I.
Theory of Financial Institution Failure

In recent years, it has become apparent that the failure of large, interconnected nonbank financial institutions, such as hedge funds and investment banks, can create substantial systemic risk and thereby impose external costs on the financial markets and economy.² Because no financial institution has the incentive to limit its own systemic risk,³ and because collective action by market participants to prevent systemic risk is unlikely,⁴ some regulation is needed to minimize the external costs produced by the failure of “too big to fail” (TBTF) institutions. Any remedial regulation should (1) prevent overly risky behavior by a TBTF institution that could cause it to fail and create contagion,⁵ and (2) prevent the panic among investors that can precipitate an institutional failure.

Regulation to avert systemic risk, however, can also create moral hazard and uncertainty. One way of reducing systemic risk is by “bailing out” TBTF institutions—guaranteeing their agreements with creditors and counterparties—which reduces the chances of their failure by preventing runs on the institutions. The problem with this approach, however, is that while loss-fearing counterparties and creditors normally exert market discipline to prevent institutions from taking on excessive risk, parties that come to expect future bailouts reduce their discipline accordingly. A policy of “constructive ambiguity”—only bailing out some creditors and counterparties so that none can count on a bailout ex ante—reduces this moral hazard. But constructive ambiguity also creates uncertainty in financial markets, leading panicked investors to withdraw their funds en masse from other financial institutions, which can increase systemic risk. The benefits of constructive ambiguity in reducing moral hazard will be produced most effectively through a discretionary and transparent process that retains uncertainty over the outcome of regulatory decision-making with regard to bailouts, but involves less ambiguity over the rules and process informing such decision-making. Creating clear procedures but preserving uncertainty over the outcome of a regulatory decision produces a better balance between uncertainty and moral hazard: Clear procedures will calm panicky investors, while uncertain outcomes will curb moral hazard.

II.
Evaluating Our Current Regulatory System

Our current regulatory system is suboptimal in both its ex ante and ex post regulation of systemic risk. Ex ante, the system fails to reduce the external costs caused by the overly risky behavior of nonbank financial institutions. Prudential regulations to curb such behavior are either insufficient, as with the Securities and Exchange Commission’s regulation of investment banks through the Consolidated Supervised Entities program, or nonexistent with respect to certain financial institutions, such as hedge funds. Ex post, the system does not sufficiently reduce the systemic risk caused by the failure of nonbank financial institutions and does an inadequate job of limiting the moral hazard and uncertainty that regulation creates. Under our current regulatory framework, when a large nonbank financial institution is on the verge of failure, regulators have two options: either undertake last minute, ad hoc actions to rescue the institution or permit the institution to file for bankruptcy. The problem is that this ad hoc approach can result in (1) bankruptcy filings by TBTF institutions that will likely cause contagion, as exemplified by the failure of Lehman Brothers, and (2) uncertainty in regulators’ decision-making processes that can create panic and worsen an ongoing financial crisis, also apparent during the aftermath of Lehman Brothers’ bankruptcy filing.

III.
The Obama Administration’s Framework for Regulatory Reform

The Obama administration’s proposed legislation would establish rules by which the Federal Reserve would designate certain financial institutions as TBTF—or Tier 1 financial holding companies (Tier 1 FHCs)—which would become subject to more stringent ex ante prudential regulations. The determination of whether an institution should be deemed a Tier 1 FHC would not depend upon the legal status of the institution, such as whether it is legally a bank, a hedge fund, or an investment bank, but rather on the extent to which a failure would be likely to impose external costs on financial markets and the economy. The Obama administration’s proposal retains the current bankruptcy process but adds a resolution regime that governs the failure of Tier 1 FHCs in some circumstances in order “to efficiently and equitably resolve the claims of creditors and other stakeholders”⁶ through a legal process similar to bankruptcy. Although the Federal Reserve and the Federal Deposit Insurance Corporation (FDIC) must approve a decision to invoke the resolution regime by a two-thirds vote, the Treasury would ultimately decide whether to invoke the regime upon consultation with the President.

The Obama administration’s proposal improves upon our current regulatory system, but it could do more to avert the systemic risk that could result from the failure of a Tier 1 FHC. Although the proposed framework instructs the regulatory agencies to consider “serious adverse effects” on the financial system and economy when deciding whether to invoke the resolution authority, the procedures for reaching such a determination are so stringent—requiring near consensus among numerous regulatory agencies—that it seems likely that at least some financial institutions whose failure will cause systemic risk will not be bailed out. The proposed legislation also leaves open the possibility that regulators, at the eleventh hour, might elevate moral hazard concerns above concerns about systemic risk. Furthermore, giving the Treasury—an agency firmly within the Executive branch—the ultimate authority to invoke the resolution regime overly politicizes what should be a technical decision based on an assessment of the expected systemic cost.

I also contend that the proposal fails to sufficiently reduce uncertainty in policymaking decisions, which could trigger panic and contribute to an environment where short-term creditors are likely to run a Tier 1 FHC. First, because the proposal leaves open the possibility of bankruptcy, creditors and counterparties of the institution now must worry about their ability to recover if the institution fails under both bankruptcy law and resolution rules. Second, the legislation does not require regulators to disclose the basis for the decision of whether an institution’s failure creates “serious adverse effects.” Without transparency in this crucial determination, ambiguity over the decision-making process remains, creating additional uncertainty for investors.

IV.
An Alternative Regulatory Reform Framework

While the Obama administration’s proposal has clear benefits, I suggest modifying the proposal’s ex post process for resolving the failure of TBTF financial institutions in order to prevent systemic risk more effectively and to reduce uncertainty. I propose that the Federal Reserve be given unilateral power to authorize the FDIC to seize a failing institution and place a value on the expected cost to the financial system and the economy of the institution’s failure. A cost-benefit provision in the new statute would then require the FDIC to provide the institution with financing only up to the cost of the systemic risk created by that institution’s failure.⁷ This will ensure that the expected cost of any bailout is less than the expected cost of systemic effects. Under my proposal, institutions deemed to be Tier 1 FHCs would not be subject to the bankruptcy process.

This alternative regulatory framework will improve upon the administration’s proposal in three ways. First, it will prevent systemic risk more reliably without worsening moral hazard. The cost-benefit provision of the resolution process ensures that systemic risk is properly considered and prioritized ex post in resolving a Tier 1 FHC failure. Under my proposal, regulators would not be permitted to elevate concern about creating moral hazard above the problem of systemic risk when deciding whether to allow a failed institution to liquidate. Furthermore, even though it is more likely under my proposal than under the administration’s proposal that Tier 1 FHCs will be rescued to some extent, any moral hazard will be limited because only short-term creditors with high-priority claims against an institution, not long-term subordinated creditors, are likely to recover fully in a resolution process.

Second, the Federal Reserve, as a regulatory agency with substantial prior experience regulating large, complex financial institutions and as the agency that would be responsible for monitoring and regulating Tier 1 FHCs ex ante, would have the most expertise and independence to make sound technical determinations about whether the systemic risk exception should be invoked.

Third, this framework reduces the additional harm and contagion caused by uncertainty in regulatory behavior without losing the benefit of reduced moral hazard. By removing the possibility of bankruptcy, the framework I propose eliminates a layer of legal uncertainty that could contribute to panic and trigger a run on financial institutions. Requiring transparency in the Federal Reserve’s methodology for making a systemic risk determination also reduces the ambiguity in decision-making procedures that can exacerbate a financial crisis.

Acknowledgments:

Copyright © 2010 New York University Law Review.

Alison M. Hashmall is a J.D. Candidate at New York University School of Law.

This Editorial introduces and is an abbreviated version of Alison M. Hashmall, Note, After the Fall: A New Framework To Regulate “Too Big to Fail” Nonbank Financial Institutions, 85 N.Y.U. L. Rev. (forthcoming June 2010).

 
I.
The Common Law of Interpretation

Such interpretive rules of thumb are judge-made.  I argue, therefore, that the common law should be understood to encompass interpretive methodology in addition to the traditional substantive common law subjects, such as the law of torts.  Judge-made rules of interpretation develop because methods of legal reasoning attach to results and weakly constrain judges in future cases.  Thus, the canons form a body of interpretive common law that legitimizes sources and methods of legal reasoning, all with an eye toward how the legislature would want its intent to be effectuated.  The common law canons do more to limit the sources of legal reasoning than they do to order them with precision: resorting to context is fine, resorting to statutory purpose is fine, but employing outlandish extrinsic sources of meaning is not.  However, the common law of interpretation has no prevailing rules for when an interpretation based on statutory purpose should trump a conflicting interpretation based on context.  In this sense, though the “canons of construction are no more than rules of thumb that help courts determine the meaning of legislation,”¹ they do, in fact, constrain and direct interpretive approaches to statutory construction, albeit weakly.

Judges, however, are not the only players in the development and ordering of canons of construction.  When a legislature enacts statutes, its members have certain ideas about how those words convey meaning.  To economize language and the legislative process, the legislature may rely on prevailing rules of interpretation extrinsic to that particular statute.  Legislatures may even prescribe rules and methods by which they wish their statutes to be construed.  Scholars and commentators often discuss “legislative preferences,” as expressed in statutes, with respect to particular policies.² But “legislative preferences,” as expressed in statutes, with respect to interpretive method remains an uncharted subject.

 
II.
The Codified Canons

Every legislature in the United States has codified canons—interpretive rules of thumb—to guide statutory interpretation, but these codifications have received virtually no attention in the academy.  By comparing the code-wide interpretive preferences of each legislature in the United States with the common law canons,³ I ask whether the common law canons, and the dominant theories of statutory interpretation underlying them, are consistent with how legislatures want their statutes to be interpreted.

I have classified common law canons as codified or rejected by a particular statute.  The principle I have used to determine whether there is a codification or rejection is whether a codification forecloses or endorses the use or nonuse of a particular canon.  These classifications should be treated as signposts to the common law canons rather than fully textured enactments.  It is crucial to consult the source codification because whenever complicated and diverse rules are forced into simplified boxes, resolution is lost; as is clear from the large variety of codifications quoted in the full paper, the rules are complex and multifarious.  This is what the catalog of general interpretive directives looks like: http://www.georgetownlawjournal.org/issues/pdf/98-2/Scott_AppendixB_FullColor.pdf.⁴

 
III.
Interpretive Methodology in an Age of Codified Canons

These legislative interpretive directives, however, are not expressed in a vacuum—the enactments often ratify or reject judge-made canons of construction.  Because the canons are nothing more than methodological common law, legislative enactments that repudiate or support canons should not only be included in any conversation about the canons, but also considered important and controlling.

The codified canons, therefore, provide a measure against which a particular common law canon can be compared.  The three dominant theories of how statutes should be interpreted—new textualism, intentionalism, and pragmatism—are each comprised of a collection of assertions about which interpretive rules are appropriate or legitimate sources of meaning.  Each theory claims individually to be the most appropriate method for construing statutes in a democracy.  Just as the legitimacy of a particular common law canon is tied to each theory’s normative claim that it is the most appropriate method for construing statutes in a democracy, conversely, the legitimacy of each theory depends on whether legislatures have ratified or rejected the interpretive rules upon which the theory relies.  Because the three dominant theories of statutory interpretation are comprised of particular rules (and in some cases a hierarchy of those rules), the codification patterns permit conclusions to be drawn about the extent to which each of the three major theories can vindicate their claim of being the most appropriate interpretive method for democratically enacted statutes.

The codifications suggest that the prevailing interpretive toolbox should be revised and recalibrated, and that the three currently dominant theories of statutory construction—and their claims to being the most appropriate approach for construing statutes in a democracy—should be re-evaluated in light of legislative choices. In short, legislative preferences (1) validate intentionalism despite critical concern about what constitutes dispositive legislative intent, (2) vindicate textualism’s commitments to plain meaning, context, integrity, and coherence, but not textualism’s embargo on extratextual sources, which runs contrary to the law of many jurisdictions, and (3) support pragmatic theory’s elevation of concrete methods of reasoning over abstract methods and its organization of sources of meaning in a hierarchical fashion (for example, statutory text, legislative purpose, specific and general legislative history, the evolution of the statute, and finally, current policy), but legislative preferences do little to create a finely variegated list of which canons trump each other.

These general conclusions, however, should not obscure the fact that interpretive method is jurisdictional; it depends on how the jurisdiction’s legislature directs its statutes to be construed.  In jurisdictions where there are no codified canons and no relevant constitutional provisions, the common law canons—insofar as those baseline rules can be identified—prevail.  But in the absence of legislative or constitutional directives, the common law of interpretation should at least be informed by prevailing legislative preferences.  In the development of the common law generally, courts will look to other jurisdictions for new developments.  As a result, when a judge approaches the common law of interpretation, the interpretive rules of similar jurisdictions should matter in some degree.  Even though “such legislative expressions may not be directly applicable or binding,” in the exercise of their common law jurisdiction “courts should be responsive” to canons codified elsewhere as expressive of legislative interpretive preferences, which “can serve to shape and add content to the common law.”⁵ This is especially so where some codification patterns shake the underlying assumption of common law canons: that they reflect legislative interpretive preferences.  Each time a judge deploys a common law canon, the selected interpretive method should be carefully scrutinized to determine whether it is sound.  The common law judge can either dismiss a canon codified elsewhere as foolish or ill advised—legislatures, after all, can be wrong—or conclude that the codified canon is a sensible aid to statutory interpretation. But legislative preferences in this area should not simply be ignored or ruled out of bounds.

Therefore, interpreters in jurisdictions where common law canons have not been displaced by interpretive statutes or constitutional directives should note the pattern of codifications.  They should resist interpreting statutes in ways that have been widely rejected by legislatures (such as strict constructionism).  Where a canon has been uniformly rejected, even if by only a few legislatures (such as the last antecedent rule or expressio unius), or is fraught by disagreement between jurisdictions that have spoken on the issue (such as the difference between “and” and “or”), an interpreter must do more work to justify its use.

