Public choice theory and occupational licensing.

Author:Larkin, Paul J., Jr.
Position::Continuation of IV. An Alternative Approach to Judicial Review of Social and Economic Legislation A. Treating Political Corruption as an Illegitimate State Interest 2. Treating Rent Creation and Rent Extraction as Bribery and Extortion through Conclusion, with footnotes, p. 291-331 - Thirty-Fourth Annual Federalist Society National Student Symposiu
  1. The factual difficulty of analyzing bribery or extortion and political activity at the wholesale level

    It could be argued that the difficulty in determining the intent of a collective body makes unworkable a rule that legislation is illegitimate for constitutional purposes if it is the product of the type of political bribery and extortion that Public Choice Theory describes and that the criminal law may prohibit. After all, an axiom of Public Choice Theory is that the apparent rationale for state actions does not necessarily align with the preferences of the decision makers, let alone their constituents. (389) It is therefore problematic to divine the motive or intent behind any particular statute because different legislators may be driven by entirely different concerns to support a particular law. (390) Indeed, because it is so difficult to divine the intent of a corporate body, the argument goes, the game is not worth the candle. In any event, what matters is a statute's effect, not the motivations of the legislators who voted for it. (391)

    A court should avoid pursuing an inquiry that requires it to answer a factually unanswerably question ("What is the last digit in [pi]?"), that requires it to use an insolubly ambiguous standard ("What conduct is 'annoying'?" (392)), or that forces it to make a decision that is entirely a matter of policy ("Who would be the best Secretary of State?"). That concern is one of the reasons why courts deem some issues to be "political questions" that the judiciary should leave to the political branches for resolution. (393) That concern, however, is not present here. It certainly is difficult to divine the intent of a collegial body, but the task is not impossibly onerous. Indeed, the Supreme Court has ruled that the courts can and must undertake precisely that inquiry when a statute is challenged as having been motivated by race- or sex-based discrimination, in violation of the Fourteenth Amendment Equal Protection Clause. (394) Moreover, as explained above the Court has concluded that an intent-based inquiry is feasible and necessary in several other analogous contexts. In each of those settings the Supreme Court has concluded that a judicial inquiry into the legislature's rationale or motive is not merely permissible, but also necessary. (395) If a court can discern a collective body's intent or motive in those contexts, the court certainly can pursue the same inquiry in this one.

    Public Choice Theory provides a useful means of analysis. It does not require courts to make political decisions; it enables the courts, simply but honestly, to analyze how the politics of the legislative process actually works. (396) As James Huffman has noted, "politics is seldom about principle and mostly about interests.... [T]he day-to-day business of government is almost entirely about the pursuit of competing private interests ..." (397) Moreover, the settings in which legislatures make occupational licensing decisions are readily susceptible to analysis using microeconomics and game theory, with a dollop of historical analysis for good measure. Courts have often employed these tools to analyze decisionmaking in fields such as antitrust and constitutional law. (398) They perfectly apply to an inquiry into the justification for occupational licensing because when and how often politicians resort to rent creation or rent extraction is subject to the laws of supply and demand, economic and political. (399) Microeconomics, game theory, and history supply objective indicia that courts can use to avoid falling into the trap of substituting their own policy preferences for legal analysis.

    Public Choice Theory teaches that interested parties and politicians use and respond to incentives in the private and public markets. (400) They will spend resources in pursuit of a benefit (or avoidance of a loss) up to the point where their individual marginal cost and marginal income curves intersect. (401) Their strategies may differ, however, depending on the relevant demand in the private or public market setting. Rent creation is preferable to rent extraction where demand is elastic and there are no barriers to entry. Rent extraction is preferable where demand is inelastic, there are barriers to entry, and firms have large capital investments that cannot be used for an alternative purpose (for example, making pea soup rather than canned peas). (402) Analysis of demand elasticity can therefore help a court start its inquiry. A historical analysis of the relevant occupation also may be helpful at the outset because it may illuminate which parties sought the regulation--the public, perhaps in response to a dramatic catastrophe such as the discovery of toxic waste disposal sites at Love Canal, New York, in the 1970s, (403) or the regulated parties themselves, as has traditionally been the case with respect to many local occupations, such as barbering. (404) That knowledge is quite useful in determining who expects to benefit from the legislation at issue. (405)

