The Curative Power of Law and Political Economy

Amy Kapczynski —

Ask not for whom the First Amendment tolls: It tolls for you.  Or so I argue in an essay just published at the Columbia Law Review online.  It’s called “The Lochnerized First Amendment and the FDA: Toward a More Democratic Political Economy”—a boring title for a vital and urgent problem.  Courts, speaking in the name of the First Amendment, are “freeing” us from regulatory approaches that have worked for decades to protect us from snake oil and inform us about the products we put in our bodies. How did we arrive here? And how might demo­cratic prerogatives retain control over the webs of commodity exchange upon which our lives depend?  The essay addresses these questions, trying along the way to model how law and political economy analysis can contribute to our understanding.

The FDA is a key accomplishment of both the Progressive Era and the New Deal and perhaps the most muscular of all federal agencies. It regulates one-fifth of the consumer economy, and has enjoyed extraordinarily high levels of influence and public trust throughout its long history.  This popularity may have something to do with the fact that the FDA gained its powers through successive waves of democratic demand for its intervention when “free markets” proved deadly.  (If you don’t know the story of thalidomide, which left a trail of destruction around the world in the 1950s and 1960s, here is a vivid introduction). Perhaps unsurprisingly, the FDA has also been a prime target of neoliberals, who resent its extensive powers.  Industry lobbying and sustained criticism from Chicago-school types and have had an impact; several recent laws have weakened the agency.  But the respect and support the FDA commands have made legislative assaults challenging.  Perhaps that is why industry—and industry funded groups—have invested in the use of the courts to attack its power.

What does that attack look like?  The cases are astonishing.  Some suggest that drug companies have a free speech right to market drugs for unproven uses.  These threaten the system that the FDA has used for decades to develop the evidence we need to understand whether drugs work.  Nonetheless, citing these cases, the FDA appears poised to substantially deregulate drug marketing.  New commercial speech doctrine may also be the demise of a law passed recently to protect consumers from misleading claims about supposedly low-risk tobacco products.   E-cigarette companies (mostly backed, apparently, by big tobacco) argue that Congress doesn’t have the power to force them to validate claims that their products are low risk, though we know relatively little about their long-term implications.

The logic of these cases could go quite a bit further, even undermining the FDA’s ability to regulate medicines and tobacco altogether.  I don’t spell out the many possible implications for food, supplements, and cosmetics, but you can read between the lines.

How did this happen?  Here’s where law and political economy offers important insights. If we read the cases that build this new commercial speech doctrine, cases like Virginia Pharmacy and IMS v. Sorrell, with the literature on neoliberalism in mind, we see that they have been deeply shaped by market supremacist thinking. They mobilize images of markets, subjects, and the state that are not only contestable, but deeply undemocratic.

How we might we best respond to this new and rather ghoulish First Amendment?  There are some excellent doctrinal arguments that could bring the courts back from the brink, as I describe in the essay.  Importantly, though, these cases should also cause us to rethink our needs for public infrastructure.  If courts thrust us into a world with more limited authority over private markets, we must envision a much more substantial role for the public—in this case, for example, by expanding public funding for health research. This approach would sidestep recent court decisions in addition to having far-reaching benefits for health democracy or health justice. It is also an instance of a broader point. By undermining public-oriented regulation of private companies, the advance of market supremacy inside of constitutional doctrine paradoxically pushes the campaign for democratic control up a level.  New public infrastructure that displaces or routes around an increasingly ungovernable private sector would, in addition to cutting out the profit-oriented middleman, more easily brush off a Lochnerized First Amendment.  The parallels to Medicare For All—spurred on by attacks to the ACA—are easy to see.

The piece was a response to the superb conference and volume on “Free Expression in an Age of Inequality” put on recently by Columbia Law School, Columbia Law Review, and the Knight Institute.  If you’ve read this far, you’re incurable, and you should also check out the other pieces published as part of the symposium, especially Jed Purdy’s “The Bosses Constitution.”  People often ask me for work describing how to “do LPE.”  These two pieces provide possible examples.

Amy Kapczynski (@akapczynski) is a Professor of Law at Yale Law School. 