Conversely, interpreters in jurisdictions without interpretive codifications should more freely rely on common law canons that have been vindicated by legislative preferences (such as reference to context, construing statutes liberally, interpreting ambiguous statutes so as to best carry out their purposes, and using legislative history).  Reliance, however, does not mean blind and dispositive acceptance.  The eclecticism reflected in the codifications demands that interpreters evaluate many sources of statutory meaning before settling on the most plausible interpretation.  A legislature should get the type of interpretation it wants, subject to constitutional limitations.  The particular interpretive philosophy of individual judges may matter less where legislatures have codified the methodology they prefer.

Finally, the high degree of legislative activity seeking to control both interpretive method and sources of meaning exposes the lurking constitutional question of whether legislative control over judicial interpretive methodology is consistent with a jurisdiction’s constitution.  The power struggle between courts and legislatures over interpretive methodology is already, in some jurisdictions, a live issue.⁶ At all events, the mass of legislative preferences should play a role in statutory interpretation unless and until courts declare that legislative activity in this area is unconstitutional.

Acknowledgments:

Copyright © 2010 Georgetown Law Journal.

Jacob Scott is an associate in the Boston office of Ropes & Gray LLP.

This Legal Workshop Editorial is based on the following Article: Jacob Scott, Codified Canons and the Common Law of Interpretation, 98 GEO. L.J. 341 (2010).

This Article is also about the United States asylum adjudication system. Asylum challenges the national conscience in distinctive ways. It generates hard questions about our moral responsibilities to fellow humans in distress; the recognition of human rights and our willingness to give them practical effect; the extent of our obligations to those who are not U.S. citizens; U.S. legal and moral obligations to the international community; the roles of state sovereignty and borders; foreign relations; allocation of finite national resources; and racial, religious, linguistic, and ideological pluralism.

Into this emotional and political fray, one often better known for polemic than for hard data, recently ventured Professors Jaya Ramji-Nogales, Andrew Schoenholtz, and Philip Schrag. Through painstaking and thoughtful empirical research, they collected massive data from several different federal bureaucracies and shed important light on the results asylum adjudicators reach. Their impressive study, Refugee Roulette: Disparities in Asylum Adjudication (Asylum Study), highlights the striking disparities in asylum approval rates from one adjudicator to another at various stages of the process.¹ As the authors convincingly demonstrate, asylum outcomes often depend as much on the luck of the draw as on the merits of the case.

The present Article has two aims. The first, which is asylum-specific, addresses the “so what” question. What are the normative implications of the findings reached in the Asylum Study? What problems have the sharp disparities in asylum approval rates caused, and what, if anything, should we do about them? To answer those questions, the Article sets a second objective—to examine, more generically, the role that consistency should play in any justice system. What, exactly, is the relationship between consistency and justice? What forces influence consistency? What instruments might enhance it? And what trade-offs do those instruments present?

Many readers will find the patterns revealed by the Asylum Study shocking. One’s visceral reaction might be that we need to “rein in” the adjudicators. Perhaps, one might think, the answers lie in terminating or demoting the outliers, or subjecting all adjudicators to performance evaluations, or making vastly increased use of agency head review of adjudicators’ decisions, or even imposing mandatory minimum and maximum approval rates.

I argue here that these impulses should be resisted. There are times when we simply have to learn to live with unequal justice because the alternatives are worse. Disparities in asylum approval rates just might be one of those instances. As long as adjudicators are flesh-and-blood human beings, as long as the subject matter is ideologically and emotionally volatile, and as long as limits to the human imagination constrain the capacity of legislatures to prescribe specific results for every conceivable fact situation, there will be large disparities in adjudicative outcomes and justice will depend, in substantial part, on the luck of the draw.

This is not to suggest that inconsistent outcomes are harmless; they impede justice in several ways.  Consistency is a reasonably good proxy for accuracy. If, for example, sixty percent of a group of decisions go one way and the remaining forty percent the opposite way, and the facts are similar enough that the two sets of outcomes cannot be reconciled, it seems likely that at least forty percent of the decisions—and perhaps sixty percent—were wrong.  That conclusion is not inevitable, because not all issues lend themselves to uniquely correct results, and because, even for those issues that do, sometimes the forty percent are right and the sixty percent are wrong.  Still, rational human choice is more likely than random selection to produce correct outcomes. On that assumption, a high degree of consensus makes the hypothesis of the majority being right more likely than the hypothesis of the majority being wrong. There is some reason, therefore, to assume that consistency correlates positively with accuracy.

Probably the most intuitive benefit of consistency, however, is the principle of equal treatment—the notion that inconsistent outcomes are substantively unfair. When two people are situated identically in all legally relevant respects, the law should treat them the same. To the extent reasonably avoidable, the outcomes should not hinge on the biases of whichever adjudicator the individual had the good or bad luck to draw.

Certainty, and the predictability that it brings, are commonly cited as a third set of reasons to strive for consistent adjudication.  Conflicting results breed uncertainty in two ways. They do so directly, by preventing the parties from predicting how their dispute is likely to be resolved. Consistency might also contribute to certainty and predictability indirectly, by enhancing the stability of the law.  Conflicts among equally authoritative bodies have ways of being reconciled eventually, either by gradual evolution or by pronouncements from above. The mere presence of a momentary conflict, therefore, can create at least the perception of imminent change, leaving affected sectors of the population uncertain how to plan for the future. Consistency reduces this uncertainty.

Inconsistency can also impair efficiency. The very fact that two decisions are inconsistent means that the second adjudicator had to revisit the analytical efforts of the first one rather than simply adopt the first adjudicator’s reasoning and result. It also means that, at some point, some government actor will have to step in to resolve the issue definitively. Moreover, the resulting uncertainty leaves the parties with less incentive to accept the first ruling in their case and more incentive to appeal it. The fact that they cannot predict the result might also discourage future parties from settling. Apart from conserving judicial and administrative resources, encouraging litigation and appeals rather than settlements and acceptance of initial decisions prolongs the waiting times—a key consideration for both the applicant and the government in asylum cases.

A final benefit of consistency is acceptability to both the parties and the general public, a central concern of every adjudication process. The public has a direct interest in consistency, since uncertainty can be problematic for the reasons already given. In addition, there is ample evidence that the public simply perceives inconsistent outcomes to be unfair. As the authors of the Asylum Study observe, we inscribe the equal justice admonition at the entrance to the Supreme Court building, follow stare decisis, promulgate uniform federal sentencing guidelines, employ pattern jury instructions, and allow judges to modify civil verdicts that veer too far from the norm.

All else equal, therefore, it is hard to be against consistency. Indeed, fidelity to the rule of law demands attention to consistency. But all else is seldom equal. Since strategies that enhance consistency can have costs, the real question is how much cost should be accepted in return for whatever amount of increased consistency it will purchase. For one thing, conflicts can have positive effects of their own. As others have observed, a judicial conversation that includes differing views expressed over a reasonable time period can be part of a healthy maturation process that ultimately aids the thoughtful resolution of a difficult issue. In addition, even when the net impact of conflicts is negative (as I assume to be the norm), some solutions might be too costly. Strategies like reductions in adjudicators’ decisional independence, broader or more frequent agency head review of adjudicators’ decisions, heightened judicial deference to administrative tribunals, or even elimination of judicial review of the decisions by centralized tribunals, for example, might well enhance consistency, but at a price that I argue would be excessive.

I offer two caveats: First, balance is not the same as, and does not promote, consistency. At best, balance prevents asymmetric inconsistency. An immigration judge corps that comprises one hundred anti-immigrant zealots and one hundred pro-immigrant zealots would be “balanced” in some sense, but in such a corps the outcomes would be more likely to diverge, not less. Second, inconsistency is a two-edged sword. It can result in an outcome favorable to the asylum seeker when another adjudicator would have reached a different result, or vice-versa. Consequently, neither one’s general ideology nor one’s specific preferences on immigration or asylum should drive one’s degree of tolerance for inconsistent outcomes.

It is useful, therefore to identify the determinants of consistency. I suggest there are at least fifteen, which the full version of this article considers in more detail. Some of those determinants relate to numbers—the number of people who decide each case, the total number of adjudicators or panels in the entire system, and the number of cases. Some of the other determinants relate to the attributes of the adjudicators, including the criteria and procedures for appointing them and their post-appointment training and guidance. Still others relate to the adjudicators’ roles—their degree of independence, the level of deference they are expected to give to other decision-makers, and their obligations with respect to the preparation of reasoned opinions and the use of stare decisis. Finally, I suggest that the level of consistency reflects the nature of the subject matter—in particular, how specialized, complex, dynamic, ideologically charged, and determinate the concepts are.

Of these variables, which ones might account for the disparate outcomes observed in the asylum setting? Given the persistence of large variances at all levels, the elimination of country of origin as an explanatory factor, and the adjudicator-specific patterns revealed by the authors of the Asylum Study, it seems easy to identify the principal contributors. They include the adjudicators’ differing ideologies and attitudes, which affect their preexisting inclinations to grant or deny asylum, and the subject matter, which is indeterminate enough, complex enough, and dynamic enough to give adjudicators relatively broad freedom to reach the outcomes they desire. The attitudes that asylum adjudicators inevitably bring to their work include not only their general philosophies about asylum or immigration, but also their normative conceptions of the adjudicative role, their levels of suspicion about the credibility of the applicants, and the weights they attach to erring on the side of either the individual or the government.

That is unequal justice to be sure, but my basic thesis is that for the most part we shall have to live with it. Unless the adjudicators can be made ideologically homogeneous—a goal I find neither desirable nor achievable—there will always be substantial asylum approval rate disparities and many outcomes will reflect the luck of the draw.

This is not, however, a call for complacency. Consistency is a positive virtue for all the reasons I have acknowledged, and I suggest steps that might enhance it at the margins. The key is to aim low and to settle for treating the symptoms.

Some worthwhile steps could achieve modest gains at the margins.  More detail could be added to the statutes, regulations, and subordinate legislation on such issues as what constitutes “persecution,” though it would be hard to anticipate every conceivable means of persecution from which the law should afford protection.  More adjudicators might complicate the task of achieving consistency, but the increased attention that an enlarged judge corps would allow an adjudicator to devote to each case might well generate a higher degree of consistency. Larger decisional units—for example through the restoration of three-member Board of Immigration Appeals panels in greater numbers of cases and increased use of en banc decisions on recurring issues—could enhance the Board’s internal consistency.  Strengthening the support staff could have the same effect.  So, too, could the provision of counsel to indigent asylum seekers at government expense—at least in cases in which the applicant has cleared some specified threshold requirement of  meritoriousness.  New quality controls for the hiring of asylum adjudicators seem warranted as well.  While personal ideology will always be part of what an asylum adjudicator brings to the job or at least soon develops, the process might more consciously avoid affirmatively factoring a candidate’s ideology into the hiring decision.  Enhancement of the various programs for professional development, the internal and perhaps even the public dissemination of each adjudicator’s asylum approval rates, expanding the Board of Immigration Appeals’ (BIA) scope of review over fact questions (from “clearly erroneous” review to de novo review, for example), and the broader use of reasoned and binding opinions carry additional potential for modest gains in consistency.

Other possible policy responses, while potentially enhancing consistency, are bad ideas nonetheless.  The Attorney General, for example, may review any BIA decision that he or she wishes. This is not an unusual arrangement; Congress often authorizes agency heads to review adjudicative decisions that fall within their domains. To reduce the approval rate disparities identified in the Asylum Study, one might be tempted to urge more frequent Attorney General review of BIA decisions.  Agency head review is often extolled as a means for agency heads to assure inter-decisional consistency and to maintain control over basic policy at the same time.  But agency head review is not essential to either goal. When there is a designated appellate authority such as the BIA, an en banc decision of that tribunal can yield the same consistency as agency head review. Congress could even authorize the agency head to require the appellate tribunal to go en banc in a particular case if there is a concern that an overworked adjudicative tribunal would not do so on its own.

The need for agency primacy over policy matters can be conceded, but again, agency head review is not essential to agency policy primacy. Rulemaking and other policy mechanisms are also available. The multiple experts from whom the agency head can distill advice and perspectives will be just as available in a rulemaking proceeding as they are in agency head review of adjudication. The agency head will be just as capable of asserting agency policy primacy via rulemaking as he or she would be via review of adjudication. And rulemaking will be just as effective in promoting agency policy coherence as review of an adjudicative decision would have been—more so, if anything, since the facts of a particular case will not constrain the reach of the rule. In the asylum context, the arguments based on agency policy coherence are particularly inapt, since the immigration judges and the BIA are within the Department of Justice while the analogous policymaking agencies are now located within the Department of Homeland Security. Agency policy coherence, therefore, is simply not an issue in this context. Moreover, as Jeffrey Lubbers has observed, there is normally a lessened need for political control in “high-volume, fact-based” adjudication processes and those in which benefits are sought.  Asylum fits both descriptions.

While I acknowledge that even adjudicative decisions will often require policy judgments—particularly if the decisions are designated as precedential—the basic functions of the adjudicators are, after all, to find facts, interpret law, and exercise specific statutory discretionary authority. Even when a case presents an important policy question, the agency head can supersede the decision by issuing a generally applicable regulation if he or she wishes—provided, of course, that Congress has delegated the relevant rulemaking authority to the agency head. If Congress has not done so, then Congress’s inaction is itself a policy decision that requires respect.

