Having considered the U.S. Supreme Court’s decision in the 1937 case of West Coast Hotel v. Parrish in the March 2016 issue of Future of Freedom, a case in which the jurisprudential tide turned in favor of deference to comprehensive social and economic legislation, a look at the earlier case of Schechter Poultry Corp. v. United States is in order. Unlike West Coast Hotel, Schechter finds the Court loath to yield to economic intervention, particularly where that intervention has troubling implications for the separation of powers.
At issue in the case were provisions of the “Live Poultry Code,” a regulatory framework set forth by the Roosevelt administration, that is, by the executive branch. Passed by Congress in 1933, the National Industrial Recovery Act gave the president the power to formulate and enforce new rules related to health, safety, and competition practices. Through an executive order in the spring of 1934, Franklin Roosevelt approved the code, creating a broad catalog of new rules. Among many other provisions, it established maximum working hours, a minimum wage, and a maximum number of workers that one slaughterhouse could employ, which number was to be tied to that house’s average weekly sales. The defendants, A.L.A. Schechter Poultry Corporation and Schechter Live Poultry Market, were poultry wholesalers in Brooklyn, purchasing live birds for slaughter and sale. They were charged with several violations of the code and convicted at their trial in federal court. The Supreme Court of the United States agreed to hear the case in April 1935.
Appealing to “the grave national crisis” of the Depression, the government argued that flexibility and discretion were necessary to nurture recovery in delicate economic conditions. The law, the government urged, was designed to promote “cooperative effort” in “the adoption of codes” within a given industry, a worthy end to which the Court should defer. For the Court, though, matters were not so simple. Chief Justice Charles Evans Hughes’s majority opinion pointed out that, contrary to the government’s arguments, the law’s project was “not simply one for [promoting] voluntary effort.” Rather, the statute “involved the coercive exercise of the lawmaking power,” binding everyone whether they assented or not.
The fourth branch
Turning to the separation of powers question, the Court reaffirmed the principle that the Constitution forbids the transferal or abdication of Congress’s “essential legislative functions.” Reversing the convictions, the Court held that “Congress cannot delegate legislative power to the President to exercise an unfettered discretion,” that “[such] a delegation of legislative power is unknown to our law” and incompatible with the Constitution. This basic idea is known as the nondelegation doctrine. Regrettably, the view of nondelegation pronounced in Schechter is, as many legal scholars have observed, effectively defunct, replaced by a rather extreme judicial deference to administrative entities. Today, the 1984 case Chevron v. NRDC is perhaps the most important opinion in administrative law and a key source of that deference. In Chevron, the Supreme Court concocted a two-step analysis through which courts determine whether the actions of an administrative agency are appropriate (as opposed to a usurpation of legislative power rightly reserved for Congress). Under the Chevron test, the first question asks “whether Congress has directly spoken to the precise question at issue.” If so, the administrative body must adhere to the guidelines that Congress has specified. If not, however, the test moves to the question of whether the agency’s is a “permissible construction of the statute.” On its face, this test seems eminently reasonable, consistent with fundamental constitutional values. But in its application, the Chevron test often — indeed, according to one 2008 study, more than three-quarters of the time — means an easy legal victory for the regulatory agency.
The system advocated by free-market libertarians is decidedly not one without regulation, devoid of rules that protect consumers from unsafe practices and corner-cutting by self-interested business. Instead, libertarians reject simply the idea that a single monopoly entity — government — ought to have the arbitrary and almost limitless power to compel compliance with its rules through violence. Libertarians propose a system much like the one for which the government claimed to argue in Schechter.
In such a genuine free-market politico-economic system, it is likely that there would be myriad industry groups and trade associations developing and publishing regulations, model rules, and guidelines, though none of the groups would have the unique and destructive power that defines the state. That is the power to aggress against peaceful individuals, to use violence against people who haven’t actually harmed anyone. Just as trifurcated government, the United States’s distinctive separation of powers, acts as a buffer against government overreach and arbitrariness, so too does the free market’s decentralized system of private regulation render smarter rules and safer products and services for consumers.
It is a great, pernicious myth that unification of power in a single hierarchical structure leads to regularity and stability. Everywhere we look, quite the opposite is true. We find that rigid centralization and fixed hierarchical chains of command stultify and paralyze, that they impede the free flow of information and frustrate the processes through which errors are discovered and corrective actions undertaken. Like the economic system more generally, the regulatory schema cannot be pre-planned and foisted upon the voluntary exchanges that make up the marketplace from without. With regulatory power monopolized and consolidated in bodies that have no incentive to craft sensible rules, risk of regulatory capture and rulemaking that actually makes consumers less safe is greatly magnified.