The Uneasy Case Against Occupational Licensing (Part 2)

Frank Pasquale and Sandeep Vaheesan–

Successful ideological entrepreneurs change policy-makers’ focus and their presumptions. Those on the right, in particular, have been very effective at shifting attention from core confrontations of capital and labor to peripheral conflicts among laborers. We see this repeatedly in inequality policy, where fundamental tensions between capital and labor are ignored, obfuscated, or trivialized by a tidal wave of technocratic reframing. Continue reading

The Uneasy Case Against Occupational Licensing (Part 1)

Frank Pasquale & Sandeep Vaheesan–

Obama-era technocrats and Trump cronies may not agree on much, but they have made common cause against occupational licensing. That focus undermines important social objectives while obscuring far more important problems in the labor market. In this post, we cover the basics of licensing, and then reframe current attacks on it. In our next post, we will explain why licensing’s mix of consumer protection and labor market stabilization is a legitimate policy option for a wide range of occupations.

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How Shareholder Primacy Hurts Jobs and Wages

Lenore Palladino— 

The debate around stagnant wages and job creation seems well-settled: scholars point to globalization, or skill-biased technical change, or the decline of union density.  Others point to the ‘rise of the robots’, claiming that automation and technology are driving us towards a jobless future. But few consider that the dominance of shareholder primacy within America’s public corporations has contributed just as much to economic inequality as these more commonly-cited factors.

I define shareholder primacy as the shift within public companies from investing corporate profits within the firm or its workers to instead sending corporate profits back to shareholders, and, in some cases, holding increasing amounts of financial assets. Companies today care more about their financial metrics than they do about producing goods and services more efficiently over time. That’s why corporations are on track to spend $1.2 trillion this year simply rewarding shareholders by purchasing back their own stock and paying dividends.

For a current example of the dominance of shareholder primacy, take the response to the big tax reform legislation of 2017, which lowered the corporate tax rate to twenty-one percent. According to Trump and the GOP, the legislation was meant to incentive companies to create jobs. What have companies done so far? $171 billion dollars have been spent on share buybacks, whereas only $6 billion has gone to workers’ bonuses and small wage bumps. When the point of corporate activity is to return money to shareholders, investing in productive workers who can grow the business over time is beside the point.

Much of the public still thinks that America’s largest businesses function as they did in the post-World War II era: they earn profits, use those profits in part to enrich their top CEOs, and also invest in their workforce, innovation, and in better prices for us all. But somewhere along the way, in the Reagan administration, government regulations and reforms in corporate governance broke this productive cycle. Some companies focused on shareholder payouts, while others focused on profiting more and more off of financial activity. This shift was led by our industrial mainstays: the paradigmatic American firm, General Electric, earned 43% of its profits in its banking arm, GE Capital, as recently as 2014.

Firms made these choices in direct response to rising pressure from capital markets to move money out of the firm and into the pockets of shareholders, and in order to keep share prices steadily rising—choices sweetened by the fact that CEOs were increasingly paid in company stock.

When investing in a stable and productive workforce is not essential, worker bargaining power declines. Before the 1970s, American corporations paid out 50% of profits to shareholders, while retaining the rest for investment. Now, shareholder payouts are over 100% of reported profits, because firms borrow in order to lift payouts even higher.

Thus the changing nature of work—the rise of the fissured workplace and the gig economy—is driven not just by a generic drive for profit or the attributes of the “knowledge economy,” but a structural shift within corporations from a productive to financialized use of corporate cash. The relentless search for short-term profits expresses itself through squeezing employees’ pay, transforming employees into independent contractors to avoid paying benefits or pensions, and outsourcing work to contracting firms that compete to pay lower and lower wages. If firms don’t count on their employees to come up with the next big productivity improvement or exciting product idea, there’s no reason to invest in employee efficiency or longevity with the firm.

Demands on firms intensified with the rise of ‘activist investors,’ formerly known as corporate raiders. As institutional investors became large shareholders of major corporations, they pressured firms to push up share prices by maximizing short-term profits. Since such institutional investors could move their investments around easily, firms grew more responsive to capital markets than to their customers. For public companies, key regulatory and legislative changes allowed for a greater focus on stock prices. In 1982, Congress passed the safe-harbor provision for buybacks, which formerly would have been considered market manipulation. Further, the shift to allow CEO ‘performance pay’ to be deducted from corporate tax incentivized corporations to pay CEOs in stock. On the private firm side, the rise of private equity and the increase in leveraged buyouts has led to extractive financial strategies in which private firms cut jobs and reduce wages in order to extract maximum wealth for the holders of equity.