Further, as the consultants’ report for a leading Administrative Conference study acknowledges, rulemaking has tremendous advantages over adjudication as a vehicle for policy formation.² These advantages include broader public input, notice to Congress, avoidance of adjudicative hearings to resolve issues of legislative fact, avoidance of litigating the same issues repeatedly, more enforceable rules, clearer advance notice of allowable and prohibited conduct, fairer applicability of the rules to similarly situated individuals at different points in time, and the opportunity for affected individuals to make policy submissions before the rule is adopted.  To be sure, notice-and-comment rulemaking can be slow and cumbersome.  But if on a given issue the agency feels that the notice-and-comment procedure would be too onerous, interpretative rules might be an alternative method of influencing adjudicative outcomes in ways that promote the agency’s policy agenda. Interpretative rules do not bind the public, and it is not clear whether they can bind the adjudicators, but they can be issued quickly and without the fiscal cost of notice-and-comment machinery. And when, “for good cause,” an agency feels that the notice and comment procedure would be “impracticable, unnecessary, or contrary to the public interest,” such as when the timing is urgent, the agency can issue an interim regulation. For all these reasons, the need for agency head review is seldom pressing.

Moreover, the central rationale for agency head review—the agency’s political accountability—is also precisely what makes agency head review affirmatively troublesome. The agency head and any subordinates to whom he or she delegates the review function are subject to popular and political pressures. On matters of policy that reality is not problematic; consideration of the public’s preferences is at home in democratic theory. But the essence of the adjudicative function is to find facts and interpret the law, not to please the public. While policy admittedly is implicated in a certain number of cases, the adjudicative function generally requires independence, not political accountability, as discussed below.

Agency head review has other costs as well. It permits a dangerous concentration of power in the hands of a single individual. When the decision being reviewed was rendered by a multi-member panel, agency head review entails the substitution of one person’s judgment for the collective judgment of several adjudicators. And the probability that a strong ideological bias will influence the result is greater when one person is deciding than when the decision is rendered by a randomly selected multi-member panel.

To sum up: There is little need for agency head review. Decisional consistency can be achieved through a combination of the administrative appellate process, legislative rules (including interim rules when necessary), and interpretative rules. Rulemaking and other powers can also preserve agency policy primacy and agency policy coherence. Moreover, agency head review poses inherent dangers to the dispensation of justice, including especially the substitution of a political outcome for one based on an independent adjudicative tribunal’s honest reading of the evidence and the law. All of these considerations have special force in the asylum context, where the stakes are high and the potential for inappropriate political and ideological influence has been amply demonstrated.

Restrictions on judicial review might also be perceived as a way to increase consistency, since the twelve general courts of appeals collectively have far more decisional units than the one BIA.  But the courts are already forbidden to review at least two important categories of asylum denials—those reached in expedited removal proceedings and those based on findings that failure to file the claim within the one-year deadline was not attributable to changed or extraordinary circumstances.³ Still, for the ostensible purpose of reducing disparities in the asylum approval rates, some might be tempted to advocate further restrictions on judicial review of asylum denials. Those restrictions could conceivably include barring judicial review of other selected subcategories of asylum cases, making judicial review discretionary, or narrowing the scope of review.

Admittedly too, there are other costs of judicial review of administrative decisions. They include judges’ lack of political accountability, the risk of error when nonexperts review the decisions of experts, the fiscal expense, and the delays.

In my view, however, the benefits of judicial review overwhelm its costs, particularly in the asylum context. Those benefits too have been explored elsewhere and need only be summarized here.⁴ Probably the most obvious are the independence that judges bring to their work and the corresponding appearance of justice. Judicial independence, in turn, is beneficial for several reasons that are explored below and assumes special importance in asylum cases because of the recent threats to the independence of the immigration judges and the BIA members. Judicial review also adds the perspective of generalist judges to the existing perspectives of the specialists whose decisions are being reviewed. It provides a regime in which legal doctrine can evolve gradually, step by step, informed by the judicial conversation that multiple courts of appeals can supply. And the mere prospect of judicial review should add an incentive for the original decision makers to reach their conclusions thoughtfully and explain them carefully. Given all the recent criticism of the haste with which asylum claims are denied, any sobering effect of judicial review on the administrative adjudicators should be savored.

Despite the inconsistencies that judicial review of asylum claims inevitably introduces, and despite its other costs, therefore, any calls for further restrictions on judicial review of asylum claims should be vigorously resisted. To the contrary, the existing restrictions should be repealed. The Asylum Study demonstrates beyond doubt that ideology explains a large part, if not most, of the striking disparities in asylum adjudication. There is simply no reason to assume that the same biases are strangely absent when the asylum decisions are rendered in expedited removal proceedings or on the basis of no “changed circumstances” or no “extraordinary circumstances.” Nor is there any reason to assume that in these cases the consequences of error are any less grave.

By the same token, there is no convincing reason to narrow the scope of review. It is narrow enough already. As in other removal cases, the court may set aside a finding of fact only if “any reasonable adjudicator would be compelled to conclude to the contrary.”⁵

Replacing review by the general courts of appeals with review by a specialized tribunal might possibly enhance the consistency of the ultimate outcomes, since specialization reduces the total number of different adjudicators who will be needed to handle a given caseload.  Specialization also heightens the adjudicators’ familiarity with analogous decisions. But that strategy too would come at a price—the loss of the generalist perspective, which enables judges to draw guidance from other subject areas and to approach the specialty area with fewer preconceptions or biases. A diet of specialized cases might also make the positions less attractive to potential adjudicators and staff, thus hampering both recruitment and retention of the most talented personnel. Specialization might render the appointment process more susceptible to lobbying pressures, and it might cause the adjudicators to become too cozy with the litigators who appear before them regularly.

Still other policy prescriptions carry the potential for greater gains in consistency but in my view would be especially bad ideas.  Quotas or other direct controls on outcomes would undoubtedly reduce the disparities in asylum approval rates, but as the authors of the Asylum Study point out, there is no way to locate either the “right” percentages or the “right” range; any figures would be arbitrary. Besides, they observe, rapid changes in human rights conditions would render the announced percentages continually obsolete. In addition, most source countries have too few asylum applicants to provide a statistically significant sample.

Other objections might be added. The argument that statistically reliable percentages would be too hard to fashion for many countries assumes a system in which each source country is allotted a different approval rate range. That feature would itself be problematic, reminiscent of the discredited national origins quota system in place from 1921 to 1965.⁶ Yet, without such differentiation, the combination of drastically different human rights conditions from one source country to another and different mixes of cases by source country from one asylum office or immigration court to another would cause outcomes to hinge needlessly on the particular office or court in which the cases are filed. The end result would be less consistency, not more. Finally, numerical controls would require adjudicators to rank asylum claims. There is no uniquely correct way to do so. Some might base their rankings on the probability of persecution, others on the severity of the alleged persecution, still others on the quality of the nexus between the persecution and one of the protected groups. The range of choices would introduce another element of inconsistency, as different adjudicators would attach different weights to different factors and might even misuse that freedom to reintroduce ideology.

I have saved my most serious worry for last. Given the glaring disparities in the asylum approval rates from one adjudicator to another, one temptation might be to “rein them in.” This could be done by taking wayward adjudicators aside, quietly “encouraging” them to increase or decrease their approval rates, and then, after a decent interval, terminating or reassigning those who remain recalcitrant. Performance reviews that take approval rates into account and serve as a criterion for retention or promotion might be another device for eliminating adjudicators who veer too far from the mean.

Any of these strategies might well reduce the disparities in asylum approval rates. But threats to adjudicators’ job security inherently compromise their decisional independence. The actions of attorneys general in the recent past have already dangerously sapped the independence of the immigration judges and the BIA.

In a previous article I explored the implications of decisional independence more generally;⁷ here, they will be just briefly recounted. Decisional independence has costs that have to be acknowledged. Probably the most controversial cost is that, by definition, decisional independence eliminates the adjudicator’s political accountability. When the decision has broader policy implications, as is especially likely when it is designated as binding precedent, that consequence can be viewed as a cost to the democratic process. It is a cost that we readily accept when courts interpret an entrenched Constitution, use judgment in interpreting ambiguous statutory language, or make common law. It is a cost nonetheless.

Some might feel that decisional independence erodes agency policy primacy. The earlier discussion on agency head review of adjudicative decisions, however, showed how agency policy primacy can be preserved through rulemaking and other devices. The admittedly substantial logistical constraints can be minimized. But whether or not one shares that assessment, the point here is that even a passionate advocate of agency head review can applaud decisional independence. Precisely that combination—adjudicator independence in reaching the decision but agency head authority to reverse it—lies at the heart of the compromise philosophy enshrined in the Administrative Procedure Act.⁸

In the administrative context, a further cost, many would argue, is the kind of decisional inconsistency exposed by the Asylum Study. Earlier discussion suggested that decisional independence might have mixed effects on decisional consistency, but let us assume arguendo that the net effect is negative. There is also the related problem of assuring that adjudicative decisions cohere with other expressions of agency policy.

Decisional independence might also impair good faith measures to boost adjudicators’ productivity. While there might be ways for agencies to impart productivity expectations to adjudicators without threatening their independence, the key variable is the consequence of failure to meet those expectations. If the consequences are significant enough to alter the adjudicators’ behavior—and communicating expectations would be useless if they are not—then they will necessarily give adjudicators an incentive to trade off care and quality for quantity, since only the latter can be statistically compiled. For that reason, independence and productivity will always be in tension.

In an adjudicative setting, my view is that decisional independence, despite these potential costs, is critical to the rule of law and to the dispensation of justice. The most familiar benefit of decisional independence is procedural fairness—minimizing adjudicative bias. An adjudicator should decide each case based on his or her honest reading of the evidence, interpretation of relevant legal sources, and exercise of any delegated discretion—not by choosing whichever outcome seems most likely to please the officials who will control his or her professional future. Decisional independence can also discourage what I have called “defensive judging”—playing it safe by avoiding rulings that might prove controversial. Decisional independence can be a vital safeguard for unpopular individuals, minorities, and political viewpoints, and it is crucial to safeguarding constitutional rights against transient majoritarian preferences. And decisional independence is integral to at least the U.S. version of separation of powers.

Apart from those rationales, which I have argued all derive ultimately from fidelity to the rule of law, decisional independence has important side benefits. They include maintaining public confidence in the integrity of the justice system, avoiding “reverse social Darwinism” in which the weakest adjudicators are the ones most likely to survive ideological purges, attracting and retaining adjudicator candidates, and facilitating the continuity of adjudicative outcomes from one administration to its successor.

For all those reasons, further assaults on the decisional independence of the immigration judges and the members of the BIA would be regrettable. To the contrary, their prior decisional independence should be restored and further safeguarded despite any possible negative effects on either decisional consistency or agency policy coherence.

The hobgoblin of little minds it might well be, but consistency matters. The moral imperative of equal justice, the needs for certainty and predictability, the benefits of efficiency, and the objective of public acceptability all demand attention to consistency in any adjudicative framework. The Asylum Study—the product of a prodigious and highly successful effort by Professors Ramji-Nogales, Schoenholtz, and Schrag—has brought home the extraordinary extent to which the outcome of an asylum claim hinges on the particular adjudicators who are assigned the case.

But the forces that generate inconsistent adjudicative outcomes are not easy to constrain, at least not without costly trade-offs. In asylum cases, the unavoidable abstractness, complexity, and dynamism of the relevant legal language make it inevitable that the human adjudicators will bring their diverse emotions and personal values to bear on their decisions. Under those circumstances, we should not expect anything but the sorts of disparate outcomes that the Asylum Study has documented.

There are ways to reduce the inconsistencies at the margins, to be sure. These have been noted. But any strategies that would shrink the inconsistencies more dramatically—and some that would not do even that—have costs that I argue are unacceptably high. These include more frequent agency head review of BIA decisions, additional restrictions on judicial review, transferring review to a specialized court, and punishing wayward adjudicators. Each of those devices would either severely compromise decisional independence or impose other excessive costs.

In the end, we shall have to learn to live with some measure of unequal justice. It is not ideal, but, as they say, it beats the alternatives.

Acknowledgments:

Copyright © 2009 Stanford Law Review.

Stephen H. Legomsky is the John S. Lehmann University Professor at Washington University School of Law.

This Legal Workshop Editorial is based on the following full-length Article:   Stephen H. Legomsky, Learning to Live with Unequal Justice: Asylum and the Limits to Consistency, 60 STAN. L. REV. 413 (2007).

The state secrets privilege is a common-law privilege that allows the federal government to withhold evidence in civil cases if revelation of such evidence would threaten national security.  Many scholars and advocates assert that this privilege is often abused by government officials who use it to cover up misconduct or prevent embarrassment.¹ Furthermore, its extensive use by the Bush administration and its continuing use by the Obama administration in high-profile cases has brought the issue under scrutiny in the mainstream press.  The question of how to reform the privilege is now a prominent public debate.

I.
History of the State Secrets Privilege

The Supreme Court first recognized the state secrets privilege in United States v. Reynolds,² a case in which the government claimed that revelation of an accident report regarding a military plane crash would threaten national security.  In Reynolds, the Supreme Court allowed the government to withhold the report without permitting a judge to review its content in camera.  Decades later, when the document was released, its contents revealed that there had been no threat to national security and that the government had withheld the document to prevent embarrassment.  In recent years, the state secrets privilege has been used to quash civil cases regarding employment discrimination, retaliation against whistleblowers, and torture.

II.
Recent Calls for Reform

Calls for reform of the state secrets privilege have largely focused on what went wrong in Reynolds:  Had the judge simply been allowed to review the document, the argument goes, the false claim of state secrets would have been prevented.  Drawing from this logic and from many scholarly articles advocating reform, Congress is considering a bill that would require substantive judicial review of the privilege.³ Under this bill, if the government invokes the privilege, a judge would be required to review each document and determine for herself whether its revelation would harm national security.

