The “co-exist” gives away the game. Historically, the term entered the
political lexicon with Nikita Khrushchev’s famous 1956 speech to the 20th Congress of the Communist Party of the
Soviet Union to signal his break with Stalin’s murderous policies that sought
constant confrontation with the West. Coexistence meant the West could go its
way so long as the Soviet bloc could go its own way too—a live-and-let-live
relationship where occasional interactions would iron out any difficulties that
arose. Nine months later, he announced to the West, “We will bury you.” Less
than five years after that, the United States and the Soviets came to the brink
during the Cuban Missile Crisis, where
the Soviets sought to alter the global balance of power by using Fidel Castro’s
Cuba as a base for its operations.
Peaceful coexistence, therefore, does not offer an ideal paradigm of how
the rule of law does, or should, interact with the modern administrative state.
To see why the two are ultimately incompatible, we must consider the nature of
both the “rule of law” and the “administrative state,” about which I have
written more extensively in my recent book Design for Liberty.
First, the “rule of law” is considered a venerable institution by both sides of the aisle. Historically, its use did not arise with democratic institutions, of which there were few. Rather, the term was employed as a rhetorical trope to offset the exercise of sovereign power by a king who ruled for life, often with an iron hand. Its enduring usefulness lies in its ubiquity. No matter what the substantive issue, the rule of law imposes a set of key procedural and substantive guarantees that all political authorities must accept. It requires that there be clear notice of the outer bounds of legal conduct so that people can confidently organize their affairs without crossing the line into forbidden territory.
In order to achieve that objective, a legal rule had to be internally
consistent, prospective in application, and simple in form. Its application to
a particular case, moreover, had to be before an impartial tribunal that gave
the accused person notice of the charges against him, a chance to present his own
case, and the right to cross-examine witnesses who testified against him. Those
safeguards applied to both criminal and civil proceedings. It is easy to take
these provisions for granted—until they are flouted by the government, which
may have its own agenda.
In one sense, the rule of the law must be consistent with at least some
form of public administration. Over the centuries, governments have had to
enforce the criminal law, tear down firetraps, and issue driver’s licenses. It
is often not easy to decide what disabilities prevent people from driving or
what qualifications must be met to operate a heavy rig. But with conscientious
officials, these focused tasks can be accomplished. Today’s “administrative
state,” however, goes far beyond this modest level of public administration.
Indeed, the successful operation of a classical-liberal approach to
government requires the state to take an active role in the creation and
enforcement of property rights. It is the state’s administrative bodies that
set up the title registries that allow everyone to determine who owns what
property. The registries let the government decide who is eligible to vote,
where to deliver the mail, and whom to assess for property taxes. These records
allow private individuals to determine who can sell, lease, or mortgage a
particular piece of property. And, of course, more complex registries must deal
with intellectual property, such as patents, copyrights, and trademarks.
The modern administrative state does not and cannot renounce these types of
government action. But its new extensive duties put too much strain on its own
ever-fragile institutions. The first example of the modern administrative state
was the Interstate Commerce Commission, established in 1887 to regulate
railroad rates across the United States. The commission was introduced to
counteract the rate anomalies that arose precisely because the railroads were
network industries whose interconnection obligations made it impossible for
them to operate along purely competitive lines. The original ICC was charged
with making sure that short-haul rates (that rose in the absence of
competition) did not exceed rates on long-haul lines between major destinations,
which were kept low by competition.
This statute was enacted at about the same time that the states were
struggling to regulate public utilities, which had monopoly powers by virtue of
their separate territories. The challenge to the rule of law was to find
institutions that could keep rates low enough to avoid monopoly rents, but high
enough to avoid confiscation of invested capital. The judicial enterprise,
therefore, had to first decide how to determine the rate base and, second, on
the risk-adjusted competitive return. From these novel difficulties arose a new
generation of constitutional issues. But they did not pose a decisive challenge
to the rule of law because of the relatively clear theoretical framework that
guided the rate-making business.
There is nothing inherent in the notion of ratemaking that is tied to
limiting monopoly profits. The level of impermissible discretion in the modern
administrative state arises when the state is free to decide whether it will
use its ratemaking power to limit a natural monopoly to competitive rates of
return or to bestow its favors on certain industries and groups. Once the state
gets into the business of conferring monopoly power on its favorite wards, the
level of discretion it exercises becomes subject to powerful political
influences.
The 1914 Clayton Act, passed in the administration of the progressive
Woodrow Wilson, modified the antitrust laws by creating special exemptions for
labor unions and agricultural cooperatives, which could now organize
collectively to gain monopoly rents. When those measures proved insufficient to
achieve their goals, New Deal reforms—including the National Labor Relations
Act of 1935 and the Fair Labor Standards Act 1938—were explicit in blocking the
entry of new workers into the market in order to preserve monopoly power for
union members. The Agricultural Adjustment Acts of the 1930s accomplished the
same goal for farmers. At the state level, the extended use of the zoning power
allowed one firm to prevail on local authorities to zone out a competitor that
might wish to set up shop across the street.
