Sunday, June 24, 2012

Legal News

Two legal items in last week's news caught my eye: The legal challenge to Dodd-Frank, and a challenge to Virginia's "certificates of need" for new hospitals.  I've written about both from an economic, and slightly political-economy viewpoint. The legal challenges are a new and interesting angle.


I am troubled by Dodd-Frank's reliance on discretionary power given to appointed functionaries. "Systemically important" is whatever they determine it to be, even after the fact.  There is no rulebook, no way to know ahead of time how to avoid "designation" and "resolution" and little recourse if you disagree. This strikes me as a poor mechanism from a moral-hazard, rules-vs-discretion, precommitment-vs-expost authority economic basis, and worse from a political economic basis of avoiding capture, "crony capitalism," keeping regulation from being subverted to stifle competition, and so on. But, knowing little about law,  I didn't think it was unconstitutional. All sorts of silly laws are constitutional.

"Certificates of need" for hospitals are one of the many barriers to entry enacted by state governments and enforced by state regulators. To start a hospital, a state board needs to give you one of these certificates, and all your competitors get to come to the hearing and complain that you're stealing their business. In Illinois, keeping up the profits of incumbents is written right there in the statute defining the board that hands out certificates.

Again, horrible economics, but governments have been using the fig-leaf of consumer protection to stifle competition and prop up politically-connected incumbents for centuries if not millenia.

Well, perhaps the framers of the constitution had more foresight than I thought. There is an interesting prospect that both of these horrible bits off economics are in fact unconstitutional and can be brought down by legal challenge.

Both threads will come together this week. We will hear on the constitutional challenge the law now called Obamacare even by its defenders.  But here the legal challenge -- the mandate -- is one of the least objectionable pieces of economics. I  wish stupid economics were unconstitutional, and lawyers could go after the heart of the bill.  If the separation of powers case for Dodd-Frank works, perhaps they will, for the ill defined terms, arbitrary power, regulator discretion and so forth in the health law make even Dodd-Frank look good.

In the big picture, our Obamacare debate has focused on health insurance, but the awful economics and regulatory destruction of the health care markets should be higher on the list. Why can't you walk in to a hospital and have any idea what the real prices are? Why does "thank you, I'll pay cash" mean you'll get socked with a huge bill, not a nice discount? Anti-competitive regulation is a big answer.  Perhaps the Virginia case can begin the dismantling of state and federal regulation strangling competition in health care.


The main legal challenge to Dodd-Frank centers on the Consumer Financial Protection Bureau.  Gray and Purcell start with a nice quote from President Obama
"Our financial system only works—our market is only free—when there are clear rules and basic safeguards that prevent abuse, that check excess, that ensure that it is more profitable to play by the rules than to game the system." We completely agree.
As do I. "Rules." Which is not how Dodd-Frank is structured:
The FSOC can declare a financial firm "systemically important"—that is, too big to fail—based on "any" "risk-related factors" that it "deems appropriate." And the CFPB can punish even responsible lenders who in good faith offer loans that the bureau later deems to be "unfair," "deceptive" or "abusive."

Those open-ended standards place no limits on the regulators' power. Indeed, in January newly appointed CFPB Director Richard Cordray told Congress that he believes it is "probably not useful" to try to define in advance what an "abusive" lending practice is. Instead, he intends to use his enforcement powers to retroactively punish lenders based on his view of the "facts and circumstances" of each case.
They echo my complaints about the FSOC.

Stupid, yes. But unconstitutional? Their argument rests on separation of powers, and "checks and balances:"
The Constitution empowers the president and Congress, as well as our courts, to prevent regulators from running amok with excessive, arbitrary or even partisan regulations.

But Dodd-Frank does not honor checks and balances. It eliminates them. The CFPB is not subject to Congress's "power of the purse,"... Instead, Dodd-Frank lets the CFPB claim more than $400 million from the Federal Reserve each year and prohibits Congress from even reviewing that budget. The president's control over the CFPB is limited because by law he can remove the agency's director only under strictly limited circumstances. Finally, Dodd-Frank limits the courts' review of CFPB's legal interpretations.
The details of the complaint adds lovely detail on the Alice-in-Wonderland quality of the words "abusive" "deceptive" and "unfair" practices, (see p. 10), adds the legal argument that theyare ex-post-facto constructs. Maybe the prohibition on bills of attainder can apply to regulatory decisions?

I wish the suit emphasized more the FSOC rather than the CFPB, which is a larger component of Dodd-Frank and a much bigger danger. But you don't have to be too much of a conspiracy theorist to realize why the big banks under the FSOC's thumb aren't willing to sign on to a complaint. It's rather courageous that so many small banks signed on. Given the CFPB's wide discretion, they are putting themselves at real risk.

Will it work? I don't know. The obvious counterargument is that this structure is set forth in legislation, passed by Congress and signed by the President. If they want to give up their power, they can do so. The complaint (p.29) already tries to counter this by pointing out precedents on the limitations of Congress' ability to devolve its power.