The Obama administration, on the other hand, recently announced that it would implement new administrative mechanisms within the executive branch to reform the privilege instead of relying on judicial review.⁴ This announcement has been met with criticism from congressional leaders and civil liberties advocates who argue that any meaningful reform of the privilege would require external oversight by the judiciary.⁵

III.
Problems with Recently Proposed Solutions

My upcoming Note⁶ argues that judicial review alone is unlikely to reform the state secrets privilege effectively because it cannot address the underlying incentives that encourage abuse by the executive branch.  Prior to the new rules issued by the Obama administration, invoking the privilege was extremely easy and had few consequences for the executive branch.  While judicial scrutiny might create some disincentive for invoking the privilege frivolously, it is unlikely to completely deter abuse for two related reasons.  First, a risk-averse judiciary is unlikely to challenge the government’s assertions of grave harm to national security except in the most blatant cases of abuse.  Second, most abuses of the privilege are unlikely to be as blatant as in the Reynolds case.  Instead, they would likely involve close calls regarding the degree to which releasing information might harm national security or the extent to which certain information—for example, how many (or how few) Arabic-speaking employees work at the FBI—might be a matter of national security.

IV.
A Better Reform of the State Secrets Privilege

My Note builds the case that administrative law-based reforms, like the ones proposed by the Obama administration, will deter executive branch abuse more effectively than judicial review alone by discouraging invocation of the privilege in the first place.  I argue that administrative law mechanisms have been used effectively in other areas of national security law to deter abuse.  By making invocation of the privilege more administratively burdensome and by putting the professional credibility of officials who will not benefit personally from the invocation of the privilege on the line, the reforms proposed in my Note would more effectively discourage over-reaching in the state secrets privilege context.

This argument does not compel the conclusion that the Obama administration’s proposal is sufficiently comprehensive to deter all abuse of the state secrets privilege.  Legislation mandating (and expanding upon) the new administrative requirements still may be necessary in order to prevent the next administration from rescinding such requirements if they become inconvenient.  My Note simply makes the case that advocates who seek to reform the privilege should build upon internal administrative law mechanisms designed to balance incentives rather than solely rely on the judiciary to police the privilege.

Acknowledgments:

Copyright © 2009 New York University Law Review.

Beth George is a J.D. Candidate at New York University School of Law.

This Editorial introduces and is an abbreviated version of her full-length Student Note: Beth George, Note, An Administrative Law Approach to Reforming the State Secrets Privilege, 84 N.Y.U. L. REV. 1691 (2009).

Environmental law scholars argue that federal ceiling preemption has pernicious effects.¹ These scholars fail, however, to adequately address the risk that states may adopt tough environmental regulations because they can externalize costs to other states, which may allow large pro-regulatory states like California to effectively dictate suboptimally stringent national standards.  Cost externalization—an inevitable byproduct of dividing the nation into fifty geographic zones—refers to instances where states and their residents do not bear the full cost of the regulations they pass because significant costs are borne by out-of-state consumers and producers.  This Editorial contends that the case for federal ceiling preemption in the area of environmental law based on cost-externalization arguments is weak.  It does so through a case study of California’s regulations of greenhouse gas emissions from motor vehicles.

California’s emissions regulations were initially preempted under the Clean Air Act by the Bush administration’s decision to deny its waiver request.  The Obama administration has reversed this denial and has also taken steps to combine California’s emissions regulations with the federal corporate average fuel economy program.² If the program succeeds, it will again impose a single national fuel economy standard.  Yet the history of motor vehicle regulation strongly suggests that any equipoise between federal and state regulations may be temporary, and that California (and states that choose to follow California) might again impose motor vehicle regulations that outpace the rest of the nation.  This Editorial addresses the costs consumers and producers in other states face from such leadership.

This Editorial argues that state regulations that provide manufacturers with sufficient flexibility to meet standards without disrupting economies of scale can largely avoid externalizing costs to out-of-state consumers, and that states often also have to consider, at least indirectly, the interests of out-of-state producers when issuing regulations.

 
I.
State Environmental Regulation and Federal Ceiling Preemption

States have developed innovative environmental policies.  Perhaps most prominently, every state has now taken some action to address climate change, adopting strategies ranging from targeted measures to increase energy efficiency and promote alternative energy to far broader proposals to cap greenhouse gas emissions across entire state economies.

California has also led an effort to regulate greenhouse gas emissions from motor vehicles, relying on its unique authority under the Clean Air Act.  The Clean Air Act preempts states from enforcing their own motor vehicle emissions standards, but makes an exception for California, which may petition the Administrator of the Environmental Protection Agency (EPA) for a preemption waiver.  In 2002, California’s legislature passed the nation’s first law to regulate motor vehicle greenhouse gas emissions, and the California Air Resources Board (CARB) subsequently promulgated regulations in 2004 establishing specific greenhouse gas reduction standards.  While other states cannot adopt their own emissions standards, they can opt into California’s program, and sixteen states have chosen to do so to regulate greenhouse gases.

Before California’s emissions regulations can become effective, the EPA must approve California’s waiver petition.  In December 2007, under the Bush administration, the EPA denied California’s waiver petition—the first time it had done so in decades and the only waiver request it ever denied in full.  Upon taking office, the Obama administration immediately decided to review this determination, and the new EPA Administrator granted California’s petition after completing formal reconsideration.³ The Obama administration also plans—through joint action of the EPA and Department of Transportation—to increase federal fuel economy standards, and harmonize them with California’s stricter standards.⁴

For now, then, it seems that those favoring more stringent regulation of motor vehicles to help combat global warming have won.  But the gains may be temporary and they do not resolve the structural question of the proper role for the states in environmental regulation.  As exemplified by the initial denial of California’s waiver petition, federal ceiling preemption in environmental law threatens state regulatory activity.  Over the past decade, federal ceiling preemption has expanded in environmental law as the result of broad interpretations of existing statutes by courts and agencies, as well as the enactment of new legislation by Congress.  Even presuming a Democratic Congress and presidential administration will be more interested in preserving the states’ ability to adopt stringent environmental regulations, questions about the proper scope of federal ceiling preemption are sure to arise.  For instance, business leaders have argued that preemptive federal policies are necessary to address climate change, while state leaders have supported federal action but have lobbied against federal ceiling preemption that would disable the many state, regional, and local programs under development.  In fact, a provision in the Waxman-Markey Bill, a leading climate change and energy bill that passed the House on June 26, 2009,⁵ imposes a five-year moratorium on state cap-and-trade programs for greenhouse gas reduction.⁶ Properly analyzing such questions requires precision about the tradeoffs involved in either permitting or preempting more stringent state environmental policies.

 
II.
Cost Externalization and Federal Preemption

Federal ceiling preemption has costs, but preemption may be justified when state regulation externalizes costs.  Cost externalization is undesirable because it distorts the incentives of state governments and regulators, leading them to enact stringent environmental regulations to gain benefits like environmental protection for their constituents at the expense of others.  Federal ceiling preemption is proffered as a solution to this problem, as it allows the federal government to consider and balance all of the costs and benefits of regulation.

A principled argument against the use of federal ceiling preemption in environmental law must therefore address whether and when state environmental regulations externalize costs.  Proponents of the extensive use of federal ceiling preemption suggest state regulations may often externalize costs, particularly when states regulate products with national markets and economies of scale in production.  California’s regulation of motor vehicle emissions is referenced as a paradigm example.  These regulations, the argument goes, may externalize costs to both out-of-state consumers and out-of-state producers.  Consumers are adversely affected if the regulations increase the cost of motor vehicles in their state, either by reducing economies of scale and increasing marginal production costs, or by forcing manufacturers to adapt vehicles to meet more expensive California standards nationally.  Producers and their workers may be harmed if the regulations make automobiles more expensive, which could decrease sales, reduce profits, and negatively affect employment rates.

This Editorial’s case study of California’s regulations suggests, however, that these fears may be overblown.  California’s regulations are designed in a way that minimizes disruption to economies of scale and mitigates cost externalization, and the argument that California is insulated from the costs it imposes on producers beyond its borders seems exaggerated.

 
III.
California’s Greenhouse Gas Regulations for Vehicle Emissions

California’s regulations under Assembly Bill 1493 (A.B. 1493),⁷ which limits tailpipe emission of greenhouse gases, grew out of the state’s preexisting Low Emission Vehicle Program (LEV).  Following the model of prior LEV regulations, the A.B. 1493 regulations set emissions standards for two different categories of new vehicles sold within the state (determined by vehicle weight) based on grams of carbon dioxide emitted per mile driven (calculated on a fleet-average basis).  The regulations do not directly impose fuel economy standards—and indeed, legally they may not under the federal Energy Policy and Conservation Act⁸—but the majority of emissions reductions are accomplished through enhanced fuel economy, and greenhouse gas emissions standards can be converted to approximate miles-per-gallon requirements.

As discussed above, in 2007 the EPA denied California’s Clean Air Act waiver request, preventing, at the time, the implementation of California’s vehicle emissions regulations.  In 2009, the EPA pivoted, as it withdrew its earlier denial and granted the waiver.  Assuming that both actions were within the EPA’s legal discretion, which is the better policy?  The answer ultimately turns, at least in part, on whether the initial waiver denial can be justified on cost-externalization grounds.  In other words, do California’s greenhouse gas emissions regulations enable it, as a single large state, to impose substantial costs to consumers and producers beyond its borders and effectively dictate national policy?

Looking first at the regulation’s potential impact on out-of-state consumers, the vehicle emissions standards’ reliance on fleet-wide averages—rather than vehicle-specific mandates—allow manufacturers to meet California standards without having to make modifications across product lines, minimizing the impact on out-of-state consumers.  Manufacturers do not have to build new “California cars.”  Instead, they can comply by altering the mix of car models sold in a jurisdiction.  Even for 2009 model-year cars—2009 being the first model year to which California’s regulations were scheduled to apply—most leading automobile manufacturers had at least some vehicle models in their fleet that comply with California’s standards.  California’s regulations admittedly may increase the cost of less fuel efficient vehicles by altering patterns of production and diminishing economies of scale.  However, they should also correspondingly increase the market for high fuel efficiency vehicles, creating additional economies of scale for these vehicles and making them less expensive both in California and in other states.

The car industry has actually recognized the possibility that California’s regulations could be satisfied by adjusting in-state sales.  In Green Mountain Chrysler Plymouth Dodge Jeep v. Crombie⁹—a case brought in federal district court by members of the car industry to enjoin on preemption grounds Vermont’s adoption of California’s standards—a General Motors executive director testified that the company might have to gradually restrict products offered in jurisdictions like Vermont that adopted the more stringent emissions regulations.  While this prediction was offered as an argument against the state regulations, the case for preemption is thin when states primarily restrict the consumption options of their own constituents.  If state residents become dissatisfied with their consumer options or come to believe the regulations are ineffective,¹⁰ they can pressure their state government officials to change them.

Commentators have also suggested that California’s greenhouse gas regulations will negatively affect out-of-state producers.  It is reasonable to presume that the regulations will impose initial additional costs on the already struggling car industry, though the regulations might also benefit the industry in the long term.¹¹ In any case, the fact that California’s regulations may affect Michigan’s economy does not establish that the regulations are suboptimally stringent, and it is not sufficient to justify federal ceiling preemption.  The key issue is whether stringent regulations result from cost externalization or whether state regulators and politicians properly consider the interests of other states.

To this end, the argument that California voters have little incentive to protect Michigan’s interests is appealing in the abstract, but the case is overstated.  First, California voters do bear some of the costs of their more stringent vehicle emissions regulations in the form of increased prices and possibly reduced consumer options. If producers can pass on their increased production costs to consumers within the jurisdiction, then the cost of the regulation will be at least partly internalized. Second, the notion of a complete “free lunch” for legislators is rather idealized.  Out-of-state interests often lobby state governments, and they may have the support of in-state groups with whom their interests align, such as car dealerships supporting automobile manufacturers.  Additionally, the line between in-state and out-of-state interests is blurred by the widely dispersed ownership of large public companies like Ford Motor Company.

 
Conclusion

Despite broad suggestions to the contrary, the scope of cost externalization for particular state environmental regulations may turn out to be fairly minimal.  As the magnitude of any regulatory cost externalization decreases, it becomes increasingly doubtful that federal ceiling preemption is desirable in light of the benefits of state-based environmental regulation, including the value of tailoring standards to local preferences and conditions, the importance of state-level experiment for technology development, and the desirability of decentralized democratic decisionmaking.  Policy makers should therefore look closely at the realities of cost externalization before determining whether federal ceiling preemption is appropriate.

Acknowledgments:

Copyright © 2009 New York University Law Review.

Brian T. Burgess is a Law Clerk for Judge Guido Calabresi. He wrote this piece while he was a J.D. Candidate at New York University School of Law.

This Legal Workshop Editorial is based on the following Student Note: Brian T. Burgess, Limiting Preemption in Environmental Law: An Analysis of the Cost-Externalization Argument and California Assembly Bill 1493, 84 N.Y.U. L. REV. 258 (2009).

The Supreme Court, it turns out, can help answer this question.  But not in the way you might think.

I.
By the Numbers: Knowing Where to Look

For decades, the FCC has maintained a set of ownership regulations that limits the number of media outlets one entity can own.  Newspapers, such as Murdoch’s New York Post, come under the purview of the FCC’s “cross-ownership rule,” restricting common ownership of newspapers and broadcast stations in a market.

Most of federal law on the matter is predicated on an assumption that consolidation will reduce so-called “viewpoint diversity.”  Put another way, viewpoints may converge with common ownership.  Yet economic or communications theory doesn’t squarely provide a conclusion to that premise.  Over the past decade, recognizing the theoretical ambiguity, the courts and the FCC have increasingly required empirical evidence in support of this convergence hypothesis.

The trouble is that the evidence so far has been, well, flimsy.

The concept of viewpoint diversity, as the courts have recognized, is elusive.  And when, in 2002, the FCC commissioned a handful of empirical studies on the connection between ownership and viewpoint diversity, it didn’t find much.  Indeed, this elusiveness led Commissioner Jonathan Adelstein to conclude that the FCC’s work was “like submitting a high-school term paper for a Ph.D. thesis.”³

But the lack of conclusive evidence may be the result of either poor measurement of viewpoints or that ownership and viewpoints aren’t directly related.  Little consensus exists as to which story is right.

