| At 9:30 this morning, the President spoke on the continuing negotiations with Congress to pass a plan to address the credit crisis. The gist of his remarks was: If it be done, let it be done quickly. Conservatives must append a further mandate: If it be done, let it be done constitutionally. Constitutionality is not a mere feature of legislation; it is a threshold requirement. All Members of Congress take a pledge to "support and defend the Constitution," and that duty does not fade away in a time of crisis—indeed, it is then especially that constitutional fidelity is most crucial and most endangered. The secretary of the Treasury's original bailout plan was met with concern by constitutionalists for its shortcomings in adherence to fundamental principle. In particular, the plan was criticized for its inattention to the federal government's enumerated powers, the lack of meaningful standards to cabin the extremely broad grant of discretion to the Treasury secretary (the "nondelegation" problem), limitations on judicial review over the exercise of that discretion, and other separation of powers problems. These failings render the Treasury proposal, and those so far that have built on it, unconstitutional. Below, we analyze the constitutional aspects of two current proposals to address the credit crisis. Fundamental Principles If the bailout is to pass constitutional muster, lawmakers must concern themselves with at least the following specifics, explained in greater detail in our previous memorandum (available on heritage.org), while keeping in mind the broader outlines of its constitutional authority.
These fundamental principles are not met by the "Agreement on Principles" negotiated last night by House and Senate leaders and the White House and wrought into legislative text this morning. Thus, our original analysis of that proposal remains relevant. The new proposal feigns attention to this paramount shortcoming but fails to fix it. The draft legislative text includes a long list of "considerations" that the secretary "shall" consult when exercising authority under the act. When deciding whether to purchase particular assets from a particular institution, the secretary would have to consider, among other factors, whether the purchase would "provide[] stability or prevent[] disruption to the financial markets or banking system," "help families to keep their homes and stabilize communities," and "ensure[] that as many financial institutions as possible participate in the program, without discrimination … based on their size, geographic operation," and other factors. Taken altogether, these vague, overlapping, and contradictory "considerations" are both incoherent and empty. They contain no limiting principle to define which acts are lawful and which are not. The long list of "considerations" does more to expand the secretary's possible range of discretion than to define it. Thus, the list does not create a circumscribed delegation of authority but instead preserves a blank check of legislative power turned over to the Treasury secretary. The broad delegation of power to the Treasury secretary therefore remains unconstitutional. In contrast to a laundry list of considerations that a future secretary could employ to justify anything at all, a constitutional standard would provide objective criteria that define and limit his range of action. For example, a constitutional law might state: "If the secretary finds A, B, and C [which are all objective criteria, and at least one of which is tied to a legitimate government function], he may purchase…" By implication, that language means that if the secretary cannot find those three criteria, his action would be unlawful. That is what the Constitution requires to render a grant of authority under law. Further, the agreement includes new unbounded delegations to the secretary of the Treasury. In addition to the power to spend up to $700 billion, in total at any time, to purchase assets of any type (the strictures on this grant are loosened from Treasury's initial proposal to include equity investments), the agreement would also direct the secretary to set standards for executive compensation and allow him to exercise the powers that come with equity ownership, including some degree of direct corporate control. To the extent they would permit elimination of compensation for which an executive has a vested contractual right, these provisions raise significant taking and due process concerns. Though the new proposal does reinstate judicial review, it does so in a way that provides no firm standards to actually constrain the secretary's discretion. The agreement would require that the secretary be "prohibited from acting in an arbitrary or capricious manner." But this standard of review is meaningless, or at best, circular, if the secretary is authorized to do whatever he thinks best. Despite this emptiness, it would still be an invitation to litigation. Lawsuits will be plentiful, injunctions perhaps only somewhat less so. Judges—not the statutory text—will determine the bounds of the authority that the secretary may exercise. Judges, however, cannot logically determine whether an action is arbitrary or capricious when the underlying criteria for making such a determination do not exist—a recipe for judicial arbitrariness and activism. Thus the review provision will sap the vitality of the secretary's mandate while providing no objective criteria to guide his acts. It is, at once, the worst of both worlds. In lieu of providing clear policy direction, the proposal would instead impose possibly unconstitutional oversight mechanisms. The plan is weighted down with a "strong oversight