The complaint and oped get really mad about the director's appointment
Moreover, Mr. Obama nullified one of Congress's few remaining limits on the CFPB—namely, Senate review and confirmation of its nominated director—by deeming the Senate to be in "recess" during a short break in early January and unconstitutionally appointing Mr. Cordray director without the Senate's advice and consent
But this point is really not about the structure of the bill, it is a criticism of President Obama's action. The statute says the director should be approved by the Senate. If the Administration acted unconstitutionally in its appointment of the director, I can see how they can reverse that action, but I don't see how that makes the statute unconstitutional. But it's better for me not to play lawyer.

Still, I do find the idea attractive (am I being too hopeful?) that something so awful in its economic structure is also unconstitutional -- and for much of the same reasons.


The Insitute for Justice summary of their complaint against Virgina's bureau is a nice primer on how state "consumer protection" is really "competitor protection,"
If you want to offer new healthcare services, even something as routine as opening a private clinic, you have to obtain special permission from the [Virginia] state government. And permission is not easy to come by: Would-be service providers have to persuade state officials that their new service is “necessary”—and they have to do so in a process that verges on full-blown litigation in which existing businesses (their would-be competitors) are allowed to oppose them. Not surprisingly, this process can be incredibly expensive, and it frequently results in new services being forbidden to operate at all.

To be clear, this requirement (called a certificate-of-need or CON program) has nothing to do with public health or safety. Separate state and federal laws govern who is allowed to practice medicine and what kind of medical procedures are or are not permitted. Virginia’s CON program only regulates whether someone is allowed to open a new office or purchase new equipment; it is explicitly designed to make sure new services are not allowed to take customers away from established healthcare services.
Both in Virginia and Illinois, these restrictions were also put in place in the name of "cost control," i.e. to stop businesses from "needlessly" building too much capacity. Our national policy is now going to echo these bright ideas.

Well, you had me when you said hello, but why is this illegal, especially unconstitutional? Heck, taxi medallions work the same way.  The IJ website says only
The Constitution protects individuals’ right to earn an honest living free from unreasonable government interference, and it prevents states from putting up unnecessary barriers to interstate commerce.
Sorry guys, the constitution as currently interpreted doesn't say anything about a "right to earn an honest living."  See the 1873  Slaughterhouse Case, (comments from George Will here) which found that "a citizen's 'privileges and immunities,' as protected by the Constitution's Fourteenth Amendment" do not extend to economic freedoms, so  "a state may grant business monopolies to some of its citizens but not to others without running afoul of the Constitution." See Wickard v Filburn which found that the Federal Government can stop a farmer from growing wheat for his own use without permission. (Recently reinforced by Justice Scalia, in Gonzales v Raich.) And  it's going to be hard to argue that opening a clinic or buying an MRI machine is protected interstate commerce.

Yes, libertarians go to sleep each night praying that these interpretations will be reversed some day. But that is a different than hoping Dodd-Frank, Obamacare, Certificates of Need, and other ham-fisted economic policy can be declared unconstitutional on their own.

Not being a lawyer, I didn't track down the legal arguments on this one any further. I'll just leave the attempt as a ray of hope.


  1. There's a great podcast on the Slaughterhouse Cases at Liberty Law Talk.

    Reviving Economic Liberties: A Conversation with Clint Bolick

    I highly recommend it. It's accessible for non-lawyers. Here's how they describe it:

    "Clint Bolick, Director of the Center for Constitutional Litigation at the Goldwater Institute, about his new book Death Grip: Loosening the Law’s Stranglehold over Economic Liberty. Bolick, of course, is no stranger to litigating constitutional claims for economic liberties and property rights, among other achievements. Death Grip argues that the infamous Slaughterhouse Cases of 1873 emptied the privileges or immunities clause of the Fourteenth Amendment of one its primary purposes: the protection of economic liberties against encroachment by state governments. This conversation explores the history and intent behind the ratification of the Fourteenth Amendment and its privileges or immunities clause, and then looks to current efforts to breathe life back into the protection of economic liberties."

  2. Touching upon this subject. Just wandered if you had seen this remarkable debate on whether Economic Freedom is as important as other rights. It is going on at
    Bleeding Heart Libertarian.

    I especially liked Deidre McCloskey's contribution.

    1. haha, wondered, not wandered.

    2. Thanks for the pointer. That was great! See today's post.

  3. << The obvious counterargument is that this structure is set forth in legislation, passed by Congress and signed by the President. If they want to give up their power, they can do so. >>

    To some degree they can, but to some degree they can't.

    In my mind, Obama should be able to agree to give up his power, but not President Romney's power. The nondelegation doctrine doesn't even always allow that -- I think the idea is that the Constitution says the President is the chief executive, whether or not he wants to be, and the Congress has the responsibility to make laws, whether it wants it or not.

    By the way, I'm as much a lawyer as you are.

  4. As always excellent analysis from you.

  5. Through the intelligent use of information, we can shape and refactor better policy.

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