Fortunately, rapid advances in statistics are making rigorous assessment of the convergence hypothesis possible.  While “viewpoint” is an elusive concept, it does have observable consequences—in the same way that elusive concepts of “ability” or “intelligence” have observable implications.  The virtue of standardized tests, such as the SAT, is that each test answer can be viewed as a noisy indicator of a student’s underlying intelligence.  Similarly, as political scientists have recognized, we can summarize legislators’ views based on their voting records on common bills.  The crucial step is collecting information about answers (or votes) to common questions, just as SAT test-takers answer the same exam.

Where might we look for answers to common questions about viewpoint diversity, when newspaper editors don’t sit for a test, such as an SAT?  Here’s where the Supreme Court comes in.  Supreme Court justices vote on the merits of roughly one hundred cases each term.  And newspapers regularly editorialize on these decisions.  Connecting newspaper editorials to the opinions of the justices solves the difficult problem of quantifying editorial viewpoints, which the FCC has recognized as a crucial component of viewpoint diversity.

With a large research team at Harvard and Stanford, we collected every editorial position on a Supreme Court decision by the top twenty-five newspapers from 1994-2004 (roughly 1600 editorial positions) and coded these as agreeing with the majority or minority on the court.  Supreme Court cases are ideal for this study as they represent a staggering array of discrete issues.

With some refined statistical adjustments, this evidence allows us to scale newspapers in terms of their comparability on a single dimension.  One can think of it as running from “liberal” to “conservative.”  The scale tells us how each newspaper would have voted as a tenth justice and allows us to assess how viewpoints change with mergers and acquisitions of newspapers.  Essentially, the results reveal what a reasonable reader would infer after reading the editorial pages of twenty-five newspapers and the opinions in some 500 Supreme Court cases over a period of ten years.  It is in this sense that the Supreme Court is helping us learn about newspapers.

Figure 1: Estimates for Viewpoints for Select Newspapers and Supreme Court Justices. The left panel presents the median viewpoint estimate for each justice of the natural Rehnquist court. On the same scale, the right panel presents the viewpoints of The New York Times, New York Post, Washington Times, and Washington Post over time, based each paper’s editorials.  The solid lines represent our median estimate of editorial viewpoints, and the colored bands visualize the uncertainty of those estimates. The New York Post is estimated starting in 1997 because electronic versions of the paper were unavailable earlier.

Figure 1 presents some sample results for The New York Times, New York Post, Washington Times, and Washington Post.  The results quantify editorial viewpoints (and uncertainty as represented in the bands) meaningfully: The overall probability that the Washington Post is to the right of The New York Times is nearly 1.  The New York Post’s phantom jurisprudence most resembles that of Justice Scalia.  More importantly, our analysis allows us to examine the dynamic evolution of newspapers. The New York Times, for example, has been consistently trending to the left of Justice Stevens.

II.
The Merger Question

So what happens with a newspaper merger?  One important test is the merger of the editorial boards of the Atlanta Journal and the Atlanta Constitution in 2001 to form the Atlanta Journal Constitution.  This merger appears to corroborate the convergence hypothesis: the Journal Constitution’s viewpoint lands squarely between the two prior papers. But they arrive at that middle position in an unusual way.

In 1995, both the Journal and the Constitution supported the five-justice majority in United States v. Lopez, which struck down a federal statute prohibiting guns in school zones.  But shortly thereafter, the papers diverge considerably.  In 1999, for example, the Constitution argued the court “ruled wisely and well” when it found that a school could be liable for discriminatory acts committed by students, while the Constitution charged that the decision “opened yet another floodgate to lawsuits.”  The viewpoints of the editorial board members differed so sharply between the two papers that the merged Journal Constitution faced difficulty forging a consensus position on cases.  Around 2006 the paper became one of the first major U.S. newspapers to disband the practice of unsigned editorials.  The individual columns reflected diverging liberal and conservative viewpoints in line with those followed prior to the merger.  Paradoxically, then, the merger may have unified Atlanta’s readership, with the net effect of exposing more readers to more viewpoints.

Figure 2: Editorial Viewpoints for the Atlanta Journal, Atlanta Constitution, and the combined Atlanta Journal Constitution. This figure illustrates the divergence in viewpoints between the two editorial boards prior to merging. After the merger, the viewpoint of the combined board falls between those of the two former papers. As in Figure 1, the solid lines represent median viewpoints, and the color shading captures the uncertainty in estimates.

Of course, the Atlanta experience may be unique.  Examining all acquisitions occurring between the newspapers in our data, effects were varied and depended on the circumstances of the ownership change: for chain acquisitions (e.g., Hearst’s acquisition of the San Francisco Chronicle), editorial viewpoints remained stable; but after the The New York Times acquired the Boston Globe, the papers switched positions.

III.
So What?

Our analysis suggests three lessons.  First, consolidation does not inexorably cause convergence or divergence in viewpoints.

Second, our analysis points to the promises and perils of empirical assessment in law and regulation.  Using tools developed across applied statistics allows thorny questions of public policy and regulation to be examined with data.  If, for example, consolidation systematically diversified viewpoints, there would be little use in maintaining various ownership regulations.

On the other hand, such inquiry isn’t easy.  Courts and agencies shouldn’t expect too much.  Our approach, for example, does not assess viewpoints expressed in news reporting, nor can we realistically examine the effects of vast changes of federal regulation.  Judges and policymakers don’t necessarily have the luxury of making decisions after the data have been systematically gathered and analyzed.  This difficulty of evaluation suggests a type of precautionary principle: incremental, as opposed to wholesale, modification of federal regulation facilitates policy evaluation.

Last, our study sheds light on and informs what factors the FCC should consider in applying its waiver policy to the likes of Rupert Murdoch.  Whether media consolidation stifles viewpoints may ultimately turn on the minutiae of the acquisition: e.g., the terms of organizational restructuring, guarantees of editorial independence, and employment conditions.

That’s the trouble when you face the data.  It might show you that the devil’s in the details.

Acknowledgments:

Copyright © 2009 Stanford Law Review.

Daniel E. Ho is Assistant Professor of Law & Robert E. Paradise Faculty Fellow for Excellence in Teaching and Research at Stanford Law School.

Kevin M. Quinn is Associate Professor in the Department of Government and Institute for Quantitative Social Science at Harvard University.

This Legal Workshop Editorial is based on the following Article:   Daniel E. Ho & Kevin M. Quinn, Does Media Consolidation Stifle Viewpoints?: How the Supreme Court Can Provide an Answer, 61 STAN. L. REV. 781 (2009).

This Editorial previously appeared in the Stanford Lawyer: Daniel E. Ho & Kevin M. Quinn, Does Media Consolidation Stifle Viewpoints, STAN. LAWYER, Fall 2008, at 38.

This Editorial takes the opposite position and shows that, barring estimation error, the legislative process accounts completely for the costs of temporary-effect legislation but not permanent legislation.  Consequently, enactment of temporary-effect rather than permanent legislation promotes political accountability and may result in greater fiscal restraint.

The Editorial first explains why the criticism of temporary-effect legislation stems from an understandable, but mistaken, focus on the short-term budget effects of legislation.  It then shows that, from the standpoint of promoting fiscally responsible decisions, temporary-effect legislation is preferable to permanent legislation both at the time policy choices are initiated and when they are renewed.  The nation’s rapidly deteriorating fiscal situation, due in part to the economic crisis of 2008 and 2009,¹ highlights the importance of understanding the budgetary effects of these legislative practices before Congress approves further deficit-increasing changes in the areas of health care, climate change, or other entitlement or tax programs.

 
I.
The Budget Accounting Treatment of Temporary-Effect and Permanent Legislation

For budget accounting purposes, the cost of proposed new spending and tax legislation is the difference between the amount of government revenues or outlays that would occur with the legislation and the amount that would occur without the legislation.  The latter amount is known as the “baseline,” and is determined by applying current law to the relevant economic (and other) variables projected to occur during the budget period being considered.  Baseline estimates generally assume that permanent laws will continue forever but that temporary laws will expire as scheduled.

The baseline cost of an entitlement or tax program may be projected to increase over time even in the absence of any expansion or change to the program.  This is because baseline estimates must assume that “laws providing or creating direct spending and receipts . . . operate in the manner specified in those laws . . . and funding for entitlement authority is . . . adequate to make all payments required by those laws.”² Thus, for example, if due to anticipated economic or demographic changes, participation in a tax or entitlement program is expected to increase in the future, the baseline cost estimate of the program must reflect that increase.

Congress typically agrees each year to a limit on the cost of new legislation passed that year.  Importantly, the budget limit applies only to the costs projected to occur during the “budget window period”—generally, only the five or ten years following the legislation.  Given this limitation, political debate naturally centers around whether legislative practices and budget accounting rules result in an accurate measurement of the costs of proposed legislation within the budget window period (such costs are referred to in this Editorial as the “official cost” of the legislation).

Supporters of legislation have long used various techniques to reduce the official cost of legislation and thereby enhance its likelihood of approval.  One technique is to delay the start of the legislation until late in the budget window period or gradually phase in the legislation’s effect.  Because this technique has the potential disadvantage of delaying the realization of benefits produced by the legislation, lawmakers sometimes employ an alternate technique of allowing the legislation to begin immediately but then terminating or “sunsetting” its effect prior to the end of the budget window period.  By using either or both of these techniques, supporters can reduce the official cost of legislation to a fraction of what it would have been had the legislation been in effect throughout the entire budget window period.

Although these techniques have been used for a number of years, the extent and frequency of their use in the tax area grew dramatically beginning in 2001.  In that year, Congress approved major tax cut legislation, virtually all of whose provisions expired nine months before the end of the budget window period.  In addition, it phased in or delayed the effect of many of the provisions.  These two steps significantly reduced the estimated total cost of the legislation over the budget window period.  Much the same occurred in 2003 when Congress passed another major tax cut.

Many analysts sharply criticized these practices.  According to these critics, the practices enabled the Bush Administration and Congress “to hide the true budgetary costs” of the policy changes and thereby “avoid the constraints imposed by the budget rules.³ One observer went so far as to label these techniques “Enron-style accounting” that caused “the official budget projections [to be] universally seen as unreliable and even fraudulent.”⁴ The observer concluded that the “[2003] bill’s true cost . . . will be close to double its ‘official’ cost.”⁵ To prevent these misrepresentations, some have suggested barring the practice of sunsetting legislation in certain circumstances or requiring such legislation to gain supermajority support before it is approved.

Critics are surely correct that the motivation behind many of the delayed effective dates, phase-ins, and sunsets of recent tax legislation has been a desire to shrink the official cost of legislation taken into account for budget purposes.  Since budget rules provide consequences that depend upon that official cost, political advantage can be gained by manipulating this amount.  For the same reason, opponents of the legislation have generally focused on this same official cost.

But from the broader perspective of promoting fiscal responsibility, both proponents and opponents of the recent legislation have overlooked the real budgetary impact of these nontraditional legislative practices.  The budget process should provide a mechanism that conveys to lawmakers the true cost of their legislative activity before they act.  This information not only enables lawmakers to make more informed decisions but also permits the public to hold lawmakers accountable for their choices.  But the true cost of legislation is not necessarily the “official cost” used for budget purposes; rather, the true cost includes the budgetary consequences of the legislation throughout the entire period that the legislation remains in effect.  Since the “official cost” incorporates only the budget consequences falling within the budget window period, it systematically understates the true cost of any deficit-increasing legislation extending beyond that period.  Thus, when proponents of permanent legislation go on record as having approved the official cost of such legislation, they escape responsibility for the full budgetary impact of their action.  By contrast, barring estimation error, the official cost of legislation not extending beyond the end of the budget period is its true cost, so lawmakers who support such legislation must therefore internalize the full budgetary consequences of such legislation.

These observations mean that at least from the standpoint of promoting political accountability and fiscal restraint, legislation whose effects extend beyond the end of the budget period, such as “permanent” legislation, generally should be disfavored, whereas legislation whose effects end no later than the end of the budget period, such as temporary-effect legislation, generally should be favored.  The following Sections illustrate this principle’s application both at the time policy choices are first adopted and at the time they are later continued.

 
II.
Initial Adoption of Policy Choices: The Medicare Prescription Drug Legislation

The greater budget transparency of temporary-effect rather than permanent legislation when policy choices are first adopted is starkly illustrated by considering the passage of the Medicare prescription drug legislation in 2003.  Early on, the President and congressional supporters agreed that this legislative effort should cost no more than $400 billion over the ten-year budget window period.  To fit within that constraint, Congress created a “doughnut hole” in the benefit structure to remove any federal subsidy for an intermediate level of prescription drug spending and delayed the start of the basic benefits until January 1, 2006, with only limited transitional assistance provided prior to that time.  Importantly, however, unlike most of the tax laws passed in 2001 and 2003, the effects of the new Medicare prescription drug law were not sunset.  Rather, the bill was enacted as a “permanent” change in the law.⁶

As it turns out, much controversy surrounded the $395 billion ten-year official cost estimate of the final Medicare legislation, and the estimate was eventually revised upward by $41 billion.  But the significance of this error pales in comparison to the real misrepresentation of the legislation’s budget consequences.  The “true” cost of the Medicare prescription drug benefit, meaning the present value of all future costs obligated by the new program, has been estimated by the Medicare trustees to be $17.2 trillion.  Thus, enactment of the Medicare law represented a huge new financial commitment by the federal government—one which no member of Congress ever was required to endorse.  The budget process, which is supposed to provide information to Congress so it can make responsible choices about the nation’s priorities and to the public so it can scrutinize those choices effectively, therefore failed in the case of the Medicare legislation, because the process disregarded any budgetary effects occurring after the budget window period.  In contrast, had the Medicare legislation been enacted instead as temporary-effect legislation, the true cost of the legislation would have been equal to its official cost (barring estimation error).  Congress, therefore, would have acted with full knowledge of the law’s budgetary implications and subjected itself to full scrutiny from the public for its choice.