board," "detailed reports to Congress," an additional, questionably "independent" inspector general, and additional audits by Congress's Government Accountability Office. In this way, the legislative branch—seemingly so reluctant to exercise its policymaking and lawmaking authority—would interfere in the secretary's authority as executor of the law, which is power delegated to him, through the President, in Article II of the Constitution. In particular, these constitutional breaches suggest bad policy as well. Instead of writing detailed laws that the President is then responsible to execute, Congress delegates vast new authority to the executive branch to "fix" he problem de jure and then tries to invent new ways to micromanage and nitpick the exercise of the authority. Such a power-sharing relationship is the exact opposite of the constitutional separation of powers perfected by the Framers of our Constitution. Ignoring that command abandons a great and durable mechanism of accountability that empowers citizens to punish public officials whose performance is sub par. All that remains is partisan bickering, finger-pointing, and reprisals. As an example of a proposal that avoids constitutional pitfalls, the Republican Study Committee (RSC) has released an independent plan to address the current economic malaise. Without commenting on the policy merits, we analyze here that plan's constitutional status. Like the "Agreement on Principles" described above, the RSC proposal exists as a set of "principles" rather than fleshed out legislative text. These principles are very different from those in the leadership/White House proposal. The RSC would expand the federal government's insurance of mortgage-backed securities to cover the entire market, up from half at present. This expansion would be funded by assessing premiums on the holders of those assets. Temporary tax relief provisions, including perhaps a moratorium on the taxation of capital gains, is designed to free capital to circulate in the economy, and a temporary suspension of dividend payments by regulated financial institutions is intended to the same end. Finally, the plan would enact a variety of regulatory changes: revision to the accounting of mortgage-backed securities and reporting requirements regarding them; changes to the mandates of the "government-sponsored enterprises," such as Fannie Mae and Freddie Mac; mandatory audits of the books of failed companies; and requirements that the SEC, Treasury, and the Federal Reserve issue further policy recommendations to Congress no later than January 1, 2009. Most strikingly, this proposal appears to raise no serious issues of improper delegation. Its mandates are far more modest than those in the leadership/White House proposal, and it seems to spell them out in sufficient detail to pass muster both under the Supreme Court's jurisprudence on delegation and the actual Constitution itself. Further, there is certainly less question of whether the RSC proposal is ultra vires—that is, beyond the powers enumerated in the Constitution—because it requires no new acts of the government. It would primarily expand several existing programs—in size but not in scope—and modify existing regulatory regimes. Its chief component, temporary changes to the tax system, is well within the government's power to tax, and its expansion of government insurance for mortgage-backed securities at least raises no new constitutional issues, especially if it is implemented in a manner similar to the Federal Deposit Insurance Corporation—as a voluntary mechanism. Due primarily to its specificity, the RSC proposal avoids constitutional pitfalls. This conclusion does not, of course, speak to its economic merits, but it provides an example of the principles necessary to pass constitutional muster. A Constitutional Duty The RSC proposal suggests that Congress can put together a plan that does not violate our fundamental law. Those who, for reasons of economic policy, favor the leadership/White House proposal must correct its legal flaws if they seek, in good faith, to uphold their duty to the Constitution and the people. To do otherwise would be to set bad precedent that may stain constitutional practice for generations to come. Andrew M. Grossman is Senior Legal Policy in, Robert Alt is Deputy Director of, and Todd Gaziano is Director of, the Center for Legal and Judicial Studies at The Heritage Foundation.
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“He believed the gods of Homer and ancient Egypt were with him, and we know as Christians that the One True God must have been with him,” Dr. Warren Carroll said on September 22 during his public lecture on Alexander the Great. “For by his march across the world, Alexander the Great prepared the way for its conversion.”
Alexander never lost a battle and, with the exception Napoleon, actually and deliberately aspired to take over the whole civilized world. There is no convincing evidence that Alexander was driven by power and wealth for their own sakes, but the cultural unification of East and West was his explicit and announced objective, Carroll said.For my American History students: Economics is important! In class you have heard me say that things are important because they are "significant". A basic understanding of economic priniciples is vital to understanding history and what makes many of those historical events "significant". Human beings have many reasons why they act and providing material goods for their families is an important part of that. I don't expect you to become expert economists in this class, but I do hope you will understand how economic issues drive human action and make history.