Though the literature is still nascent, several scholars have examined the direct negative impact of corporate financialization on income inequality. One study found that financialization, net of other factors, could account for more than half of the decline in labor’s share of income in the nonfinancial sector of the economy, and is comparable to the effect of de-unionization, globalization, and technological shifts.  Others look directly at the impact of financialization on declining corporate investment, finding that the financial profit rate is correlated with a significant decline in investment, especially for large firms. Less investment can mean less to spend on improving the skills and productivity of one’s workforce.

Corporate financialization is not the only driver of labor market challenges. It has become impossible, though, to think about how to solve problems in the labor market without taking on the primacy of shareholders. It is not simply that firms want to spend less money on workers—it’s that they actually need them less, and so the incentive to invest in a high-quality workforce is much reduced. In order to have a stable and productive workforce, and for workers to have the bargaining power they need to take home a fair wage, the incentives that drive shareholder primacy must be reformed.

A modified version of this post will be published as part of the article, Eleven Things They Don’t Tell You About Law & Economics:  An Informal Introduction to Political Economy and Law, forthcoming in Volume XXXVII of Law and Inequality:  A Journal of Theory and Practice (Law & Ineq.) of the University of Minnesota.

Lenore Palladino is Senior Economist and Policy Counsel with the Roosevelt Institute, a Lecturer in Economics at Smith College, and Of Counsel with the Law Firm of Jason Wiener, p.c.

Beyond Access to Justice: Challenging the Neoliberal Roots of Hyper-Gentrification

John Whitlow – 

New York City recently became the first jurisdiction in the United States to guarantee a right to counsel for poor people at risk of eviction. This was an important step in the fight for equal access to the courts, and a significant victory for tenant advocates who had waged a decades-long campaign to ensure fairness for people on the verge of losing their homes. I cut my teeth as a New York City tenant attorney in the early 2000s, when the right to counsel felt closer to a pipedream than a reality, and I can say unequivocally (and uncontroversially) that providing tenants with a lawyer when they enter the maw of housing court is a good thing. At the least, it will keep landlord attorneys and judges on their toes and reduce the stress and trauma tenants feel when navigating a byzantine system on their own. At the most, it will allow people to mount robust defenses and save their apartments, in the process preserving some of New York’s evaporating supply of affordable housing. But I can also say that it is not nearly enough to derail the hyper-gentrification that has been a through line of recent economic development policy and has its roots in the fiscal crisis of the 1970s.

In the context of an over-heated housing market, the right to counsel should be viewed as a limited intervention that operates when eviction is imminent, i.e. after the structural sources of displacement have done their work. Failure to recognize the limits of the right to counsel – and of access to justice paradigms more generally – naturalizes those structural sources and legitimates as normal the widening inequalities produced by our current political-economic and social order. Challenging inequality and displacement in a deep and lasting way requires moving beyond access to justice and critically engaging the core tenets of market-driven urbanization.

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Economic Human Rights, Not Tough Policy Tradeoffs

Martha McCluskey —

According to conventional law and economics wisdom, problems of economic inequality are best solved with targeted redistributive spending, not universal human economic rights. A political economy perspective suggests the opposite: that legal rights are crucial for economic justice.

Orthodox law and economics tellsus: all rights have a cost.  Law allocates economic gain, but cannot generate it, in this view.  From this premise, any new economic rights aimed at supporting those who are disadvantaged must come at the expense of some other economic gain.  For example, a universal right to affordable health care would simply mask an inevitable tradeoff in public and private spending:  fewer resources for education or jobs.  In addition, in this logic, an economic entitlement to receive basic human support will replace market discipline with incentives for waste, reducing economic resources overall.

What orthodox law and economics doesn’t tell us:  all costs have a right.  That is, any costs associated with new economic rights arise not from essential economics, but instead from contingent legal and political arrangements. Particular legal and political regimes produce, organize and limit access to human needs like education or health care. Law itself shapes the economic forces that appear to be disrupted when law re-allocates rights to advance general human needs.

