The Dubious Morality of the Modern Administrative State
2020-03-12 · Guest: Richard Epstein (Professor of Law at NYU) · 52:12
The Dubious Morality of the Modern Administrative State
Bob Zadek interviews Professor Richard Epstein about his book, The Dubious Morality of the Modern Administrative State. They explore the historical shift from a constitutionally limited administration to the expansive “fourth branch” of government, focusing on the erosion of the nondelegation doctrine and the economic consequences of centralized regulation.
Topics: Administrative State, Constitutional Law, Nondelegation Doctrine, New Deal, Progressivism, Labor Law, EPA, Price Controls, Knowledge Problem
Speakers:
- Bob Zadek: Host
- Richard Epstein: Professor of Law at NYU, Senior Fellow at the Hoover Institution
Introduction to the Administrative State [00:17]
Bob Zadek: Hello everyone, welcome to the Bob Zadek Show, the longest-running live libertarian talk radio show on all of radio. Thank you so much for listening this Sunday morning. We are this morning and always the show of ideas, never once the show of attitude.
This morning, I’m delighted to welcome back to the show Professor Richard Epstein. Richard is—he doesn’t know this exactly—but Richard is my mentor. Whenever anything is occurring in the world, whenever I am curious about anything or want accurate, thorough information, my first source is Professor Epstein. Richard has a weekly podcast, The Libertarian, and he truly is “the libertarian,” at least in my mind. Every—it hits every Thursday, I believe. I commend it to all of you. Professor Epstein is the Peter and Kirsten Bedford Senior Fellow at Hoover. He is the Laurence A. Tisch Professor of Law at NYU Law School, my alma mater, and also a senior lecturer at the University of Chicago.
This morning, we will discuss Richard’s new book on the dubious morality—and it is dubious—of the modern administrative state. I have had many shows on the administrative state. It is a fascinating topic, and it is important because it affects every American every day, and yet so few Americans even know what the administrative state is. They don’t know how we got here. They don’t know why it is the subject of so much discussion and commentary. Think about it no more. At the end of this hour, you will understand the pervasive and un-small-d democratic effects which the administrative state has on your life every minute of every day. Richard, welcome back to the show this morning.
Richard Epstein: It’s always nice to be with you, Bob.
Bob Zadek: Now Richard, it has been said that the administrative state is not provided for anywhere in the Constitution. The Constitution sets up, as we of course all know, three independent, co-equal—maybe I should say allegedly co-equal, but co-equal—branches of government: the executive, the judicial, and the legislative, and nothing about the administrative state. So it has been said that the administrative state is not provided for. It’s a somewhat recent—that is, not in the founding era—invention, and it is not controlled by small-d democracy in our country. It just is there.
I’ll start by asking you if you could just explain in the broadest sense, just so our audience who doesn’t think about the administrative state every minute of every day understands what we are talking about when we talk about the administrative state. And Richard, I’ll ask you when you do that, if you could divide the response into two parts: the administration, or agencies in general, which are provided for in the Constitution more or less—the Constitution provides for a Postmaster General, it provides for a post office; no one expects the Postmaster General will be out delivering the mail, he’s going to have people, or she people, working for him. So the Constitution does anticipate government workers, which is after all what the administrative state is. So talk about administration in general, which is provided for, and then the somewhat sinister-sounding “administrative state,” if you will.
The Historical Shift from Administration to the Administrative State [02:34]
Richard Epstein: Sure. Well, the first thing to mention is when we talk about the “modern administrative state” as in contrast to the earlier version of this, we sometimes call this a fourth branch of government. That is something which is outside of the scope of the previous three branches of government and that is independent of it in some degree. And that development takes place in 1934 in its most conspicuous fashion in a case called Humphrey’s Executor, where it was announced that the President of the United States could not fire commissioners of the Federal Trade Commission.
Now, going back earlier on, as you mentioned, you have to have administration in order to get something done. And so one of the things I always like to do when I talk with libertarians who are hardline anarchists is to say, how do you get around in a world in which you don’t prepare lists? And these lists include who’s entitled to drive a car, who owns a particular piece of property, who’s going to have to pay a certain kind of tax, who’s going to be eligible to vote, and so forth. Putting these lists together is an extremely difficult task. And then the question is exactly who and how is this going to be done under the Constitution?