Pencils And PoliticsImprobable as it might seem, perhaps the most important fact for a voter or politician to know is: No one can make a pencil. That truth is the essence of a novella that is, remarkably, both didactic and romantic. Even more remarkable, its author is an economist. If you read Russell Roberts's "The Price of Everything: A Parable of Possibility and Prosperity" you will see the world afresh—unless you already understand Friedrich Hayek's idea of spontaneous order.
Roberts, an economist at George Mason University and Stanford's Hoover Institution, sets his story in the Bay Area, where some Stanford students are indignant because a Big Box store doubled its prices after an earthquake. A student leader plans to protest Stanford's acceptance of a large gift from Big Box. The student's economics professor, Ruth, rather than attempting to dissuade him, begins leading him and his classmates to an understanding of prices, markets and the marvel of social cooperation. Holding up a Dixon Ticonderoga No. 2, she says: "No one can make a pencil."
Nonsense, her students think—someone made that one. Not really, says Ruth. Loggers felled the cedar trees, truckers hauled them, manufacturers built the machines that cut the wood into five-sided portions to hold graphite mined in Sri Lanka, Mexico, China and Brazil. Miners and smelters produced the aluminum that holds the rubber eraser, produced far away, as were the machines that stamp TICONDEROGA in green paint, made somewhere else, on the finished pencil.
Producing this simple, mundane device is, Ruth says, "an achievement on the order of a jazz quartet improvising a tune when the band members are in separate cities." An unimpressed student says, "So a lot of people work on a pencil. What's the big deal?" Ruth responds: Who commands the millions of people involved in making a pencil? Who is in charge? Where is the pencil czar?
Her point is that markets allow order to emerge without anyone imposing it. The "poetry of the possible" is that things are organized without an organizer. "The graphite miner in Sri Lanka doesn't realize he's cooperating with the cedar farmer in California to serve the pencil customer in Maine." The boss of the pencil factory does not boss very much: He does not decide the prices of the elements of his product—or of his product. No one decides. Everyone buying and selling things does so as prices steer resources hither and yon, harmonizing supplies and demands.
Goods and services, like languages, result from innumerable human actions—but not from any human design. "We," says Ruth, "create them with our actions, but not intentionally. They are tapestries we weave unknowingly." They are "emergent phenomena," the results of human action but not of human design.
When a student asks about the exploitation of housecleaners, Ruth responds that if they are exploited making between $10—above the minimum wage—and $20 an hour, why are they not exploited even more? The answer is that the market makes people pay maids more than the law requires because maids have alternatives.
But back to Big Box doubling prices after the earthquake. The indignant student, who had first gone to Home Depot for a flashlight, says it "didn't try to rip us off." It was, however, out of flashlights. Ruth suggests that the reason Big Box had flashlights was that its prices were high. If prices were left at regular levels, the people who would have got the flashlights would have been those who got to the store first. With the higher prices, "someone who had candles at home decided to do without the flashlight and left it there for you on the shelf." Neither Home Depot nor the student who was angry at Big Box had benefited from Home Depot's price restraint.
Capitalism, Ruth reminds him, is a profit and loss system.Corfam—Du Pont's fake leather that made awful shoes in the 1960s—and the Edsel quickly vanished. But, Ruth notes, "the post office and ethanol subsidies and agricultural price supports and mediocre public schools live forever." They are insulated from market forces; they are created, in defiance of those forces, by government, which can disregard prices, which means disregarding the rational allocation of resources. To disrupt markets is to tamper with the unseen source of the harmony that is all around us.
The spontaneous emergence of social cooperation—the emergence of a system vastly more complex, responsive and efficient than any government could organize—is not universally acknowledged or appreciated. It discomforts a certain political sensibility, the one that exaggerates the importance of government and the competence of the political class.
Government is important in establishing the legal framework for markets to function. The most competent political class allows markets to work wonders that government cannot replicate. Hayek, a 1974 Nobel laureate in economics, said, "The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design." People, and especially political people, are rarely grateful to be taught their limits. That is why economics is called the dismal science.
© 2008
