Topic: Government and Politics

Big Victory for Economic Liberty

Amid a financial crisis that has pundits playing the game of who can come up with the most nationalization and re-regulation—and a presidential campaign where neither candidate seems to have much coherent to say about the economy—one bright ray of light shone through.

And it came from San Francisco, no less.

On September 16, the U.S. Court of Appeals for the Ninth Circuit delivered a blow against unfair economic regulation in the case of Merrifield v. Lockyer. Pacific Legal Foundation lawyer and Cato adjunct scholar Tim Sandefur argued on behalf of Alan Merrifield, a businessman prevented from building structures to keep out pests by a bizarre licensing regulation. The California law in question required people who do not use pesticides to undergo years of training and take an examination testing their knowledge of chemicals and insects before they can use pest control techniques that involve neither chemicals nor insects.The law only applies to pigeons, rats, and mice, however, so putting spikes on a building to keep seagulls off it does not require a license. But the same activity aimed at deterring pigeons does. Moreover, the record showed that the rule was designed for the sole purpose of protecting people who have licenses from having to compete in the marketplace against upstart businesses like the one operated by Merrifield.

Circuit Judge Diarmuid O’Scannlain, writing for the panel majority, succinctly explained the problem with California’s rationale:

The possibility that non-pesticide-using pest controllers might interact with pesticides or will need the skill to suggest pesticide use when it would be more effective is the very rationale that government’s counsel proffered, and we relied upon, in upholding the requirement that Merrifield obtain a license under due process grounds. We cannot simultaneously uphold the licensing requirement under due process based on one rationale and then uphold Merrifield’s exclusion from the exemption based on a completely contradictory rationale. Needless to say, while a government need not provide a perfectly logically solution to regulatory problems, it cannot hope to survive rational basis review by resorting to irrationality.” (Emphasis in original)

That is, “economic protectionism for its own sake, regardless of its relation to the common good, cannot be said to be in the furtherance of a legitimate governmental interest.”

This decision is thus a tremendous blow against the various licensing advantages granted by legislatures to the few at the expense of the many. As Sandefur put it in PLF’s press release, “This is a victory for free enterprise and for the Constitution’s safeguards for entrepreneurship.”

The battle for economic rights remains an uphill struggle, however, because the invalidation of California’s pernicious legislation rested not on the basic right to earn an honest living but on the state’s “irrational singling out of three types of vertebrate pests” to the economic benefit of some exterminators as against others.The case necessarily turned on an “equal protection” violation, instead of constitutional protection of any substantive rights. Without that arbitrary listing of pigeons, rats, and mice, the pesticide/insect requirements would have withstood Merrifield’s challenge. Judge O’Scannlain implicitly recognized that reaching the correct result in this manner was intellectually unsatisfying, but that his hands were tied by the Supreme Court’s 1873 Slaughterhouse Cases (which eviscerated the Fourteenth Amendment’s Privileges or Immunities Clause). So long as the Supreme Court shies from revisiting the twisted logic of that precedent, the Constitution will offer precious little defense against legislation that restricts the ability of individuals to freely exchange goods and services.

Nevertheless, in establishing the legal principle that mere protectionism is not a legitimate state interest, the Merrifield case is a major victory for economic liberty—and the first time the Ninth Circuit has taken up this issue.

Congratulations to Tim and to Pacific Legal!

An Alternative to the United States of Permanent Receivership

If you have not seen this essay [.pdf] already, it is well worth your time. Zingales ends the essay:

The decisions that will be made this weekend matter not just to the prospects of the U.S. economy in the year to come; they will shape the type of capitalism we will live in for the next fifty years. Do we want to live in a system where profits are private, but losses are socialized? Where taxpayer money is used to prop up failed firms? Or do we want to live in a system where people are held responsible for their decisions, where imprudent behavior is penalized and prudent behavior rewarded? For somebody like me who believes strongly in the free market system, the most serious risk of the current situation
is that the interest of few financiers will undermine the fundamental workings of the capitalist system. The time has come to save capitalism from the capitalists.