A large and growing body of research testifies to the economic damage that can and does result from needless and nonsensical regulations. For example, a study from the Competitive Enterprise Institute estimates that the total cost of regulations to the U.S. economy approaches a staggering $2 trillion. Research furthermore suggests that when politicians’ hands are tied on spending, they regulate, and that the powerful use access to federal agencies to “regulate away” threats from smaller competitors. A 2015 study from the Mercatus Center shows “fewer new firm births and slower employment growth” in more-regulated sectors, as well as a troubling contrast in the relative abilities of small and large firms to absorb the costs associated with new regulations; it will surprise few that, from 1998 to 2011, new rules had a greater negative impact on employment growth in smaller companies.
A fading order
The New Deal era witnessed significant expansions of the administrative state, broadening the foundations of the particular form of economic fascism the United States has today. And, indeed, to call it fascism is no exaggeration. The mutual admiration between Roosevelt’s White House and the fascists of Europe is now well documented. The political economy of the New Deal aggrandized the federal government in unprecedented ways, grounded upon ideas that Friedrich Hayek called scientism. The scientism of the New Deal saw state power as the instrument through which social and economic relations were to be rationally ordered. The bureaucracy, staffed by “experts,” was to allocate manpower and resources, to make the decisions that are properly left to the price system.
Under this emerging system, as Richard Epstein recently remarked in discussing Woodrow Wilson, “traditional views of separation of powers and federalism are a mere irritation that we have to overcome.” Many of the new executive powers that appeared during World War II never fully subsided. The increase in the power of the executive branch relative to the other two branches troubled many old-fashioned liberals, whose ideas on the role of government and the rule of law made them enemies of the New Deal. Through much of the 1930s, the Supreme Court was famously hostile to Roosevelt’s signature policy package, recognizing that it set the country on a dangerous new path to bureaucratic authoritarianism. Schechter represents that hostility.
Examined retrospectively, though, Schechter seems like the last gasp of a rapidly fading constitutional order. As Judge Douglas H. Ginsburg observes, Schechter “marks the last time the Court held a statute unconstitutional under Article I, Section 1.” Despite its bastardy — its questionable constitutional extraction — the Supreme Court has long since embraced the modern administrative state. Unauthorized and unlawful, this fourth branch of government today enjoys broad discretion to issue its own rules and operate an extensive system of administrative courts. Its nominal home, the executive branch, employs millions of people. And as Robert Higgs reminds us, “True government employment is much greater than officially reported.”
Seduced and deceived by the apparent exigencies of endless war, the American people were vulnerable, abandoning the constitutional separation of powers in favor of the modern administrative state. As a practical matter, regulatory bureaucracies now live in a kind of legal limbo, regularly exercising the powers of all three branches, positioned quite outside the traditional constitutional framework. To whom they answer is unclear. Ostensibly, the bureaucracy answers to the president, yet as Ronald J. Pestritto observes, its “powers are often exercised in a manner that is largely independent of presidential control and altogether independent of political control.”
Even the faintest possibility of a free society with a limited government vanishes in a political culture that treats this kind of unaccountable power as legitimate. Compromise with or submission to such power does not befit a free people. Though the administrative state may appear permanent and immovable, its many ineptitudes are today more stark than ever.
Technology has empowered individuals to discover, innovate, and exchange at a speed with which the lumbering regulatory state cannot keep pace. Given the unpromising prospects of reform from the political branches and the Supreme Court’s complicity in the system as it stands, libertarians might look outside the legal and political structure for solutions. Recently Charles Murray has suggested that Americans expose the weaknesses of the regulatory system through calculated disobedience, arguing that, confronted with widespread nonobservance, administrative agencies will be powerless to enforce their rules. Rather than (or, perhaps, in addition to) seeking to influence politics or the courts, simply ignore the state and work to fortify peaceful social counter-power. Libertarianism celebrates the separation of powers, both in the United States’s governmental system and as a general political and economic principle. The Schechter case reminds us of a time when that principle was still taken seriously in establishment quarters. For that reason alone, it is worth remembering.
This article was originally published in the May 2015 edition of Future of Freedom.