 
III.
Continuation of Policy Choices: The R&E Tax Credit

The contrasting budget accounting treatment of temporary-effect and permanent legislation is also important when policy choices are continued, and is illustrated by considering the tax credit for research and experimental activities (“R&E tax credit”).  In 1981, Congress approved a new R&E tax credit to provide an incentive for certain research activities.  Congress provided that the credit would sunset at the end of 1985 after being in effect for 4.5 years.

The R&E credit has proven to be extremely popular and remained in effect, with only minor changes, for virtually the entire period since 1981.  After its initial term, the life of the credit has been regularly extended, generally in one- or two-year increments.  Indeed, even though there is no suggestion that its initial temporary term was in any sense a budgetary gimmick, the credit is often pointed to as the poster child for fiscally irresponsible “sunset” provisions.  Yet by adopting the credit as a temporary measure and then extending it only in short-term increments, Congress has had to take its cost into account in the legislative process for every one of its over twenty-five years of existence, a period far longer than that of any budget window period thus far.  As a result, legislators regularly have had to struggle with finding an acceptable offsetting change to “pay for” an extension of the credit.  Even where no offset has been found, the extension has theoretically displaced other spending initiatives or tax expenditures in the same manner in which the continuation and expansion of discretionary spending programs compete with and displace one another.

Moreover, as experience with and data about the R&E credit have accumulated, the estimates of the cost of continuing the credit—currently more than ten times the cost estimated in 1981—can be expected to be more and more accurate.  Thus, because of the temporary nature of the credit, Congress has been confronted by, and has had to take into account in the legislative process, current and increasingly accurate information relating to the cost of continuing the program.

Contrast the budget accounting treatment of continuing a permanent tax or spending program.  In that case, the cost of continuation largely disappears from the legislative radar screen because continuation occurs as a result of legislative inaction rather than legislative action.  Moreover, by approving a program as a “permanent” change, Congress modifies the budget baseline to incorporate its cost in all subsequent years, including any growth in costs resulting from increased participation in the program or other factors not due to legislated changes.  Thus, enactment of permanent measures makes any continuation of the program beyond the initial budget window period appear to be cost-free.

Proposals made by the George W. Bush and Obama Administrations to change the baseline to disregard the temporary nature of the 2001 and 2003 tax cuts demonstrate how important this budget accounting difference is.  If the baseline were changed to treat these tax cuts as if they had been enacted as permanent law (despite the sunset clause), it would allow a continuation of the cuts beyond 2010 to appear to be cost-free and thereby facilitate their extension.  In 2007, in response to the Bush Administration’s proposed change to the baseline rules, then-CBO Director Peter Orszag explained why this change would be a form of bait-and-switch that would substantially undermine the integrity of the legislative process:

[S]coring expiring provisions as entailing no budgetary cost after their expiration, but then assuming their extension in the baseline, would cause the costs of extending those provisions to “disappear” from the process—which would substantially undermine its integrity.⁷

Despite this criticism, in 2009, the Obama Administration’s Office of Management and Budget (OMB), headed by Dr. Orszag, made precisely the same proposal as the Bush Administration to change the baseline.⁸ In a remarkable display of chutzpah, the OMB captioned this proposal as a “Return to Honest Budgeting.”⁹ The Obama Administration proposal would allow a total of $3.5 trillion in costs to disappear from the budget process during just the next ten years.¹⁰ In other words, during the current period of rapidly growing deficits and debt, this amount of additional spending (or lost revenue) could be approved without any member of Congress or the Administration having to take responsibility for it.

Dr. Orszag’s initial criticism of the Bush Administration proposal was correct.  Moreover, the reason he offered shows equally well why the current budget accounting treatment of permanent legislation substantially undermines the legislative process.  Permanent legislation is scored as entailing no budgetary cost after the end of the budget window period even though the baseline assumes continuation of the legislation forever.  Thus, the costs of such legislation after the end of the budget window period “disappear” from the legislative process in exactly the same manner as Dr. Orszag’s example, with the same deleterious effect on the integrity of that process.

 
IV.
Passage of Permanent Legislation Permanently Distorts Budget Process Information

The adoption of a permanent program permanently distorts the information provided by the budget process even if the program itself, as a result of subsequent congressional action, turns out to be only temporary (or, indeed, never goes into effect).  Although this phenomenon is derivative of effects already discussed, the consequence is so counterintuitive as to merit a brief, separate discussion.  The impact is also very important:  It means, for example, that the $16.8 trillion of Medicare prescription drug program costs for which no lawmaker has ever been held accountable has permanently distorted budget accounting by that amount even if the program itself is curtailed or repealed in the future.

The phenomenon is illustrated by considering legislation affecting a tax law provision concerning the allocation of interest expense between domestic- and foreign-source income.  In 2004, Congress liberalized this provision to provide a cut in taxes but deferred the effect of the change until 2009.  The estimated cost of the liberalization during the applicable ten-year budget window period (FY 2005-2014) was about $14 billion.  In 2008, prior to the liberalization going into effect, Congress delayed its effect for two years until 2011.  However, because the baseline for FY 2009-2018 assumed that the new liberalized law would be in effect as a result of the 2004 legislation, the two-year delay in this tax cut was estimated to raise about $8 billion in revenues.  In 2009, in approving health care legislation, the House Ways and Means Committee agreed to an additional delay of the tax cut until 2020, producing a further estimated increase in revenues of about $26 billion.¹¹

If the Ways and Means Committee proposal becomes law, the net budget effect of the three changes would be an estimated increase in revenue of $20 billion ($14 billion revenue loss from 2004 legislation plus $8 billion and $26 billion revenue increases from 2008 and 2009 legislation), most of which would be used to finance the cost of health care reform.  But the interest allocation rules would not have been changed at all by this legislation—taken together, all of the legislation would leave the law (until 2020) precisely where it was prior to 2004.  Thus, the estimated $20 billion increase in revenues resulting from the “changes” to those rules cannot be an accurate reflection of the budget impact of the legislation.  No program would have been started, modified, or cancelled as a result of the legislation; the $20 billion would simply be the byproduct of how the budget accounts for the delay of a program that has not yet gone into effect.

Moreover, this misrepresentation can be repeated over and over again.  For example, if the 2009 Ways and Means Committee bill is enacted (delaying the effect of the 2004 liberalization until 2020), Congress could later delay it again, thereby “raising” billions more in revenue to finance other spending or tax cuts.  Again, all of this would occur despite the absence of any change whatsoever to the interest allocation rules.

The reason for the misrepresentation is the “permanent” nature of the 2004 amendment to the interest allocation rules.  As permanent legislation, it changed the baseline for all succeeding years even though Congress was charged with just a small portion of the cost of the change—the $14 billion loss in revenues estimated to arise during the forthcoming ten years.  Thus, subsequent delays in the effect of the 2004 amendment effectively credit Congress with an amount for which it was never charged in the first place.  This example shows how enactment of permanent legislation permanently distorts the information provided by the budget process even when the legislation itself turns out to be only temporary or, as in this case, never goes into effect at all.   The budget treatment of permanent legislation allows Congress to generate fake cost savings or revenue increases whenever it wants.  Congress simply has to pass permanent spending increases or tax cuts that are never intended to go into effect, and then to vote repeatedly to delay the start of such programs.

 
Conclusion

In early 2009, in one of the first laws passed under the new Obama Administration, Congress extended for 4.5 more years an entitlement program providing health insurance benefits to children.  The law, however, was approved under a special budget rule that accounted for its cost as if the extension were permanent.  Hence, even as lawmakers expressed concern about the daunting fiscal challenges facing the nation, they approved a new program whose true cost may far exceed the official cost revealed in the legislative process.  Congress may soon take similar action if it passes permanent health care or climate change legislation or converts Pell Grants from a discretionary program into a permanent one, as recommended by the President.¹²

This Editorial has shown that after taking into account the budget accounting rules in the legislative process, it is preferable to pass temporary-effect rather than permanent legislation to promote political accountability and fiscal restraint.  Barring estimation error, the full cost of legislation is revealed to Congress and the public when temporary-effect, but not permanent, legislation is adopted and continued.  The budget implications of these legislative practices should be understood clearly before Congress undertakes major reforms of entitlement and tax programs.

Acknowledgments:

Copyright © 2009 New York University Law Review and George K. Yin. All rights reserved.

George K. Yin is Edwin S. Cohen Distinguished Professor of Law and Taxation at University of Virginia School of Law.

This Editorial is an updated and abbreviated version of George K. Yin, Temporary-Effect Legislation, Political Accountability, and Fiscal Restraint, 84 N.Y.U. L. REV. 174 (2009).

In this Article, I attempt a step forward on that important project. I begin by offering a novel explanation for why Chevron falls short of offering the proper method of statutory interpretation. I argue that Chevron was never well calibrated to determine whether a statute is clear or ambiguous in relevant respects. The reason is that the decision fails to give courts adequate tools for determining whether Congress has delegated interpretive authority to the agency involved. How big is the problem? It is hard to measure, but there is a sense among professors who study this area that, Chevron notwithstanding, courts are too often in the business of invalidating agency interpretations.⁴ In addition, there is another part of the problem: courts too often uphold agency interpretations when they should instead invalidate them.

Where exactly does Chevron take a wrong turn? The decision pursues the correct goal—namely, to account for how Congress designs regulatory statutes. It recognizes that Congress may delegate authority to agencies to capitalize on agency expertise on complex issues or to obtain legislative consensus on contentious issues. And it recognizes that Congress may delegate expressly by granting regulatory authority in statutes or implicitly by leaving interpretive room in statutes. So, sensibly, Chevron asks courts to determine whether Congress has delegated such interpretive power to the agency involved.

Yet, despite its grasp of legislative realities, Chevron then reverts to a standard judicial conception of statutory interpretation. That (mis)conception has judges examining statutory text as if Congress meant to resolve rather than delegate an interpretive question. According to Chevron, courts should look for a “clear” meaning using the “traditional tools of statutory construction.”⁵ This process is not one-size-fits-all. That is, courts approach statutory text using different interpretive theories, including textualism, intentionalism, and purposivism. At the bottom of all those theories, however, lies a vision of legislative behavior that sees Congress as resolving concrete questions. For example, textualism sees statutory text as embodying a legislative deal, often peculiar when viewed in context but no less precise in its meaning. Intentionalism views statutory text as reflecting a collective legislative intent, albeit imperfectly expressing that intent. Purposivism regards statutory text as the manifestation of a general legislative goal, again as imperfectly expressing that goal. Despite their differences, all of these theories view Congress as striving for a relatively specific meaning. (In addition, textualism views statutory text and only statutory text as law.) When courts apply any of these theories, they are approaching regulatory statutes in much the same way as they approach any other statute: trying to recover the specific meaning of the words at issue.

To be sure, some courts apply Chevron mindful of a more agency-liberating spirit. They look for a “zone of indeterminacy” that permits them to uphold the agency interpretation if that interpretation is reasonable.⁶ The difficulty is that the doctrine does not ordain this type of judicial generosity. I claim that the doctrine itself should do better. As it stands, Chevron effectively primes courts to find a relatively specific meaning. Once courts find a “best” meaning, they must possess more than an average amount of judicial resistance to set aside that meaning in favor of the agency’s merely “reasonable” meaning, as Chevron optimistically counsels.⁷ Ardent textualists probably have a more difficult time abandoning their preferred meaning than others because they are especially committed to the pursuit of linguistic clarity.⁸ But no judge, textualist or otherwise, who takes seriously the search for linguistic clarity is immune.

In some sense, the Court has already recognized the deficiencies of Chevron. It has been fiddling with Chevron in a way consistent with my criticisms. In United States v. Mead Corp.,⁹ for example, the Court returned to the question of whether Congress has delegated interpretive authority to the agency involved, this time by focusing specifically on the relationship between congressional delegation and administrative procedures. The Court reasoned that Congress would not intend for an agency to possess binding interpretive authority unless it authorized (and the agency utilized) procedures that are appropriate for issuing binding interpretations.¹⁰

In my view, Mead does not remedy the problem because, like Chevron, it is right in theory but not in practice. Specifically, it does not give courts an adequate metric for evaluating questionable administrative procedures. Mead instructs courts to consider whether the procedures at issue promote fairness and deliberation, which is a standard judicial conception of the values that procedures serve—and a fuzzy one at best. I do not deny that procedures, if sufficiently formal, serve these rule-of-law values. My point is that courts, if interested in tracking congressional delegation, should be equally interested in how procedures fit into the strategic legislative picture. Why are procedures important to Congress when delegating interpretive authority to an agency? If courts focused on answering this question, then Mead might truly focus on the connection between delegation and procedures. Furthermore, courts might have more guidance in applying the decision. As Mead stands, courts are seriously confused about what it means and how it applies.¹¹

Rather than fiddling, I argue that the time has come to replace the standard judicial theories and conceptions with the factors that matter to Congress when designing regulatory statutes. I admit that identifying those factors is no easy task. Yet the decisions themselves suggest a compass. Both Chevron and Mead reflect impulses that can be traced to political science literature, and in particular, positive political theory (PPT). This literature does not reveal how Congress designs particular statutes. Rather, it contains hypotheses about legislative behavior that might furnish assumptions about legislative behavior in the statutory interpretation context. Courts already rely on assumptions about legislative behavior when they apply Chevron and Mead.  In my view, PPT suggests more accurate ones and therefore can produce better interpretation of statutes.

PPT scholars offer two hypotheses that are of particular interest in fashioning a new approach to statutory interpretation. First, PPT scholars assert that Congress is more likely to delegate if the issue is complex or an obstacle to a law’s passage.¹² Congress lacks the time and competence to handle many issues and will be blamed for any burdens imposed specifically by statute. Congress also faces obstacles to consensus that are alleviated by choosing ambiguous language. Of note, legal scholars have also underscored the potential for Congress to use “deliberate ambiguity” when writing statutes.¹³ Second, PPT scholars assert that Congress is more likely to delegate if it can monitor subsequent agency interpretations through administrative procedures or has reasonable assurances that agency preferences are likely to roughly track legislative preferences.¹⁴ Notwithstanding its appeal, delegation comes with a price. Congress must monitor subsequent agency action to ensure that it roughly tracks legislative preferences. Administrative procedures are an ingenious form of legislative monitoring because they shift the costs of monitoring to constituents. Rather than having to discover information about agency action itself, Congress gives constituents a right to participate in the process so that those constituents may learn about agency action as it unfolds and alert Congress to intervene on their behalf.