And so if you start to look at this, for the most part, what you do is you leave the judiciary out of this because this is a branch of government which is designed to deal with the breakups that take place in the first two branches of government. The judiciary does not have the power to initiate; it only has the power to decide when cases are brought before it. So it turns out the distribution of the administrative state is something that has to take place between the President on the one hand as the head of the executive branch and Congress on the other. And to see why this is such a difficult problem, think of the President as though he were CEO of a corporation and the Congress as though it were the board of directors, and ask yourself this very simple question: just how clear is the line between the things that are board responsibilities and how things are responsibilities of the CEO? And it turns out it’s kind of murky.
So what we can do first of all is we can announce the sort of things that are going to be done, and then we could try to figure out how they’re distributed between the President, who after all does run an independent agency subject to his control, and the Congress. And the way in which this thing starts out with is this very famous dispute in the early 1790s about how we decide where to put post offices in the United States, something to which you alluded. And the question is whether or not Congress should put out a big old map and designate all the places by legislation where the post office ought to be built, give that list to the President, and then have him contract with various people to do it, or whether or not they should give up a set of criteria, and what the criteria do is to tell you where you would like to have the post office, what kind of street, what kind of building, what kind of facilities and so forth, and then in effect let the President choose the site and do the execution.
When this debate came forward in 1793, what they did is they had a long discussion and eventually the skeptics who said that the President did not have the power to select the sites for the post office won out over those people who thought that he should be allowed it. The debate was one of immense sophistication, with very powerful arguments on both sides. And the one takeaway that you get from it is back in 1793, when things were small enough that you could imagine a situation where Congress could actually sit down with a map. But on the other hand, if you start to go forward today, you’ve got a country which is a hundred times as large, a post office system which is a thousand times more complicated, and it turns out that basically the division of power necessarily in these kinds of complex situations is going to shift from a deliberative body to an executive body, so that no matter what we wish to say about the growth of the administrative state, it’s clearly going to be more heavily weighted to the President than before. And now what you’re going to have to do is have the Congress set the parameters and the President try to execute them.
For a very long period of time, up to say about 1937, that was what for the most part people tried to do. And the way the administrative state worked is it had a number of functions. It obviously had to raise a military, and then you have to have an administrative system in there which is going to tell you who’s going to be promoted, who’s going to be retained, who’s going to be fired, and you have to have a system of salaries, and you have to have a system of retirement pensions. And then you also have to have a civil service, and you have to do exactly the same thing with them.
The United States government in the early days was a repository of large amounts of land, and there was a huge amount of debate as to what kinds of contracts it could enter into with what kinds of individuals, namely railroads in particular, to give that land away in exchange for something coming back. And we also had a tariff system, and somebody had to figure out how to calculate the tariffs on particular goods in accordance with formulas that Congress or somebody else would specify. And the administrative state in these early periods did these kinds of stuff, and for the most part, if you look back on it, you’d be very hard-pressed to find something that was done in this particular period that would really raise hackles. If you’re a hardline libertarian, you don’t believe in taxes, well, you don’t believe in the United States Constitution either, and so you could be skeptical. But anybody who’s in the classical liberal tradition would say that this thing worked pretty well, and the size of government underneath this was about one or two or three percent of the GDP, larger obviously in times of war than without.
The Procedural and Substantive Agenda of Progressivism [04:41]
Richard Epstein: So the transformation comes during the New Deal, where all of a sudden the levels of ambition that start to take place with what it is that government can do is in fact becomes far higher than it had ever been before. This is not just a random event; this is a function of the rise of progressivism in the first third of the 20th century. So now how does this work? Well, there’s a procedural side and there’s a substantive side.
On the procedural side, the leading thinker was actually Woodrow Wilson, who had written a book on government power in 1885 when he was all of 29 years old, which became essentially the Bible—the book on congressional power. And Wilson was very much opposed to the separation of powers, which he just thought got in the way of everything else, and he wanted to have something like a German system with unitary government power that can be disposed of all of these things. And so once you start to see separation of powers as an obstacle, you see an independent administrative state as a way to fuse together the executive power and the legislative power, even indeed the judicial power, and so you can sort of get things done. Wilson thought you’d get them done well; in many cases, you get them done very badly because the concentration of power has highs but it also has desperate lows, whereas separation of powers will keep you on more of an even keel.