On the question of health care, for example, a complex system of legal rights and institutions already protects economic gain for some at the expense of health and economic security for others.  Legal systems distributing risks and rewards in health care include patent rights, insurance regulation, corporate governance rules, antitrust law, criminal law, and tax policy. Moreover, these legal rights are not firmly settled or self-evident, but instead are continually questioned and modified, especially in response to lobbying, litigation, and advocacy by industry interests.  New rights to egalitarian economic support can similarly re-arrange economic gain and loss as a legitimate and beneficial function of democracy.

Further, we should not presume human economic rights amount to zero sum transfers or costly economic distortions.  That conventional law and economics thinking rests on the myth of an essential market order that transcends law and politics, thereby closing off analysis of how re-structuring the market could generate far better economic conditions.  But a more complete law and political economy view recognizes that entitlements do not come at the expense of naturally productive market activity; instead, entitlements generate and govern market production. New legal rights can give people new power to resist existing market constraints, and that transformative power can lead the economy to new levels of prosperity and stability. Continue reading

The Real Barriers to Access to Justice: A Labor Market Perspective

Frank Pasquale – 

There is a vast literature on access to justice in the United States. In what Sameer Asher has diagnosed as a broadly neoliberal discourse, the legal profession itself stars as the key barrier to access to justice: It is slow to adopt technology, restricts entry with excessive licensure requirements, and bogs down in technicalities. Let’s assume, for now, that these are fair charges.* Are they really the reason why so many consumers feel unable to fight giant corporations, or why employees feel trampled by the fissured workplace?

I’d like us to keep in mind a few other factors. The evisceration of class actions, the rise of arbitration, boilerplate contracts—all these make the judicial system an increasingly vestigial organ in consumer disputes. You cannot read a book like Lewis Maltby’s Can They Do That? without recognizing that the powerlessness of most workers is not the result of a paucity of lawyers (especially in an country with more per capita than almost any other), or greedy firms overcharging for services. It is, instead, the result of a web of rules woven by lobbyists and elite attorneys over decades with the intent of making the firm, in effect, a private government. Corporations have skillfully funded candidates in state judicial elections (or politicians who appoint judges) who promote their vision of a stripped-down, nightwatchman state. Make lawyers as cheap and skilled as you want—they can’t help victims access justice if the laws themselves are systematically slanted against them. The same goes for #legaltech: I expect every innovation to, say, create apps to help the evicted to be overwhelmed by a tsunami of money backing services like ClickNotices.

On the criminal side, the underfunding of public defenders (and other advocates for those targeted by the carceral state) is shameful. From a supply-side perspective, the answer here may be to cheapen training and thereby double the number of public defenders, so that states could perhaps hire two at $24,000 a year instead of one at $48,000. I do not believe that’s a great solution. As long as there are $1.5 trillion tax cuts flying around (mainly to top income brackets), and 1412 households in the US making over $59 million annually, I’d put forward a vision for more spending on these vital services, at a good wage, with a strong Public Service Loan Forgiveness Program. The latter should not even be considered a subsidy, given the vast profits the government has made on student loans generally, and the market’s systemic undervaluation of public service work. I realize that policy is going in the opposite direction now—but let’s also realize how much that development is driven by private lenders’ lobbyists, who want to make the federal student loan program a quicksand of confusing paperwork and high interest rates in order to make their own products comparatively more attractive.

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The Mythical Community Bank

Mehrsa Baradaran — 

It’s not particularly surprising that ten years after the financial crisis, the Senate is poised to pass a deregulatory banking bill. In the world of banking regulation, memories are remarkably short. In fact, armies of lobbyists have been slowly chipping away at Dodd- Frank since its passage. But there is something sinister in the way Democrat and Republican supporters of this bill characterize what they are doing: supporting community banks so that they can serve their communities. They conjure images of George Bailey banks across the country, just waiting to be free of onerous and expensive government regulation in order to help disadvantaged and undeserved communities.

“Main Street businesses and lenders tell me that they need some regulatory relief if we want jobs in rural America,” Democratic Senator Jon Tester of Montana said during a hearing to vet the bill in November. “These folks are not wearing slick suits in downtown New York or Boston. They are farmers, they are small business owners, they are first-time homebuyers.”