The next 50 years? Perhaps. Markets deal with risk through deterrence. Individuals and firms take risks and gain or lose from their decisions. The gain or loss comes after the decision. If individuals and firms are protected from losses through taxpayer interventions, deterrence against bad risks cannot work. Risks are dealt with prior to a decision rather than afterwards. The government is charged with preventing unwise risk-taking before any decisions are made. Government officials come to have a veto over choices by private actors.

In this way, the United States of permanent receivership becomes in theory, and more and more in practice, a state of control over private decisions.

When to Worry about Moral Hazard?

In three different, recent op-eds, I’ve read that only during boom times should we worry about moral hazard — the idea that some actor will engage in overly risky behavior because he believes that he’ll be bailed out if the risk goes bad. The most recent op-ed to say this is Charles Goodhart’s, in today’s FT

OK, I did worry about moral hazard in 1998 when stock prices peaked. And again in 2006 during the housing price boom. 

Question: Instead of worrying, when is it time to “do” something about moral hazard? 

It seems the answer is never. During boom times, no one asks for government to play Good Samaritan. And during a bust — like now — when there’s opportunity to tell negligent investors to “go swim in the lake,” we’re told, well, the time to worry about moral hazard is during boom times! 

That’s another reason to call moral hazard the ”Samaritan’s Dilemma.”

HRW’s Deafening Denunciation of Hugo Chávez

Human Rights Watch cannot be accused of being a right-wing organization fostering Washington’s imperialist agenda. Thus, its recent report bluntly condemning Hugo Chávez for the erosion of democracy and the gross violation of civil liberties in Venezuela is creating shockwaves. The first reaction from the government in Caracas has been to expel HRW director José Miguel Vivanco.

In 236 pages, the report, titled “A Decade Under Chávez: Political Intolerance and Lost Opportunities for Advancing Human Rights in Venezuela,” details Chávez’s abuses against opposition groups, the media, organized labor, civil society, and his assault on the Courts. It’s a worthwhile read.

The United States of Permanent Receivership

Next year marks the 30th anniversary of the appearance of the second edition of Theodore J. Lowi’s The End of Liberalism, subtitled The Second Republic of the United States. The preface to the second edition ends, “I want to express a very belated thanks to Friedrich A. Hayek. His work had much more of an influence on me than I realized during the writing of the First Edition. I neither began nor ended as a Hayekist but instead found myself confirming, by process of elimination and discovery, many of his fears about the modern liberal state.”

Lowi argues that the Second Republic is marked by “the state of permanent receivership,” which is defined as “a state whose government maintains a steadfast position that any institution large enough to be a significant factor in the community may have its stability underwritten. It is a system of policies that sets a general floor under risk, either by attempting to eliminate risk or to reduce or share the costs of failure.” This state includes anticipatory receivership, which includes “businesses that are not actually on the brink of bankruptcy but are in a sector of the economy where bankruptcies or reorganizations are likely unless there is some kind of a preventive measure.”

Thirty years out, Ted Lowi looks pretty good this morning. Not much else looks good, but the second edition of The End of Liberalism shows that this dour morning has been coming for some time.

Read the book.

Oprah and the Tomnibus

For those not keeping close tabs on Congress, throughout this session Senator Tom Coburn (R-OK) has used procedural tactics to stop dozens of spending bills that would normally breeze through the Senate. Frustrated to no end, Senate Majority Leader Harry Reid (D-NV) bundled many of these bills together in an omnibus package, sometimes referred to as the “Tomnibus”.

Despite his attempt at political logrolling, Reid’s omnibus failed in July when senators voted to reject a motion to proceed to consideration of his legislation.

But now it’s back, thanks to Oprah Winfrey. On her television program, Oprah made an emotional lobbying pitch for the package. Her interest stems from the inclusion of one program that would spend a billion dollars to combat child exploitation.

With Oprah’s weight behind him, Reid will soon make another attempt to pass the Tomnibus, which would cost taxpayers roughly $10 billion and create at least 35 new programs.

Can Oprah have the same effect on legislation that she’s had on so many books?

Stay tuned.