So that’s the procedural framework, and essentially after he left office and Roosevelt came into power, you could start to see that thing being instantiated in the courts. Now, on the substantive agenda, what the socialists, what the progressives wanted to do was to say, “We know how to run an economy better than a market system.” So they were deeply suspicious of competitive markets, and they did not think that the scope of government control should be limited to a sensible application of the antitrust laws, which was designed to control monopoly, which was fully accepted and pretty well executed, I might say, by the classical liberals, the old guard in the court after the period from about 1890 to about 1935.
1890 is a very key date because that’s the date of the Sherman Act, and that’s also the date that the first rate regulation of natural monopolies, the so-called Minnesota Rate Cases, comes to the Supreme Court. So we know we’re no longer talking about small, isolated little businessmen as we did before the Civil War; we’re now talking about giant companies, we’re now talking about the trust—that’s why we have an antitrust law against these particular organizations. And so what our folks wanted to do on the progressive side is they wanted to do a great deal more than that. They wanted to essentially determine how these firms should operate.
And there’s a very nice case and a very nice contrast, and I’ll stop for the first question on this point, which takes place in the early 1940s. 1944 is the year in which Friedrich Hayek published his book, The Road to Serfdom. And Hayek had many things wrong in that book, but one of the things that he sort of really caught on the line was essentially that when you try to get an over-ambitious government, it turns out that it lacks the knowledge and the ability to coordinate activities amongst diverse individuals and that these things are better done through a price mechanism and voluntary arrangement.
So what our friend Hayek says is, when you put together a system of roads and highways, treat that as a government function where what you do is you set the rules of the road, but you don’t determine the composition of the traffic. That’s something which you let private firms do, whether they’re driving cars, trucks, buses, commercial freight—you name it, they can do it in that way. When it came to the FCC, the Federal Communications Commission, this was very much a Hoover confection in the 1920s, and Hoover was a Republican, but he was also a progressive at that point. And the mandate of the statute was that we are to determine how to allocate frequencies in terms of the public interest, convenience, and necessity, whatever that phrase happens to be.
So this thing percolates along, and in 1943, just before Hayek wrote this, a case called NBC v. United States comes before the Supreme Court. And the actual issue in the case was whether or not you break up NBC’s blue and its red network into ABC and NBC, but Felix Frankfurter, who was a very pronounced progressive, takes the opportunity to comment on the way in which markets do and do not work. So he looks at this statute, and somebody says, “You can’t delegate this authority to these various administrative bodies because they’ll just do anything they want.” What you really have to do is you have to limit it to what Hayek thought were the rules of the road. And it turned out Frankfurter, a good progressive, rejects that and says, “We’re not just interested in determining the rules of the road; we’re interested in determining the composition of the traffic,” that is, the various networks that are going to own and the kinds of shows that they’re going to put on. He says, “I can’t do that myself; I’ve got to develop it through an administrative agency.”
Well, it turned out the administrative agency couldn’t do it either, because they come up with a set of criteria, they’re all inconsistent, they’re all completely malleable. It takes them 17 years to do this, and it turns out they run a completely crazy system called “comparable hearings” to allocate frequencies, and the moment the winner gets the frequency, what does it do? It auctions it off to somebody else. So you have a situation of a private auction, immense administrative expenses, and no revenues to the government for the spectrum, but to the lucky winner of this process. And that’s essentially what the gap is. The modern administrative state suffers no lack of ambition. It’s not designed to be more efficient in the way in which you enforce contract laws, property rights, rules of the road, protection from nuisance law; it’s designed substantively to transform everything that we did as a common law nation into something else. And that something else is necessarily interventionist. So when you talk about the modern administrative state, what you’re talking about is a set of transformation where instead of using the complex legal system to run a government or to enforce the common law rights of property, contract, and tort, you’re using the administrative state in many cases to transform the world into a better place by a bunch of people who in the end actually do not know what that better place is or how to get there. So that’s the story in the grand situation, and that’s the story that I tried to tell in my book about the dubious morality—i.e., the questionable judgments—behind the modern administrative state.
The Source of the Problem: Congress or the Agencies? [06:24]
Bob Zadek: Now, those of us who rail against the administrative state, the target of that anger, disappointment and the like—frustration, perhaps—are agencies like EPA and the Army Corps of Engineers, all of these agencies that because of statutes that gave them power or gave them broad jurisdiction, they start to intrude in everyday life. And I should also mention the Department of Labor, and Richard, you talk about that long and eloquently in the book—labor legislation which affects—in 1938, which of course intruded into a purely personal contractual relationship between employer and employee. And I might ask you to comment upon that in a second because you do a wonderful job discussing the concept of an hour—more about that in a moment.