I suggest that courts should examine the sorts of considerations that PPT theorists and legal scholars have identified as indications of congressional delegation. Assuming Congress delegates to agencies for reasons related to the complexity or contentiousness of the issue addressed by a statute, courts should consider the complexity or contentiousness of the issue. Assuming Congress delegates to agencies under conditions that minimize principle-agent concerns, courts should consider the adequacy of administrative procedures for this purpose or should consider other evidence of likely legislative-administrative preference alignment. To isolate these factors, courts should examine the face of the statute as well as its legal or social context. The stronger the case for interpretive delegation, the more courts should hesitate to read the statutory text as “clear” on the theory that Congress intended such clarity.

I acknowledge that a focus on “delegating” factors has limitations. First, it might not constitute much of a test because courts might find a delegation more often than not. Many issues in regulatory statutes are complex, and many agencies have relatively formal procedures for resolving interpretive questions. Accordingly, it is fair to describe my approach as a presumption of judicial deference to agency interpretations. My claim is that such a presumption is the right one. By the same token, I am not advocating judicial abdication. Courts should not defer to agency interpretations when circumstances suggest that Congress did not mean to delegate.

Second, courts might find evidence of a delegation but not necessarily to the agency. When Congress seeks to avoid contentious issues, for example, it could delegate to courts rather than an agency. In such circumstances, a finding of delegation is still significant. Even if courts retain interpretive authority for themselves, they might exercise that authority differently knowing that Congress did not specify a meaning. They would be justified in eschewing the traditional theories of statutory interpretation and considering other factors, including the agency’s views of wise policy. This approach offers a modern understanding for a famous old administrative law case, Skidmore v. Swift & Co.¹⁵

I am not alone in seeing real advantages in attempting to build delegating factors into statutory interpretation. Looking at two recent Supreme Court decisions, I see certain Justices as moving toward this approach. In Zuni Public School Dist. No. 89 v. Department of Education,¹⁶ Justice Breyer set aside Chevron’s question of meaning to focus on the sort of factors that I identify here. He returned to the statutory text but only as confirmation of a delegation, whereas Justice Scalia invalidated it on plain meaning grounds. In Gonzales v. Oregon,¹⁷ Justice Kennedy purported to apply a standard interpretive principle, but he did so in consideration of the sorts of factors that I emphasize here. Interestingly, he found no delegation based on the factors. He rejected the agency’s interpretation, whereas Justice Scalia offered a plain meaning argument to uphold it. These cases demonstrate not only that my approach can work, but that it can work both ways—to uphold or invalidate an agency interpretation.

Why should courts adopt the approach that I advocate? First, I believe that the law should seek to minimize fictions. Chevron does not track congressional delegation, although it purports to do so. My approach minimizes the fiction about congressional delegation by basing the doctrine on better assumptions about the legislative design of regulatory statutes. Second, I argue that the law should incorporate these assumptions for normative reasons. The problem with decisions like Chevron and Mead is not their focus on congressional delegation, but their overly judicial approach to ascertaining the existence of delegation. The focus on delegation is sensible. It continues an old tradition of promoting fidelity to congressional will, not as to specific statutory meanings but as to the involvement of agencies in choosing such meanings. In addition, it promotes other critical values. The reasons for which Congress delegates generally correlate to the reasons for which deference is normatively desirable: agency expertise and political accountability. On the flip side, Congress is not always inclined to delegate, and agencies are not always inclined to use formalized procedures. Precluding agency interpretive authority under these circumstances respects congressional will and promotes rule-of-law values.

In the Article, I address institutional and normative objections to my approach. The institutional objection concerns the difficulty of applying this test. As I previously mentioned, lower courts are already struggling with the doctrine in this area. It might be that they cannot handle one more complexity. I argue that my approach is not necessarily worse and may be better than current law, though I leave open the possibility of a truly streamlined rule: a presumption of judicial deference to agency interpretations stronger than Chevron has ever required.

The normative objection concerns the role of courts in policing broad delegations through statutory interpretation. Courts have enlisted canons of construction and even theories of interpretation to ensure that Congress delegates no more broadly than is normatively desirable.¹⁸ This well-established approach is seemingly precluded by my own. In fact, I show that it can coexist with my approach, applying in select cases when courts determine that nondelegation values are paramount. But before asking courts to determine which approach—the prodelegation or antidelegation approach—is appropriate in particular cases, I highlight a different alternative. In my prior work, I have argued that it is possible and promising for courts to police broad delegations under the arbitrary and capricious test of administrative law rather than as a matter of statutory interpretation. The idea is something of a compromise between prodelegation and antidelegation values or, more specifically, an insistence that policymaking exhibit a modicum of restraint and rationality at some point in the process. If Congress chooses to delegate broadly, courts should ensure that agencies exercise their delegated authority in a disciplined manner.

In sum, Chevron’s mistake is in thinking about statutory ambiguity too much as a problem of words rather than as a manifestation of politics. Congress certainly uses words in statutes to make policy. But Congress also uses words in statutes to avoid setting specific details, often delegating that responsibility to the agency involved. Chevron comes into play precisely at that moment—when Congress transfers authority to an agency not in so many words. Yet Chevron directs reviewing courts to consider what words Congress provided as the best indication of implicit delegation. Moreover, it allows courts to use interpretive theories that are designed to find a relatively specific meaning. Instead courts should examine other signals of congressional delegation before they draw conclusions about the significance of words. Like any other approach to statutory interpretation, mine is not without its own difficulties. In the end, I maintain that it offers a better method of interpretation in this context. Courts protect important normative values—indeed, the values for which Chevron and Mead themselves purport to stand—when they attempt to regard regulatory statutes in their realistic legislative context.

Acknowledgments:

Copyright © 2009 Duke Law Journal.

Lisa Schultz Bressman is Professor of Law at Vanderbilt University Law School.

This Legal Workshop Editorial is based on the following Article:   Lisa Schultz Bressman, Chevron’s Mistake, 58 DUKE L.J. 548 (2009).

The inherent problem with such lawmaking moments, however, is just that: they are “moments.”  What Congress and the President do with much fanfare can slip quickly and quietly away in the ensuing years.  This is famously so for environmental law.  Subsequent legislative amendments, limited budgets, appropriation riders, interpretive agency rulings, massive delays in rulemaking, and simple nonenforcement are more than capable of converting a seemingly uncompromising legal mandate into nothing more than a symbolic aspirational statement.  In short, what Congress and the President give, they are just as easily able to take away.

The critical lesson for climate change legislation is that the pending lawmaking moment must include the enactment of provisions specifically designed to maintain the legislation’s ability to achieve its long-term objectives.  Climate change legislation is peculiarly vulnerable to unraveling over time for a variety of reasons, but especially because of the extent to which it imposes costs on the short term for the realization of benefits many decades and sometimes centuries later.  Because of its fundamentally redistributive character, there will invariably be politically and economically powerful interests unhappy with its short-term costs seeking to relax the law’s requirements either formally or informally.  The erosion will be quiet, yet far-reaching in effect.  It will happen in the chambers of Congress, in the form of compliance extensions, budgetary shortfalls, appropriation riders, and earmarks, and it will happen in the vast hallways of the federal bureaucracy, in the form of delays in the promulgation of regulations, agency interpretations of statutory mandates as non-mandatory, generous agency settlements, and simple non-enforcement of the law.

It is therefore not enough for Congress to enact a law that mandates tough, immediate controls on greenhouse gas emissions.  Nor is it enough for Congress to build into the new law strong economic incentives that render more palatable the changes in business and individual behavior necessary to accomplish those mandates and promote overall economic efficiency.  Much more is necessary.  Like much legislation, for climate change legislation to be successful, the new legal framework must simultaneously be flexible in certain respects and steadfast in others.  Flexibility is necessary to allow for the modification of legal requirements over time in light of new information.  Steadfastness or “stickiness” is important to maintain the stability of a law’s requirements over time.  The need for both is just far greater for climate change legislation.  Flexibility is essential for climate change legislation in light of the enormity of the undertaking, both in its temporal and spatial reach, and the surrounding uncertainty concerning the wisdom of specific regulatory approaches.  Yet the basic legal framework and legal mandate must also be sufficiently steadfast to be maintained over the long term notwithstanding an unrelenting barrage of extremely powerful short-term economic interests that will inevitably seek that mandate’s relaxation.

To that end, the law will need to include institutional design features that allow for such flexibility, but insulate programmatic implementation to a significant extent from powerful political and economic interests propelled by short-term concerns.  Such design features will include “precommitment strategies,” which deliberately make it hard (never impossible) to change the law in response to some kinds of concerns.  They will also simultaneously provide avenues for change in response to other longer-term concerns that are in harmony with the law’s central purpose to achieve and maintain greenhouse gas emission reductions over time, thus addressing concerns that are otherwise less likely to have a powerful voice in lawmaking fora.

Directed to all three branches of government, such institutional design features should therefore be deliberately asymmetric, making it easier to change the law in one substantive direction rather than another.  Like the classic children’s board game “Chutes and Ladders,” the design of climate change law should include chutes that make it harder for the government to make certain kinds of changesand ladders that make it easier to make other kinds of changes and to achieve the overall statutory purpose over time.

Climate change law should further include a series of other structural features deliberately designed to keep the statute on track over time, particularly within the executive branch.  Congress could design some measures to insulate agency officials from certain political pressures, especially those likely derived from short-term economic concerns, which seek to undermine the law’s effectiveness.  Congress could craft other measures to enhance the influence on the law’s administration of interest groups concerned about protecting future generations, but which would otherwise lack the necessary economic or political clout.  Possible techniques include requirements for consultation with other agencies, scientific advisory committees, and stakeholders more insulated from short-term political pressures; statutory and regulatory hammers and judicial review provisions that ensure timely implementation; and preemption triggers that accommodate the prerogatives of competing sovereigns while also exploiting the resulting tension as leverage to further climate change policy.

The obvious objection to any such deliberate modifications of lawmaking processes, especially those that make future lawmaking more difficult, is that they are antidemocratic.  They allow the views of existing majorities to trump the views of future majorities who may well view sound public policy very differently.  The present always tends to believe that it may well be wiser than those who came before them or those who will come after them, and the risk is too great that allowing such restraints on future lawmaking will allow the present in its own self-interest to control the future.  The shorthand reference to this objection, of course, is that the deadhand of the past or present should not be able to govern the future.

There are, however, at least three compelling reasons for why these concerns are not persuasive as applied to the need for substantial lawmaking restraints in federal climate change legislation.  The first is that such restraints, notwithstanding their seemingly anti-democratic implications, have a long and accepted history in domestic law, ranging from the Constitution’s organization of the House and the Senate to a host of existing federal statutes that seek to insulate somewhat certain decisions from politics.  Hence, rather than suggest a departure from the nation’s lawmaking traditions, at the very least, they fall well within them.  Second, the lawmaking restraints in federal climate change legislation would be deliberately asymmetric to further the options ultimately available to future generations, not to restrict them.  There is existing skewing in lawmaking, particularly of the undue influence exercised by certain interests groups at the expense of others.  The kind of institutional lawmaking design features contemplated for federal climate legislation would  seek to address that existing skewing and therefore ultimately foster, rather than undermine, the fundamental values underlying representative government.

The final justification relates to the sheer practicalities of failing to address over the longer term the threats now posed by climate change.  Most simply put, preserving the ability of future majorities to retain the full range of options necessary for self-government most likely depends on climate change legislation capable of maintaining greenhouse gas emission reductions over the longer term.  Otherwise, current lawmakers will be undercutting the autonomy of future majorities by subjecting them to a natural environment that sharply curtails their options.  In other words, cross-temporal majority effects will occur with or without climate change legislation.  The question is not whether to have such cross-temporal impacts, but which ones.  To the extent, therefore, that lawmaking restraints are a necessary component of climate change legislation that can provide future majorities with greater opportunities, they further, rather than undermine, democratic norms.  It would therefore be tragic, indeed, to posit that protection of the political prerogatives of the future precludes current generations from adopting laws that seek to preserve future generations’ options.  Sometimes lawmaking limits do weaken the future, but sometimes they strengthen it instead.

The challenge to develop the right mix of precommitment strategies is considerable, and the risk that any particular one could be perversely hijacked can never be eliminated.  But through the asymmetric hurdles and shortcuts described above, Congress could diminish the risk of short-term pressures undermining its legislation and increase the chance that future generations’ concerns willnot be forgotten during the decades required to achieve the law’s ambitious objective.  That would be truly momentous.
 

Acknowledgments:

Copyright © 2009 Cornell Law Review.

Richard J. Lazarus is Professor of Law at Georgetown University Law Center.

This Editorial is based on the following full-length Article:   Richard J. Lazarus, Super Wicked Problems and Climate Change: Restraining the Present to Liberate the Future, 94 CORNELL L. REV. 1152 (2009).

My article advocates a variety of “agency-forcing” measures designed to enhance the ability of Congress, the executive, and especially the courts, to ensure that agencies abide by executive mandates and other reforms, and to provide a check on overt politicization or inaction on agencies’ part. The article also introduces the concept of “indirect challenges” to agency rulemaking, arising outside of the Administrative Procedure Act’s domain of direct challenges to agency action, at a later juncture when a defendant asserts a preemption defense to state common law tort actions.

On May 20, 2009, President Barack Obama issued a memorandum announcing his administration’s official policy on preemption: “[P]reemption of State law by executive departments and agencies should be undertaken only with full consideration of the legitimate prerogatives of the States and with a sufficient legal basis for preemption.”¹ The new administration’s pronouncement creates a conducive climate for reforming the agency decisionmaking process along the lines suggested in my article.