    Microeconomics and game theory also illuminate how the actors will play their parts. Rent creation may be more profitable in the short run than rent extraction, particularly for a powerful legislator, such as the Speaker of the House of Representatives, because it is easier to move a bill through a legislature if everyone lines up behind it. Nonetheless, in the long run rent extraction is potentially more profitable than rent creation. Political threats can give rise to a lucrative auction in which a politician receives political rents from competing interests. (406) For example, by threatening to adopt strict environmental regulations a politician can receive rents from both industry and environmental organizations. (407) A politician can continue that ploy for some time or can see to the enactment of only minimal regulations while holding out the threat or possibility of supplementing them at a future legislative session. Or the legislature can enact a bill with a relatively short lifespan. So-called "tax extenders"--legislation creating temporary tax benefits--are a classic example. (408) Their benefits last for only a defined period, requiring the beneficiaries to re-approach legislators to see to their renewal, which gives legislators the opportunity to extract rents on a periodic basis for an indefinite period.

    The Supreme Court's 2015 decision in North Carolina State Board of Dental Examiners v. FTC (409) should make the task of discerning the purpose of licensing requirements easier for the courts to perform. North Carolina law empowered a state Board of Dental Examiners, six of whose eight members had to be licensed dentists, with authority over that profession. (410) After dentists complained to the board that non-dentists were charging lower prices than dentists for teeth whitening, the board sent cease-and-desist letters to non-dentist teeth whitening providers, warning that the unlicensed practice of dentistry is a crime. (411) The Federal Trade Commission opened an investigation and ultimately concluded that the board's actions constituted an unfair method of competition, in violation of Section 5 of the Federal Trade Commission Act. (412) The Supreme Court upheld the FTC's decision, ruling that the state dental board was subject to suit under the federal competition laws.

    The issue in North Carolina State Board of Dental Examiners was whether the board's actions were sheltered from review by virtue of the so-called antitrust "state action doctrine," which renders the antitrust laws inapplicable to an economic regulation adopted by a state in its sovereign capacity. (413) The Court rejected the claim that state action immunity applied to the board's actions. (414) The Court stressed that where a state delegates control over a market to a non-sovereign actor, as North Carolina did to its board, the state action doctrine applies only if the state itself accepts political responsibility for its delegation by actively supervising the private actor's decisions. (415) Accordingly, the state must identify an independent entity with supervisory authority over the profession in question that "must review the substance of the anticompetitive decision" and "must have the power to veto or modify particular decisions to assure they accord with state policy." (416) The effect of the Court's ruling is to require a state to make clear that the purpose of a regulatory program is to protect select businesses from competition. Given that requirement, the North Carolina Dental Board decision should enable courts to readily determine when a state is using a licensing scheme to shelter cronyism.

    In sum, there is no persuasive legal reason why the judiciary cannot undertake the type of inquiry contemplated by Public Choice Theory when economic legislation is challenged as arbitrary. Courts can adequately determine the intent of a collegial body such as a legislature in a variety of contexts. Nothing about occupational licensing makes the inquiry into legislative intent a futile endeavor.

    But that does not end the inquiry. The next question turns on matters of policy, not fact. How can we hold an assembly to the same legal and ethical standard that we demand of individual legislators without taking politics out of the political process? Does it make sense to treat rent-creation and rent-extraction as tantamount to bribery and extortion given what McCormick said about the practical operation of the contemporary political process? And does it matter that the legitimacy of a transaction is challenged under the Equal Protection Clause rather than as an alleged criminal act? The following subsection addresses these questions.

  2. The policy implications of analyzing bribery or extortion and political activity at the wholesale level

    There are major differences between prosecutions for straightforward bribery or extortion and equal protection...

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