But the source of the attention, or the focus of the anger, is on the agencies themselves. But that may be misguided, I think, because the agencies are simply doing what they’re supposed to do under an act of Congress. So is the source—should the source of the anger not be at the agencies who are just, if you will, doing their job, but rather in the enabling legislation that ceded to them enormous power from Congress? And in doing so, Richard, you might mention for our friends out there listening the very important principle of nondelegation, which of course is around during this entire conversation.
Richard Epstein: Well, look, I think the answer to your question—is it the mischief of the legislature or the mischief of the agency?—the answer is both. In some cases, you have very bad statutes that are made even worse by administrative agencies. In some cases, you have modest and sensible statutes that are made worse by administrative agencies. Sometimes you have administrative agencies that behave fairly well and don’t attract very much attention. But I would say on average that you see the ambition being taken place at both levels. What happens is the legislation that you start to put out there is something which is designed to sort of revolutionize the way in which you attack various problems, say environmental issues, and then what you do is you see an agency rule coming forward with something like a Clean Air Plan or a Clean Water Plan which takes the mandate and pushes it much farther.
The EPA and the Knowledge Problem [08:14]
Richard Epstein: So let me just give you sort of one simple way in which you might want to think about this in connection with the EPA. Generally speaking, the EPA is designed to control what we would call nuisances and pollution of one form or another. And these are very well and familiar concepts that exist out there in the world that everybody understands. So I think it doesn’t take a real genius to believe that if you have a bunch of dirty cars on the road spewing a bunch of poisonous gases into the atmosphere, the very people who put the gases into the air are the people who breathe it. And so when I moved out as a young law professor to Los Angeles in 1968, every time you went away from Santa Monica into San Marino, it turns out your eyes would glaze over in real pain because of the pollution and the gas inside it.
And it turns out you can’t have a system of private rights and remedies to control this situation. You’re not going to have class actions of three million car drivers being sued by three million residents when they’re the same people. So what you have to do is to put in some system of control at the top which limits the amount of emissions. But at that particular point, the question comes is what’s the technique that we’re going to try to use to control these sorts of things? And there’s a big choice: do we want to do this by inputs or do we want to do it by outputs? And almost invariably, the correct way to do this is to say, “This is your target, you figure out how to do it.”
But what the administrative agencies do is they say what we’re entitled to do is to tell you what kind of equipment you have to put on and literally design the thing for you. And if it turns out they design the inputs and they don’t design the outputs, it, like many other government-built things, a horse ends up looking like a camel—that is, these things don’t work very well. And when you started moving forward under the Obama administration, you could see what happened. So you have something which says that you need to put on the best source of emissions reduction into a particular item or tool, and you know, what you’d want to do is to figure out how you design that tool. I think it’s a mistaken approach; the correct approach is to tell you how much you can emit and to charge you or to enjoin you if you do too much.
But what they did is they decided that the best system of emissions control didn’t look just at the facility; what it allowed you as the agency to do was to give quotas for the amount of pollution that could come out of every state in the union. And that’s a clear extension of a bad idea. So the bad idea in the Environmental Protection statute is to try to regulate the inputs, and the bad idea by the administrative agency was to assume that this covers not only machinery and equipment where it’s manageable, but gives you, by silent delegation, the entire ability to regulate the entire economy. And so you’ve got problems on both sides of this kind of relationship.
And what you need to do is to have a very consistent approach. And what that consistent approach says is, in the tort law, if you try to design equipment for a polluter, you’re always going to get it wrong. You tell him, “This is the amount of pollution that you can admit,” it’s got to be greater than zero or nothing ever works, “you figure out how to do it, and if you go too far above it, we’re going to shut you down, and if you go a little bit further over it, we’re going to tax you for the amount of pollution that you created.” And so the whole design scheme of the EPA was badly conceived in the first place, and it was badly executed. This is not to say that you don’t need it. In fact, if you look at the technological advances today and compare the amount of pollution emissions that we have, vast transformation over 50 years since 1970 when this happened, all of it for the better. But the point is it’s not nearly as good as it could have been or should have been because they followed the wrong model.
