The Regulatory State And The "Main Project" Of Government

A couple of weeks ago economist John Cochrane of the Hoover Institution had a very important blog post that I have just now seen.  It is titled "Rule of Law in the Regulatory State."   The post records and expands on a presentation that Cochrane made at a Hoover panel discussion in July celebrating the 800th anniversary of the Magna Carta.

Cochrane's post is a thorough treatment of what I have called the "main project" of the government and all of its agencies, which is to grow the government and expand the power of the agencies.  They may say that they are just regulating banks or drug companies or polluters or whomever in the public interest, but whatever actual regulatory thing they may be doing at any given moment is always secondary and subsidiary to the main project of growing the agency and the government and expanding their powers.

Cochrane asks a very important question:  Do you ever notice a major regulated entity publicly criticizing or attacking its government regulator, even for the most outrageous of conduct?  As examples, do you ever notice a large pharmaceutical company publicly criticizing the FDA -- even, for example, when the FDA instigates criminal prosecution for what is the clearly constitutionally protected free speech known as "off-label marketing"?  Or do you ever notice a big bank publicly criticizing one of its regulators or the Justice Department -- even when the regulators and prosecutors initiate one after another completely phony shakedown prosecution for things like "robosigning" of mortgage documents or "insufficient controls" over money laundering or supposedly "defrauding" Fannie and Freddie?  Or do you ever notice a large securities firm publicly criticizing the SEC -- even when the SEC regularly initiates phony non-insider insider trading enforcement actions in the unconstitutional rigged forum of its own administrative law judges?  Or do you ever notice a large mining company publicly criticizing the EPA -- even when needed permits are unjustifiably held up for years?  And so on and on for many more examples.

And of course the answer is that with extremely limited exceptions the large regulated companies in these and many other industries do not and cannot publicly criticize the regulators because the regulators hold sway over innumerable discretionary approvals and actions that the regulated companies need to operate.  The regulators are supposed to be disinterested, neutral experts just looking out for the best interest of the public.  But what they care about far and away above everything else is that they should never be criticized publicly.  If you want their go-ahead on any one of a hundred things you want to do, the price is that you must support their political agenda, at the top of which is that the agency and its power must grow.  And if you make the mistake of criticizing them publicly, they have infinite ability to harm or destroy your business -- the FDA can delay the approval of your next three drugs for years; the bank regulators can disapprove your next merger or design a "stress test" that you cannot pass; the EPA can shut down one of your mines or never let you open one in which you have invested millions; etc., etc., etc.

This rule of law always has been in danger. But today, the danger is not the tyranny of kings, which motivated the Magna Carta. It is not the tyranny of the majority, which motivated the bill of rights. The threat to freedom and rule of law today comes from the regulatory state. The power of the regulatory state has grown tremendously, and without many of the checks and balances of actual law. We can await ever greater expansion of its political misuse, or we recognize the danger ahead of time and build those checks and balances now. . . . 
We’re headed for an economic system in which many industries have a handful of large, cartelized businesses— think 6 big banks, 5 big health insurance companies, 4 big energy companies, and so on. Sure, they are protected from competition. But the price of protection is that the businesses support the regulator and administration politically, and does their bidding. If the government wants them to hire, or build factory in unprofitable place, they do it. The benefit of cooperation is a good living and a quiet life. The cost of stepping out of line is personal and business ruin, meted out frequently.
Cochrane then goes through a litany of no fewer than thirteen instances where individuals and industries are systematically coerced to do the political bidding of regulators due to some combination of vague or endless (Dodd-Frank, Obamacare) statutes and regulations and unbounded discretion given to the regulators.  The examples range from bank regulation (Cochrane cites the "stress tests" -- that can be engineered to destroy any bank in regulatory disfavor -- and the "robosigning" shakedowns); the SEC (he cites insider trading actions brought before SEC ALJs); the FDA (approvals held up for as long as 20 years for the politically disfavored); campaign finance (the Scott Walker "John Doe" investigations); Education (the retaliatory investigation against Laura Kipnis for criticizing the DOE's made-up policies for how colleges should deal with allegations of sexual abuse); and many more.  There is this quote from EPA Region 6 head Al Armendaris caught on tape discussing how to deal with some oil companies who were pushing back against an EPA initiative:

The Romans used to conquer little villages in the Mediterranean. They’d go into a little Turkish town somewhere, they’d find the first five guys they saw and they would crucify them. And then you know that town was really easy to manage for the next few years. . . .  we do have some pretty effective enforcement tools. Compliance can get very high, very, very quickly.


A remarkable thing about all of this is the extent to which these highly discretionary and therefore lawless regulatory regimes are extremely recent.  This is not how the American government has traditionally operated.  Sure some bank regulation existed going back to before World War II; but the real explosion is just in the last five years with Dodd-Frank.  The EPA only goes back to the 70s, and their gigantic mission expansion, including the currently-attempted takeover of the entire energy sector of the economy, is again in the last few years.  Obamacare only dates from 2009.  Most so-called "money laundering" regulation only started in the 70s, with a big expansion in the Patriot Act of 2001.  And so forth.

The only section of Cochrane's post that I find disappointing is the last one, dealing with what to do about this situation.  Given the fundamental threat to our democracy and constitutional government posed by the metastasizing administrative bureaucracies, some fundamental changes are in order.  Cochrane has some good suggestions, like giving the people more rights to appeal and to challenge regulatory decisions in court.  But I'm not sure that would make much difference.  Here are my proposals:

  • The courts, and particularly the Supreme Court, need to do their fundamental duty and enforce the number one provisions of the Constitution, which are that only the Congress has legislative powers and only the courts have judicial powers, and all legislative powers and judicial powers currently residing in administrative agencies are unconstitutional and done.  And only the President has executive powers, so all executive powers residing in the so-called "independent" agencies (like SEC, FTC, FCC -- where the President cannot fire people) are unconstitutional and done.
  • And then Congress needs to shrink the U.S. Code by about 80%.

Being the optimist that I am, I actually think that we may see some progress on these fronts within my remaining life time.  But of course the agencies will use all of their powers to prevent any push back from ever gaining traction.