This shift in focus from controlling natural monopolies to creating
statutory monopolies out of competitive industries places enormous stress on
the rule of law. Why should particular favors be showered on some members of
one industry, while denied to their rivals? Which occupations or trades should
receive this special dispensation? Favoring one group and then another requires
large administrative agencies to establish criteria by which the state selects
successful applicants. It turns out, however, to be exceedingly difficult to
offer specific rules of guidance in the ambitious undertaking of dispensing
government favors. Administrative bodies thus continue to expand to achieve
their particular ends.
Faced with these obstacles, the Progressives had to develop rationales to
justify these broad grants of administrative power, which were articulated in
canonical form by the legal academic and government advisor James Landis in his classic 1938 volume, The Administrative Process. Landis
took the then-fashionable view that market institutions were haphazard bodies
that could not process the plethora of technical information needed to make
rational investment or business decisions. In their place should be government
experts and neutral government officials who would take on the essential task
of overseeing these market institutions. These individuals would be largely
appointed by democratically-elected public officials, but would by virtue of
their delegated authority be insulated from day-to-day political pressures. The
system of strong property rights would give way to a new system, where various
interest groups would participate in hearings concerning their affairs. The
procedural safeguards surrounding the deliberations before these independent
administrative agencies would preserve, it was claimed, the old rule of law
values in a new setting.
The key ingredient in this new system was the broad level of delegation
that gave administrators the dominant hand in allocating property rights. Nowhere
is the change of direction more evident than in the rules that were used to
allocate spectrum under the Telecommunications Act of 1934. After holding a
series of hearings to evaluate competing license applications, the FCC chose
the winner based on who best served the “public interest, convenience and
necessity.” These words were consciously framed in a way to insulate these
administrators from judicial review. In praising this standard in NBC v. United States, Justice Felix Frankfurter stressed that the agency had a mission
commensurate with its expertise:
But the Act does not restrict the Commission merely to supervision of the
traffic. It puts upon the Commission the burden of determining the composition
of that traffic. The facilities of radio are not large enough to accommodate
all who wish to use them. Methods must be devised for choosing from among the
many who apply. And since Congress itself could not do this, it committed the task
to the Commission.
Note that Justice Frankfurter does not even hint that a public auction of a
well-defined system of property rights could deal with the scarcity problem as
it existed at its time. Naturally, these allocation methods proved notoriously
elusive and, to this day, have never been resolved in a coherent fashion. In a
system, that offers no clear principles of allocation, political favoritism and
interest group politics become endemic.
Over the past seventy-five years, Landis’ optimism about his government
experts has been falsified time and again. The specialized tribunals set up to
deal with labor, telecommunications, securities, and trade disputes are often
chosen along political lines. They are subject to pressures that in some
instances result in industry capture and, in other instances, in blockades by
well-financed interest groups that are able to mobilize on the agencies.
The procedures themselves often become both so rigid and interminable that
endless time is lost in nonstop maneuvering, which invites massive judicial
appeals that could result in remands for yet another round of hearings. In
other instances, the procedures themselves can be short-circuited by an
administrator whose decision to initiate a hearing or bring an enforcement
action can have disastrous consequences for a firm that is caught in the
crossfire, long before the actual hearings take place.
The Achilles heel in this structure lies in the simple fact that there is
no effective judicial remedy to deal with the endless delays that agencies,
such as the Food and Drug Administration or the Environmental Protection
Agency, can create long before any lawsuit is filed. Litigation only compounds
the initial delay, and exposes the firm to tacit retaliation in some unrelated
proceeding over which the agency also has vast discretion on how to proceed.
These problems have only become more complicated in modern times as the
reach of government power has continued to expand. The tasks of the ICC and FCC
have been relatively constrained since their formation. But the modern EPA’s
powers go far beyond controlling traditional common law nuisances (tailpipe
emissions, for example). Its powers now include designating large tracts of
wetlands or uplands as protected habitat for some endangered species.
In addition, entitlement programs like Medicare and Medicaid entrust
government agencies with organizing health-care and consumer markets by a
dizzying array of rules that again commit the nation to the failed model of
government expertise and public participation. The portions of Obamacare that
survive constitutional challenge will leave both the state and federal
governments with the hapless task of setting rates and rebates for thousands of
health-care providers.
The rule of law can only survive where there are rules that guide and limit
government conduct. Seventeen-part tests are not rules. In many cases, they are
not even intelligible standards. The reason why classical-liberal rules can
comply with the rule of law is that the simplicity of their basic standards
does not require public officials to have the massive amounts of delegated
discretion of the kind routinely conferred on modern administrative agencies.
Courts are thus left with two possible responses to the entrenched
administrative state: either defer to agencies on all key decisions, or try to
shut the whole operator down. The usual judicial response is the former. The
correct response, I insist, is the latter. But it is no easy matter to overturn
practices that are so entrenched. Knocking out key provisions of the PPACA is a
good first step on the path of redemption.
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