And so what happens is you can’t do this stuff on the cheap. You can’t sort of say, “When I teach administrative law, I just ask about the level of delegation.” You have to understand the substantive schemes. And so what’s distinctive about my book compared to most people who write about administrative law is I come to administrative law as a kind of a second-order discipline. That is, I’ve spent my life studying how these substantive systems ought to work—the environmental system, the labor market system, the securities market system, and so forth. And when you understand how they work, you can figure out how the administrative state should dovetail into it. If you don’t understand how they work, what you’ll do is you’ll make kind of statements which says, “Well, you really do have a principle of nondelegation; you’re not allowed to give to an agency something which the principal doesn’t have, but on the other hand, it’s completely unenforceable, doesn’t make any particular sense.” And so what you do is you have a principle that everybody respects and nobody enforces.
Now the Supreme Court in a case called Gundy, decided just a year or so ago, has decided they may take a fresh look at this stuff, and they really should. But to try to figure out how you deal with all nondelegation and delegation questions in one breath is not possible. The statutory schemes go off in so many different ways, you have to be much more careful in the way in which you tailor the inquiry to ask the simple question: if this is something done by Congress, it should have done it; if it’s something that can’t be done by Congress, it better give pretty good rules on how it ought to be done, and the court should make sure that you don’t transform the substantive ends of the statute by the kinds of tools that you put into place in order to operate.
Bob Zadek: This is Bob Zadek spending the morning with Richard Epstein. Professor Epstein has just written an important new book, a scholarly book, eminently readable, The Dubious Morality of the Modern Administrative State. What is the role of the administrative state in our lives? Is it necessary? How should it be changed? When we come back after our 30-second break, I’d like to ask Richard to explain to us the important—or an important—constitutional doctrine called or identified as nondelegation. It asks the question: given that Congress has very distinct powers and duties of legislation, to what extent may Congress outsource that responsibility, delegate it—the responsibility of legislation—to another branch of government? How violative is that of core constitutional principles? When we come back after 30 really short seconds.
[Ad break removed]
Bob Zadek: Welcome back to the Bob Zadek Show, longest-running live libertarian talk radio show in all of radio, the show this Sunday and always of ideas, never once the show of attitude. This morning we are spending an hour with Professor Richard Epstein. Richard has written The Dubious Morality of the Modern Administrative State, a new, thoughtful, very thoughtful approach to the history and the future of the modern administrative state and why every one of us should care so deeply about this important issue. Now Richard, before we went to break, I invited you to help our audience understand this core, important constitutional issue of nondelegation or delegation, if you prefer the positive—the delegation of authority by the Constitution to the legislature to enact legislation, and then the sub-delegation, my word, of that power by the legislature to the executive branch. To what extent does that happen? To what extent is it a problem? And what does the Constitution say about it?
Richard Epstein: Well, look, I think when we left off you wanted me to talk, if I’m not mistaken, about the labor legislation. Is that correct?
Bob Zadek: That’s right. That too as well. We can do either one. Do the labor legislation because you tell it in such a wonderful, interesting way.
The Nondelegation Doctrine and Labor Legislation [15:00]
Richard Epstein: Look, labor regulation in the United States has this huge transformation. If in fact what you’re doing is you’re looking at labor legislation before the New Deal, the following principles seem to apply: which is that you’re allowed to enter into whatever contract you want as an employer or an employee, and the terms and conditions are strictly up to you, both for wages, hours, conditions, and all the rest of that stuff. And what happens is you rely on competitive pressures to make sure that if some employer is not doing things quite right, somebody else will come and offer a hand or a substitute job. And during the period between 1870 and 1940, the improvement in the laboring conditions of the United States, largely without the influence of unions or any other kind of situation, was great. There’s a fine book by a man named Robert Gordon called The Rise and Fall of American Growth, which stresses that during the so-called Lochner era—that’s my term for the case which stands for freedom of contract in this world—the improvement in the material conditions in the lives of American, with all the ups and downs and all the tragedies, was greater than at any other period in history before or after, and large amounts of it was driven by this freedom of contract ideology.
But as we mentioned earlier on, there is this progressive view, and the progressives essentially they look at contracts and they see that there’s some things wrong with them. There are people who get fired, there are people who’d rather join unions, there are people who get injured on the job—lots of things that are happening there. And they’re determined to figure out how it is you can tame the labor relationship so as to essentially limit the powers of the employer in order to improve the positions of the workers. First generation of these statutes was the workmen’s compensation statutes from about 1910 to about 1920. What most people do not know about these statutes is that they were first introduced on a voluntary basis, mainly in England in mines and on railroads, dangerous occupations, because in fact this was a contractual arrangement more efficient than the common law rules, which tended to worry more about negligence of the employer and contributory negligence of the worker. So the statute never blew up for the most part early on because it was modeled on a series of voluntary private arrangements.