But what is it that these “Main Street lenders,” fighting the Henry Potters of the world, want? The bill would exclude from Federal Reserve risk oversight banks with assets between $50 to $250 billion. There is a glaringly obvious problem with this: banks with those kinds of assets are hardly small community banks. In fact, the bill is a Trojan horse, using community banks as cover to deregulate some pretty large regional banks. Many banks that fell into trouble during the last financial crisis are within the proposed size range. This simply isn’t about harmless small banks that are just trying to help the downtrodden mom and pop store or the marginalized borrower seeking a mortgage so she can live the American dream. It’s just another sop to the big banks.

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Structural Inequality and the Law: part I

K. Sabeel Rahman 

In the 2007 school desegregation case, Parents Involved in Community Schools v. Seattle School District No. 1, the Supreme Court struck down the voluntary school desegregation efforts by Louisville, Kentucky, and Seattle, Washington for employing an overly aggressive mode of racial balancing. In his majority opinion, Chief Justice John Roberts argued that de jure segregation—of the sort that marked the Jim Crow South—had been officially eliminated as in the case of Louisville, and had never been employed in Seattle. Thus whatever racial disparities existed in these regions were not the product of law. For such schools, Roberts wrote, “[t]he way to stop discrimination on the basis of race is to stop discriminating on the basis of race.” The systematic racial segregation of modern metro areas, long documented by urban scholars as a result of economic inequalities, racial wealth disparities, and deliberate policies of zoning and urban planning, did not factor into Roberts’ analysis.

A relative lack of concern for what might be termed “structural” inequality has characterized the Roberts Court’s voting rights jurisprudence as well. In Citizens’ United v. FEC, which upheld corporate campaign contributions as political speech, the Court ignored how disparities in economic wealth could skew the otherwise free-flowing marketplace of ideas or the dynamics of political competition. In Shelby County v. Holder, Roberts suggested that the preclearance regime established by the Voting Rights Act of 1964 to oversee voting regulations in many Southern states was no longer needed. In her dissent, Justice Ginsberg castigated Roberts’ argument as, among other things, exhibiting a blindness to more subtle “second-generation” barriers preventing minority groups from exercising their voting rights in full.

These glimpses point to a larger challenge for legal scholarship, analysis, and policymaking. The question of structural inequalities often stump courts and lawmakers alike. What does it mean for inequality to be “systemic”? Can any single actor be held responsible for such systemic or structural disparities? If these disparities are so diffuse, so baked into the background patterns of social and economic activity, how would they even be redressed or counteracted? This two-part series offers a means of conceptualizing both structural inequality and its means of redress.

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What Role for Global Finance in a Course on International Trade Law?

David Singh Grewal –

Most years, I teach an introductory course on International Trade Law. And every year since I began I’ve included a session on the international financial architecture, on the view that this architecture is intimately bound up with the functioning of the trade regime.

Euro Dollar The European Union United States

I begin the course predictably enough with a series of sessions on the history and political economy of international trade before we get into what I call the “guts of the GATT.” Here, we study the key articles of the General Agreement on Tariffs and Trade (GATT) and the main disputes that have arisen concerning their interpretation, both before and after the establishment of the World Trade Organization (WTO). Any course on international trade law would have to introduce core elements such as “most favored nation” status (Art. I), “national treatment” (Art. III), key exceptions (for example, as elaborated in Article XX), and the main “annex agreements” of the WTO (such as the TRIPS agreement, which Amy Kapczynski has discussed on this blog), as well as the various remedies and safeguards available to states facing disruptions from international trade. But toward the end of the course, I bring my friend and colleague, Robert Hockett, to discuss the international financial architecture underpinning economic globalization as a whole.

I suspect few international trade law courses address international finance as an integral part of an introduction to trade liberalization. Given the evolution of international economic law, this choice is probably unsurprising. Neither in the treaty text of the GATT (nor in the other “annex agreements” that make up the WTO) is financial architecture explicitly regulated. By contrast with international trade law, international financial law is elaborated through a different set of governing texts, institutions, and international monetary practices—prominently, the IMF Articles of Agreement, the IMF itself, and the practices that have developed among affiliated national central banks and finance ministries. Trade law scholars may be understandably wary of bringing such complex or seemingly extraneous considerations into a course that will already be full enough.

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