Abuse of Power, Big Time

This week, the Washington Post ran two excerpts from Barton Gellman’s new book Angler: The Cheney Vice Presidency, which describes the fight over warrantless wiretapping in greater detail than we’ve had before. We still don’t know the precise reach of the original (pre-2004) program, nor do we have the classified legal analysis prepared by John Yoo. But Gellman’s account makes you wonder just how far the program and the legal theory went, given that it horrified men like Attorney General John Ashcroft, Deputy A.G. James Comey, and Office of Legal Counsel head Jack Goldsmith–all staunch conservatives who were perfectly comfortable with ambitious theories of executive power, all of whom (along with FBI Director Robert Mueller and sundry other top Justice officials) were ready to resign over the original warrantless wiretapping program. (Marty Lederman made a similar point last year, when Comey testified before the Senate Judiciary Committee).

Ashcroft’s record on civil liberties and executive power is fairly well known. And keep in mind who Goldsmith and Comey are. Goldsmith says plainly that he’s “not a civil libertarian,” and he got the OLC job on John Yoo’s recommendation. And as a US Attorney in New York, James Comey was quite comfortable with pushing the law to its limits and beyond. He prosecuted Martha Stewart for misleading federal investigators about behavior that wasn’t a crime, and he even seriously considered pursuing mail and wire fraud charges against disgraced reporter Jayson Blair for the hitherto unknown crime of making stuff up in the New York Times (Bill Kristol, beware). But the original program was a bridge too far even for them.

Gellman describes a “come to Jesus” meeting orchestrated by David Addington, Alberto Gonzales and Dick Cheney, to get the Justice Department to reauthorize the surveillance program:

Comey, Goldsmith and Philbin found the titans of the intelligence establishment lined up, a bunch of grave-faced analysts behind them for added mass. The spy chiefs brought no lawyers. The law was not the point. This meeting, described by officials with access to two sets of contemporaneous notes, was about telling Justice to set its qualms aside.

The staging had been arranged for maximum impact. Cheney sat at the head of Card’s rectangular table, pivoting left to face the acting attorney general. The two men were close enough to touch. Card sat grimly at Cheney’s right, directly across from Comey. There was plenty of eye contact all around.

This program, Cheney said, was vital. Turning it off would leave us blind. Hayden, the NSA chief, pitched in: Even if the program had yet to produce blockbuster results, it was the only real hope of discovering sleeper agents before they could act.

“How can you possibly be reversing course on something of this importance after all this time?” Cheney asked.

“I will accept for purposes of discussion that it is as valuable as you say it is,” Comey said. “That only makes this more painful. It doesn’t change the analysis. If I can’t find a lawful basis for something, your telling me you really, really need to do it doesn’t help me.”

“Others see it differently,” Cheney said.

There was only one of those, really. John Yoo had been out of the picture for nearly a year. It was all Addington.

“The analysis is flawed, in fact facially flawed,” Comey said. “No lawyer reading that could reasonably rely on it.”

Gonzales said nothing. Addington stood by the window, over Cheney’s shoulder. He had heard a bellyful.

“Well, I’m a lawyer and I did,” Addington said, glaring at Comey.

“No good lawyer,” Comey said.

Bonus Angler revelation: Former House Majority Leader Dick Armey suggests that Cheney lied to him to keep Armey from going all wobbly on the Iraq War vote:

The threat Cheney described went far beyond public statements that have been criticized for relying on “cherry-picked” intelligence of unknown reliability. There was no intelligence to support the vice president’s private assertions, Gellman reports.

Armey had spoken out against the coming war, and his opposition gave cover to Democrats who feared the political costs of appearing weak. Armey reversed his position after Cheney told him, he said, that the threat from Iraq was “more imminent than we want to portray to the public at large.”

Cheney said, according to Armey, that Iraq’s “ability to miniaturize weapons of mass destruction, particularly nuclear,” had been “substantially refined since the first Gulf War.”

Cheney linked that threat to Hussein’s alleged ties to Al Qaeda, Armey said, explaining “we now know they have the ability to develop these weapons in a very portable fashion, and they have a delivery system in their relationship with organizations such as Al Qaeda.”

“Did Dick Cheney … purposely tell me things he knew to be untrue?” Armey said. “I seriously feel that may be the case… . Had I known or believed then what I believe now, I would have publicly opposed [the war] resolution right to the bitter end.”