When you start getting to the New Deal, however, now you’re trying to go to two things, which is unions and hours and overtime legislation. So minimum wage, overtime legislation are the two things. On the union side, what happens is in the progressive period, that is before the New Deal, the United States Supreme Court on several occasions struck down any statute which required mandatory collective bargaining of an employer with a particular union. It did it in the federal case in a case called Adair in 1908, and it did it with respect to state unionization states in a case called Coppage v. Kansas. And the latter opinion by Justice Pitney is one of the great opinions explaining how it is that freedom of contract turns out to dominate any of these particular kinds of positions.
Now, I mentioned earlier names like Felix Frankfurter and how optimistic they were about the ability of the United States government to regulate the frequencies in terms of the Federal Communications Act. Well, it was the same Felix Frankfurter who in 1930 wrote a book with a man named Nathan Greene called The Labor Injunction, saying essentially what you have to do is to put in organized labor into this situation so that you should never allow a particular employer to get an injunction against the union that is prepared to organize its work. And way back in 1983, on the 50th anniversary of the New Deal, I made myself something of a pariah at Yale Law School when I defended the earlier regime and attacked the Frankfurterian approach. And the basic argument is government regulation of labor markets in my view will not work as well as a free competitive system. What’s good for goods is good for essentially for services.
New Deal comes along, two halves: National Labor Relations Act essentially does organize and requires mandatory collective bargaining. And so it introduces a lot of rigidities into the system. The unions in the beginning start to gain a lot of power out of this particular system, but after the employers adapt and as the workplace starts to change in its nature and its operation, the union situation is one in consistent decline since about 1954. It’s a very inefficient structure for everybody: workers who want to advance up the ranks are blocked by union contracts from doing it, employers who want to sell off a subdivision or reorganize their business are blocked by unions from doing all of that stuff, and so the resistance to unions becomes fierce, well-organized, well-disciplined, and in an important sense, what happens is the union movement is still powerful, but today it’s largely in the public sector, not in the private sector, because it cannot survive in any kind of a competitive world market.
The Fair Labor Standards Act and the “Regulatory Hour” [18:42]
Richard Epstein: More importantly for these purposes are the Fair Labor Standards Act in 1938, where it was held that you can have the government set minimum wages and overtime rules of a certain kinds of people. And that puts into place a huge administrative structure. So recently I wrote an article called “The Regulatory Hour,” which goes into all of the incredible problems you have to face to find out what it means when you say as a matter of legislation that X is an hour and the minimum wage for X hours is 25 cents or $7.50, depending on what period you’re working in. And it’s an absolute nightmare.
Now, Bob, one of the things you mentioned earlier on is did the administrative state stray beyond its purpose? And in the environmental statutes, it many times it surely did. But in the labor statutes, you have to be able to define an hour, and well, there are a thousand different things that you worry about: coming and going to work, lunch breaks, restroom breaks, changing into clothes and equipment and so forth, time out the penalties or whatever it turns out to be, rest periods. And so the actual statute on this and the regulations that follow are a small book. And it turns out that if you don’t quite follow these particular rules, the penalties on the employer can be very heavy, both in terms of what they have to pay by way of compensation to aggrieved workers, possible fines and so forth.
The overtime provisions are every bit as onerous. There is absolutely nothing in the world which makes it perfectly clear that if you work 40 hours a week you get X, but if you work 40 hours in one day—or one hour more rather, 41 hours—that last hour is going to cost you 50% more. In some industries, it makes sense to pay overtime, and you will see that in the contracts themselves; in others it does not, and you won’t see it in the contracts. So what happens is if you now look at the distribution of hours, you get up to 40 hours and you have huge amounts of workers; 41, virtually nobody working there because employers don’t want to pay that extra fee. Distortion in the labor market, to put it mildly.
And early on, when this thing comes before the United States Supreme Court, they’re trying to figure out how to make sense of this rules and there’s just a wonderful situation about a bunch of people who are basically paid to stay in a ready room playing checkers or going to sleep, getting paid very little money, and if they’re called out on an emergency job as a fire department, they’re going to get paid a lot more. And the Supreme Court had to decide whether when these guys were basically resting in this rec room, were they on the job entitled to overtime pay or were they not? And in a case called Skidmore, they made the following decision: if they’re up playing games, they’re working; if they’re sleeping, they’re not working, which is a distinction that commends itself to nobody. And why is this so important? Because it turns out that’s an industry in which the overtime is more hard work model doesn’t work. And it shows you something about all of these statutes is they are sort of geared for the main line jobs where they have some degree of plausibility, but there’s 20%, 30%, now probably even more of the labor market that doesn’t work according to these conventional principles. And for these particular situations, the Fair Labor Standards Act is a straightjacket which makes everybody worse off than would otherwise be the case.