 
I.
The Past: Agency Disregard of State Regulatory Interests

President Obama’s directive to federal agency heads is to review preemptive statements in regulatory preambles and codified rules promulgated over the last ten years and to take corrective action to amend those that are not legally justified. The first part of my article (“Agency Disregard of State Regulatory Interests”) could serve as an appropriate target list. It explores the federal agencies’ dismal track record on accountability and highlights why reform is necessary.

A close look at the circumstances behind the Food and Drug Administration’s (FDA) issuance of the 2006 drug labeling preemption preamble reveals a lack of transparency, procedural irregularity, and utter indifference toward state governmental entities. In its notice of proposed rulemaking in December 2000, the FDA disclaimed any potential preemptive effect.² With this denial, the FDA relieved itself from the further requirements of the executive mandate on federalism (Executive Order 13,132), which requires consultation with relevant state organizations. Any interested parties that followed FDA involvement in pharmaceutical regulation—particularly those monitoring agency rules with the potential to oust existing state law regulations and common law tort liability—would, moreover, take this as a signal to focus antipreemption efforts elsewhere. It therefore came as a surprise—unwelcome, to say the least—that the final rule issued by the FDA in January 2006 contained an express statement of preemptive intent.³ The FDA’s preemption statement, moreover, materialized in the rule’s preamble, thus eluding detection via the transparent and public process of notice-and-comment rulemaking.

In an act of breathtaking hubris, the FDA included a federalism impact statement (required by Executive Order 13,132) that defended its actions and subtly held state governmental groups to blame for not submitting any comments on the proposed rule. Perhaps in an effort to camouflage its duplicitous, 180-degree change in its position on the rule’s preemptive effect, which it deliberately set out in a preamble and without public comment, the FDA dared to suggest that it consulted with state governmental officials and entities. At best, the FDA was referring to its solicitation of comments during the notice-and-comment period—although it was during that period that the FDA disclaimed any preemptive effect. At worst, the FDA was being disingenuous—the view espoused by state representatives such as the National Conference of State Legislatures (NCSL) and members of Congress led by Representative Henry Waxman. With the benefit of hindsight, the FDA’s 2006 drug labeling preemption preamble can be seen as but one example of agency bait-and-switch tactics, a pattern the FDA has followed again and again in both the drug and food contexts.

Nor does the FDA stand alone in its transgressions. National Highway Transportation and Safety Administration’s (NHTSA) proposed Roof Crush Resistance rule was emblematic of a consistent pattern and practice whereby NHTSA disclaimed any federalism impact while simultaneously asserting the preemptive effect of the rule.⁴ NHTSA also bypassed any consultation with relevant state organizations on the ground that the proposed rule lacked “sufficient federal implications to warrant consultation with State and local officials or the preparation of a federalism summary impact statement.” ⁵

These are but two examples of federal agencies’ documented disregard of congressional and executive mandates to incorporate into their rulemaking processes consultation with relevant state entities and investigation of the potential consequences of their rules on state regulatory schemes. It is the grim background against which my article charts a new path.

 
II.
The Future: Agency Accountability to State Regulatory Interests

In recognition of the key role that federal agencies have—and ought to have—played in judicial preemption determinations, I have previously proposed an “agency reference model” that “directs attention to a repository of agency information—ideally reflecting a broad range of views, having been vetted by expert and public opinion—focusing on the precise nature of the agency’s regulatory cost-benefit (or risk-risk) determinations as well as the economic consequences of various determinations and the effects of state regulation on federal regulatory schemes.”⁶ Even the Court’s antipreemption decision in the Wyeth v. Levine⁷ pharmaceutical case (in which the FDA’s preemption preamble received especially harsh treatment) recognized the significance of input from the relevant federal agency: Agencies have “a unique understanding of the statutes they administer and an attendant ability to make informed determinations about how state requirements may pose an ‘obstacle to the accomplishment and execution of the full purposes and objectives of Congress.’”⁸ Given the significance of their role, it is imperative that federal agencies be made accountable to state regulatory interests, what I have dubbed “federalism accountability.”

 
A.     Federalism Executive Order 13,132

The 1999 Federalism Executive Order 13,132 provides a blueprint for reform: timely and meaningful consultation with the states throughout the process, issuance of federalism impact statements that detail the effects upon the states and changes in the federal-state balance, robust interchanges during the notice-and-comment period, including solicitation of comments and responses thereto.⁹ The spirit of the executive order is even more far-sighted, envisioning a cooperative partnership between states and agencies in the development of rules and regulations. Critical to the success of any such reforms, however, is an effective enforcement mechanism—a serious drawback of the existing executive order.

 
B.     Agency-Forcing Measures

President Obama’s presidential memorandum admonishes all agencies to adhere to the strictures of Executive Order 13,132 and directs that preemption provisions should be codified in regulations, not inserted in regulatory preambles. It is an executive agency-forcing measure. But like Executive Order 13,132 itself, the presidential memorandum does not create any enforceable rights. The White House could use its Office of Information and Regulatory Affairs’ (OIRA) centralized review to enforce the order. Alternatively, Congress could codify the order. Each of these avenues has been proposed before in this (or a similar) context—thus far, to no avail. Although my article revisits executive and congressional enforcement mechanisms, my main focus is on the comparatively underexplored realm of judicial enforcement.

The United States Supreme Court’s Wyeth v. Levine decision stands as an intriguing exemplar of how courts can force agencies to act (or change their ways). In rejecting a drug manufacturer’s assertion of implied preemption of state failure-to-warn claims, the Court looked askance at the FDA’s “proclamations of pre-emption” in its 2006 drug labeling preemption preamble. The Court specifically mentioned that the FDA’s failure to “offer[] States or other interested parties notice or opportunity for comment” rendered its views on state law “inherently suspect.”¹⁰

At the same time, the Court did not in any way abandon its embrace of implied preemption jurisprudence.¹¹ Bent on reconciling its implied preemption holdings, the Court contrasted its propreemption Geier v. American Honda Motor Co., Inc.¹² decision, in which the Department of Transportation had promulgated a regulation with “force of law,” with the situation in Wyeth, in which the FDA had put forth its views in a preamble that evaded the notice-and-comment rulemaking procedures. Justice Stephen Breyer concurred separately to emphasize the majority’s concession that agency regulations with “force of law” can preempt. Justice Breyer spelled out that the FDA “may seek to embody [its] determinations [whether and when state tort law acts as a help or hindrance to federal regulatory goals] in lawful specific regulations describing, for example, when labeling requirements serve as a ceiling as well as a floor.”¹³

Wyeth will thus motivate agencies to look inward (and, in line with President Obama’s presidential memorandum on preemption, backward as well). Agencies will be dissuaded from operating on the basis of politically motivated “proclamations of pre-emption”—such as the one offered in the 2006 FDA preemption preamble—that would not withstand judicial scrutiny. Agencies, instead, will be goaded toward notice-and-comment rulemaking, which “offer[s] States or other interested parties notice or opportunity for comment.”¹⁴

Courts already have tools to ensure that agencies disclose relevant data and provide reasoned responses to material objections raised during the rulemaking process. Motor Vehicle Manufacturers Association v. State Farm Mutual Automobile Insurance Co.¹⁵ articulates a standard of “hard look” review in the context of determining whether a regulation is “arbitrary and capricious” under § 706 of the Administrative Procedure Act (APA). Direct challenges to preemptive rules in the health and safety arena are, however, few and far between. This is in marked contrast to other areas, such as environmental regulation, in which nonprofit governmental organizations take an active role in challenging rules adverse to state regulatory interests. A host of potential reasons may explain this seeming market failure: the absence of clearly identified and effective representatives of state regulatory interests in which common law tort standards (as opposed to state regulations enforced by state-level agencies) are at issue; insufficient financial impact upon the states, which is often what galvanizes participation by state governmental entities; and formidable standing and ripeness barriers. To the extent that the agencies’ insertion of preemptive provisions into preambles to rules (not to mention instances where the agency engaged in the kind of bait-and-switch tactics discussed above) simultaneously diverted the attention of the watchdogs and may have insulated the rules from direct judicial challenge,¹⁶ Wyeth could expand the domain of direct challenges to preemption provisions in notice-and-comment rulemakings by virtue of the fact that agencies will be spurred in that direction.

Even more significantly, Wyeth could augur the dawn of a novel form of indirect challenge to agency rulemaking (arising outside of the APA’s domain of direct challenges to agency action) at a later juncture when a defendant asserts a preemption defense to state common law tort actions. Courts have an opportunity to scrutinize both the empirical substrate of the regulatory record compiled by the agency as well as its articulated reasons underlying any interpretive policy.

Wyeth directs that, even in contexts in which Congress has not authorized the agency to preempt state law directly or the agency has not promulgated regulations with “force of law,” the Court looks to the agency’s explanation of how state law affects the regulatory regime. The question becomes “what weight [the Court] should accord the FDA’s opinion.”¹⁷ The Court had previously given a nod (if not outright deference) to agency proclamations of preemption in “regulations, preambles, interpretive statements, and responses to comments.”¹⁸ In these cases, the Court studiously avoided specifying the level of deference owed agency interpretations on preemption. Several lower courts gave Chevron, or mandatory, deference to the FDA’s preemption preamble.

I have argued that courts could play a role here by conditioning any deference to an agency’s preemption position on that agency’s compliance with the strictures of Executive Order 13,132. A few federal district courts have taken such a hard-line position, rejecting preemption defenses based upon the FDA’s assertion of preemption in the drug labeling context. I have also argued that the agency’s views should be accorded Skidmore “power to persuade” (not Chevron mandatory deference) as a means to encourage agencies to engage in formal notice-and-comment rulemaking processes that, arguably, vet the agency decisionmaking process and make the agency respond to substantive concerns raised by all affected parties. In Wyeth, the Court (at least implicitly) endorsed my position. The FDA’s preemption preamble miserably failed this standard—the Court was unpersuaded by what the agency “said” when it seemed contrary to what it “did.” Put differently, deficits in the agency regulatory record cannot be overcome by embellishment by the agency in the interpretive sphere. By virtue of subjecting agency action and interpretation to Skidmore deference at the preemption juncture, which turns on the “thoroughness, consistency, and persuasiveness” of the agency’s explanation of state law’s impact on the federal scheme, courts establish a framework for indirect challenges to agency rulemaking.

Anticipation of such judicial review at this stage would, moreover, force agencies (prodded by interested parties) not only to adhere to the strictures of the executive order, but also to compile a diligent agency record that would serve as the basis of the court’s evaluation of whether the state tort action seeks to “redo” the analysis conducted by the agency and should therefore be ousted.

NHTSA’s recent withdrawal of its preemption language in the roof crush final rule exemplifies the type of response from agencies anticipated by my article. Without much (if any) fanfare,¹⁹ on May 12, 2009, NHTSA quietly removed controversial preemption language, stating that the agency had “reconsidered the tentative position presented in the [proposed rule] . . . . [and] do[es] not foresee any potential State tort requirements that might conflict with [the] final rule.”²⁰ During the notice-and-comment period (as detailed in the final rule), “[c]onsumer advocacy groups, members of Congress and State officials, trial lawyers, consultants and members of academia, and private individuals strongly opposed our view that there could be conflict. The opposing letters from State officials included one signed by 27 State Attorneys General and the National Conference of State Legislatures.”²¹ In reaching its determination that it “do[es] not currently foresee any potential State tort requirements that might conflict with [the roof crush standard] final rule,” NHTSA repeatedly adverted to the absence of empirical evidence in the agency record to substantiate any conflict between state law tort requirements and the federal regulatory regime.²²

To date, NHTSA’s response is far more promising than has been the FDA’s. In 2008, the FDA promulgated a drug regulation (“changes being effected” or “CBE”) that governs when manufacturers can unilaterally change their labels in response to new risk evidence.²³ During the notice-and-comment period, members of Congress challenged the proposed CBE rule on empirical grounds. The group requested data on the number of CBE supplements submitted to the FDA since 1982, as well as examples of any cases in which a CBE supplement was used to the detriment of public health (as claimed by the FDA). The FDA’s response hardly instills confidence in its claims regarding the impending dangers of overwarning: of more than 3000 CBEs, the FDA noted four relevant examples in which the FDA rejected manufacturers’ CBE supplemental applications—none of which offered evidence of threatened harm to the public.²⁴ Under my proposed model, the empirical backing for the FDA’s position would be scrutinized by a court, and, in turn, the FDA’s position would likely fail under hard-look review.

Consider, too, drug manufacturer Johnson & Johnson’s request that the agency “reaffirm its practice to provide a full and complete written response to all CBE supplements . . . [t]o enhance transparency and accountability in the safety labeling process.”²⁵ Johnson & Johnson urged the FDA to “provide a comprehensive, written response to the sponsor describing FDA’s grounds for approval, disapproval, or request for modifications to the CBE supplement.”²⁶ The FDA declined to do so, and issued a quick dismissal without elaboration.²⁷ The framework I have proposed would, in fact, require the FDA to provide such comprehensive, written responses that would become part of the official agency record reviewable by courts making preemption determinations.²⁸

 
III.
Conclusion

In my article, I advance two basic normative claims—albeit against a backdrop that seems to be in considerable tension with achieving them. First, agency disregard of states’ interests is by no means inevitable. Second, and more fundamentally, Congress, the executive, and, most significantly, the courts can ensure that these state regulatory interests are no longer ignored by implementing agency-forcing measures that will steer agencies toward a more responsive, and responsible, course.

Acknowledgments:

Copyright © 2009 Duke Law Journal.

Catherine M. Sharkey is Professor of Law at New York University School of Law.

This Editorial is based on the following full-length Article:   Catherine M. Sharkey, Federalism Accountability: “Agency-Forcing” Measures, 58 DUKE L.J. 2125 (2009).