned by the government for $23 million dollars up front, and $50,000 per year of the lease. Because oil drilling is a heavily regulated industry, Century only felt safe spending that kind of money because the lease contained a promise that Century wouldn’t be subject to any changes to the law that the government might make in the future, except for a specific class of regulations created under the authority of a single statute, the Outer Continental Shelf Lands Act (OSCLA). Without this promise, there would have been nothing to stop the government from taking Century Exploration’s money and then outlawing drilling in the Gulf of Mexico, or passing new regulations that would make it prohibitively expensive for Century to make use of the leased plot.

Unfortunately, the government did the very thing it promised not to. Under the Oil Pollution Act (OPA), drilling companies have to calculate the volume of oil that would be released in a “worst case scenario” and prove that they have the financial resources to fund cleanup efforts. The method for calculating the amount of oil, and the cost of cleanup, are governed by regulations issued under the OPA. Two years into Century’s lease, however, a civil servant in the Interior Department sent the company an email demanding a recalculation of the “worst case scenario” using a more extreme methodology contained in an attached FAQ. Using that new method, the cost of cleaning up a hypothetical spill increased from $4.5 million to $1.8 billion. Because Century couldn’t prove that it would have $1.8 billion on-hand in the event of a disaster, it could no longer operate on the leased plot.

Century appealed to the courts, relying on a 2000 case called Mobil Oil in which the Supreme Court interpreted a nearly identical lease to mean that the government would breach its contract if it tried to apply new laws or regulations to the leaseholders (except, again, for regulations under OSCLA). Under Mobil Oil, unilaterally changing the method of calculating the volume and cost of a spill would be just such a breach; the regulatory changes were made under the OPA, not OSCLA, and the changes were made by email, not by formal regulation. The government insisted it had done no wrong and, remarkably, the U.S. Court for the Federal Circuit agreed.

Cato has filed an amicus brief urging the Supreme Court to review this case and make clear that the government can’t violate contractual obligations with impunity. We make two key points:

There’s Room for Direct Democracy in a Republic

Not many people know that there’s a clause in the Constitution that charges Congress with guaranteeing every state a “republican form of government.” Even fewer people are aware of exactly what that means.

Historically, the Guarantee Clause is considered to have been a measure the Framers included to ensure that the governments of the states—which used to have far greater autonomy—didn’t devolve into monarchies or other despotic forms. But the clause’s legal effect has never been fully fleshed out. Not that there haven’t been opportunities; claims based on the Guarantee Clause are peppered throughout U.S. history. Courts have typically disposed of them by invoking the political question doctrine, which they use to avoid deciding an issue they believe is more appropriately left to the elected branches. Since there’s no legally binding definition of “republican,” a court applying the Guarantee Clause has little to work with, also contributing to the tendency to treat such cases as non-justiciable.

Accordingly, when a group of legislators and citizens groups supporting big government banded together to attack Colorado’s Taxpayer Bill of Rights (TABOR) based on a Guarantee Clause claim, it seemed like a longshot. Their theory was that the state no longer had a republican form of government because the TABOR—a voter-approved state constitutional amendment—restricts the legislature’s ability to raise taxes without approval from the people of Colorado.

Colorado Gov. John Hickenlooper (D), defending the state’s constitution, moved to dismiss the case in federal district court but, surprisingly, lost the motion. Even more surprisingly, a panel of the U.S. Court of Appeals for the Tenth Circuit affirmed that denial, which meant that the plaintiffs’ claims could go to trial and jeopardize the continued existence of the state’s popular anti-tax measure. Colorado has one more chance, however, to prevent poorly constructed Guarantee Clause claims from being heard in federal courts and thus jeopardizing the dozens of state constitutional measures that use popular input: the Supreme Court.

Governor Hickenlooper has filed a petition for certiorari requesting that the Supreme Court, among other things, put to bed the erroneous notion that elements of direct popular participation and direct democracy can’t exist in a republican government. Joined by the Independence Institute, Reason Foundation, and Individual Rights Foundation, Cato has filed a brief supporting Colorado’s petition. We argue that the Court should hear the case so it can inform the lower courts that pretextual Guarantee Clause claims don’t belong in federal courts.