So again, it’s another situation where you think you’re so smart that you can tell every business what counts as an hour and how they’re to organize it, but it turns out you just don’t know enough to do it from the center. And that was the great insight that Hayek had in The Road to Serfdom and in his piece that he wrote in 1945 about the use of knowledge, in which he says decentralized decisions on these things will outperform centralized decisions because you have much greater information and you have people making the decisions who will suffer adversely if they get it wrong. Government officials are remote, they’re indifferent, they’re not going to be adversely affected by their own mistakes, so their performance levels should be expected to be much lower.
Price Controls and Information Distortion [21:12]
Bob Zadek: And just a—an additional comment, Richard, if I may for the audience, is that the animus that progressives have toward the marketplace, they use phrases like “cutthroat,” “unfair,” “greedy,” things of that nature. Everybody’s of course greedy, that is, they want the best for themselves, and so long as they do so without fraud and coercion, what’s the problem? But the point I want to make is the core value, or one of the core values of the free market, is the free market automatically generates information that is simply not available—it’s not that we’re not smart enough, it is not available any other way, you cannot acquire it. Therefore, the free market provides information about supply and demand and allocation of capital that cannot be done any other way. And to the extent that progressives seek to modify or affect the free market with price controls, whether it’s hourly wages or any other form of price control, all they are doing is adding a distorting influence to this otherwise pure flow of information. And that’s one of the evils of setting prices for anything: it simply distorts the quality of the information and results in a misallocation of resources and capital. Sorry, Richard, I just wanted to toss that out.
Richard Epstein: Amen, brother, as we say. And in addition to that, it imposes an administrative structure that after a while becomes an end unto itself. And what it does is it therefore creates a huge amount of cost to do this, and cost essentially are taxes which prevent gainful transactions from taking place. And we’ve been talking only about the administrative state at the federal government, but it’s every bit as important to recognize that similar things happen all the time at the state level. In New York, they passed a Rent Stabilization Act in 2019, which is now in the process of completely upending the market because the progressives, having control of both houses of the New York State legislature and a governor who will sign anything that’s put in front of him, gave a set of terms that have been so onerous that it turns out that employers—not employers, but landlords—are going to have to bail out. They’re going to be reluctant to rent out places that are empty, people are going to be very reluctant to build anything new if they think it’s going to be caught by this statute, existing units will start to stagnate. But what will happen is it’s always good, so we are told, because rents are lowered, it means that the world is better off. This is a world which has only tenants and not landlords. The reason why contracts always outperform legislators is legislators have constituents that are on one side of a market, and the losses to the other side of the market are a blank check to them. Markets don’t have that characteristic; the only deals that go forward are those that are mutually beneficial, so that landlords and tenants are not trying to fight over an ever-smaller pie; they’re trying to cooperate in a way that will allow you to make for a larger pie.
Administrative Deference and the Median Vote [22:42]
Richard Epstein: And of course, apropos, Richard, we could get sidetracked and talk about the coronavirus for the next couple of days on the air. But one little—I know, I know, I feel the same way, Richard. But one little comment, just because it was—we are sitting here trying to buy toilet paper at our home and it’s all—the shelves have been cleared up. And Richard, because you were commenting on price controls, the sister, if you will, my phrase, of price controls is anti-gouging legislation, which is the—if you will, the reciprocal of price control, or maybe it is price controls. But in any event, one can only speculate whether the shortage on the supermarket shelves would be as great if supermarkets were allowed to charge more because of scarcity, thereby discouraging people to load up at the expense of others and just let the market allocate those resources, if you can call toilet paper a resource, those resources to the people who want it the most as opposed to those people who can wake up earliest in the morning to get on the supermarket line. But Richard, that’s for another show.
Richard Epstein: No, actually, there is something about this which I’m going to relate. There’s a case called Seminole Rock that I talk about in my book. And it’s not quite as dramatic as the shortages that we have today, but remember, in the beginning of World War II, what we did is we had a complete transformation of the way in which the economy worked. Because you had to move from a peacetime footing to a wartime footing, and huge amounts of resources were going to be devoted into the wartime sector. It was obviously going to put pressures on the peacetime sectors; there’s a huge demand which is constant and there’s a smaller supply of goods, what you’re going to expect to see is that the prices are going to go up. And so the United States decided to put in wage and price controls—price controls rather—under the Office of Price Administration.
And the question is how do they implement this? Now, this was a reasonably sensible scheme as price controls go, because unlike modern rent control statutes, they don’t set the prices for you completely arbitrarily. What they do is they say the historical prices that are in effect for such and such a good as of such and such a date will remain in effect for the next year. It’s not the perfect system because it doesn’t allow for any upward adjustment, but it’s not a crazy system because it’s relatively easy to administer than having the state come along and provide the price for each and every good at an independent level.
And so the question that arose then is how do you set the price? Do you set it by contracts that are entered into during a period of transition, or do you set it by the contracts that have delivered goods during that same period? And what the government did is it said it’s the delivered goods that set the price for this formula, not the new contracts. And they were right. And the reason they were right is that the new contracts would reflect the scarcity, and so therefore what they would do is they would set prices much higher than the government wanted it, whereas the delivered price under previous contracts would keep a measure of stability. And this was sustained, if you believe in this system, in the Seminole Rock case.
Now, what happened is Seminole Rock then became a synonym for the proposition that whenever the government is faced with a problem, whatever the administrator says is going to be the final word unless it’s totally and completely and abjectly absurd. And that is a misreading of what that particular case was about. This was the system for a more or less sensible price control scheme as these things go, and then what happens is by the time you get to other cases, it turns out that in a case called Auer, which was decided in the Clinton administration when Robert Reich was the Secretary of Labor, they sort of said, “Well, you know, we can determine who is or is not entitled to overtime benefits.” And they decided that under the Fair Labor Standards Act, these rules only apply to ordinary workmen; they don’t apply to executives, administrators, or professionals. That’s the statutory language.
And Reich and his team decided that what this applied to government, that at the top of this situation, if you had sergeants or if you had even lieutenants in the police office, that these guys should be treated like patrolmen even though they clearly have an executive and administrative supervisory function. And Justice Scalia, in an opinion which he later repudiated, sort of said, “Well, if there’s anything remotely sensible about doing all this, we will let it ride, and you could penalize these guys for bad service and you could penalize ordinary workers for bad service. Since they both have the same quality on one issue, we can decide that a lieutenant who supervises 50 person is just like a patrolman who’s one of the people who’s supervised.”
And so that’s where the administrative state started to go really crazy, when they start giving a huge amount of deference to these administrative to do whatever they want without reference to the statute, and you will basically turn circles to uphold that particular statute even though everything you know about the industry, everything you know about the statutory language, everything you know about the legislative history cuts in the opposite direction. And so the recent battle over delegation that you mentioned at the beginning seems to be taking hold now, and it’s pretty clear that a case like Auer is probably not good law anymore because when they had to do this in connection with VA benefits, it was very clear that they’re cutting back very rapidly against this kind of a situation happening.
So it turns out that if you look at these statutes, there can be intelligent delegations and bad delegations of power. And so let’s go back and understand what’s at stake here for one point. I’m not in favor of price controls. But the fact that you’re not in favor of price controls doesn’t mean that if you do have a system of price controls, they’re all equally bad so you don’t have to differentiate between one and the other. There are good ways to execute a bad statute and there are bad ways to execute a bad statute. And what the point of administrative law is there is to make sure that bad modes of explication which go fanciful things are not allowed to take the statute far beyond what it goes. So if you recall what you said earlier on, is it the statute that’s wrong or is it its interpretation that’s wrong? Well, with the Fair Labor Standards Act, it’s a bad statute, but the administrative interpretation as to who’s entitled to overtime in fact was bad execution of a statute. So again, you have a case of joint and dual responsibility.
Bob Zadek: Richard, I have to interrupt because I want to spend the last 10 seconds reminding our audience: listen to your podcast, it’s wonderful, The Libertarian, it drops down every Thursday night, and read Richard’s column “Defining Ideas” at Hoover. Richard, thank you so much for your time. I hope you’re not self-quarantined today.
Richard Epstein: I’m fine for the time being at least, and I hope you are too.
Bob Zadek: Thanks a lot, Richard. Bye-bye.