We give three reasons for this position. First, the plaintiffs’ complaint fails to provide a court with legal standards coherent enough to decide the case under the Guarantee Clause. Second, under Supreme Court precedent, the idea that initiatives and referenda are incompatible with republican government was resolved (and rejected) when Congress admitted states that used these popular procedures into the union. Third, even a brief look at the history of the Founding Era’s understanding of the words “republic” and “republican” dispels the myth on which the plaintiffs base their claim: that direct popular participation is incompatible with the republican form. Our brief provides that historical context.

In sum, the suggestion that the Guarantee Clause—meant to ensure that state governments would remain governments “of the people” and wouldn’t revert to despotic monarchies—could be used to wrest greater control of the taxing power from the people makes the plaintiffs’ claims risible. The Supreme Court should take this opportunity to hear Hickenlooper v. Kerr and put an end to this case.

Obama’s Immigration Executive Order – Policy Implications

On Thursday, President Obama is expected to announce the specific provisions of his immigration executive order.  This order will have broad policy implications.  Below is a brief explanation of the changes in policy likely to be announced and their economic effects based on the leaked information.

Legalizations

The most contentious portions of the executive order will be the legalizations.  Many of the beneficiaries of all the legalization programs would be eligible for legal status through more than one program, creating significant overlap and making it difficult to predict exactly how many people would be eligible.  Below I will analyze each one and then sum up what the economic consequences are likely to be.

Federalism Should Trump the Drug War

Americans are angry with their politicians but nuanced in their political opinions.  Voters in Alaska simultaneously ousted their Democratic Senator and legalized the use of marijuana.  Floridians voted to allow the use of medicinal marijuana and reelected Republican Gov. Rick Scott.

In fact, Milton Friedman and William F. Buckley long argued against drug prohibition.  The electorate appears to be moving their way.

Which makes sense.  If you want to limit government and protect individual liberty, it’s impossible to ignore the ill consequences of arresting and imprisoning millions of people for using illicit substances. 

Drug use is bad.  Arresting people for using drugs is worse. 

But conservatives have another reason to abandon the drug war: federalism.

The Drug War has poisoned almost everything it touches.  The rule of law suffers.  Lawyers speak of the drug exception to the Fourth Amendment, since judges often sacrifice Fourth Amendment protections when drugs are involved. 

Constitutional interpretation is malformed.  In Gonzales v. Raich the Supreme Court held that Uncle Sam could regulate someone who grew marijuana for personal consumption under the interstate Commerce Clause.  The reasoning of conservative jurist Antonin Scalia was used by the legal Left to argue that ObamaCare was constitutional.

Federalism is another victim of the Drug War.  Many conservatives complain about the over-criminalization of life, with Washington encroaching on an area that’s traditionally a matter of state authority.

New Essays in Cato Online Forum on Growth

Here are the latest entries in the Cato Institute’s online forum on reviving growth (see here for some more background about the forum):

1. Tyler Cowen contends that foreign policy can have a major impact on long-term growth.

2. Heather Boushey argues that a national program of paid family leave will boost labor supply and therefore growth.

3. Eli Dourado proposes incentive pay for Congress.

4. Peter Van Doren cautions that there are no easy answers.

Government Shutdown Theater: Republicans Should Not Surrender to Obama’s Blackmail

Notwithstanding the landslide rejection of Obama and his policies in the mid-term election, I don’t think this will produce big changes in policy over the next two years.

Simply stated, supporters of limited government do not have the votes to override presidential vetoes, so there’s no plausible strategy for achieving meaningful tax reform or genuine entitlement reform.

But that doesn’t mean that there won’t be important fiscal policy battles. I’m especially worried about whether we can hold on to the modest fiscal restraint (and sequester enforcement) we achieved as part of the 2011 debt limit fight.

Today in Cato’s Online Forum on Growth

The Cato Institute’s special online forum on reviving growth (see here for more details) continues today with the following four essays:

1. Dean Baker argues for free trade in doctors and drugs – by eliminating immigration restrictions and patent protection.

2. Jim Manzi also calls for more high-skill immigration, as well as visionary investments in scientific research and technology projects.

3. Jonathan Rauch proposes a national apprenticeship system.

4. Philip K. Howard makes the case for radical simplification of law.