For many judicial conservatives, the last 90 years have been an aberration: The New Deal catalyzed an enormous â malign, in their view â growth in the federal government. Lost in the regulatory jungle, they claim, is a âconstitution in exileâ that will emerge only when the excesses of the federal administrative state are pruned away.
Itâs a powerful vision. At least it is for the firms who must follow federal health, environmental or securities law. Itâs less attractive if you bear the costs of financial crisis or environmental catastrophe. But the Roberts Court has been firmly on the side of those being regulated. The courtâs interventions have cut deep into the regulatory state in recent years, yet none has struck a body blow to any federal agency, let alone to the coordinating role played by the federal government in steering the national economy. That may be about to change.
The U.S. Solicitor General recently asked for high-court review of a Fifth Circuit opinion that does effectively neuter a federal agency, the Consumer Financial Protection Bureau, which is much loathed on the right. The significance of the Fifth Circuitâs ruling, though, isnât this localized effect: Rather, it casts broader doubt on funding sources for the Federal Deposit Insurance Corp., the Office of the Comptroller of the Currency and, crucially, the Federal Reserve. While the Fifth Circuit took lawyerly pains to narrow its judgment, its efforts are thoroughly unconvincing. It has effectively launched an attack that could imperil much of the financial regulatory infrastructure that saved the U.S. economy in 2008 and 2020.
So far, the Supreme Court has waged war on the federal regulatory state along two main fronts. The first, exemplified by a June decision invalidating the EPAâs erstwhile Clean Power Plan, turns on whether Congress can delegate policy-making tasks to agencies. The second, which turns on the presidentâs powers to appoint and remove high-level officials, has cast a shadow on the consumer bureau and the Federal Housing Finance Agency.
These rulings â especially on the Clean Power Plan â impose serious constraints on the governmentâs power to use regulation.
The Fifth Circuitâs November opinion, however, rests on a different provision of the Constitution called the Appropriations Clause. This holds that âMoney shall be drawn from the Treasuryâ only âin Consequence of Appropriations made by Law.â
In a challenge to another CFPB enforcement action, the Fifth Circuit invalidated a statute that allowed the bureau to requisition funds from the Federal Reserve. The Circuit Court contended that this mechanism was offensive to the Constitution because the CFPB is not just outside the appropriations process. It is also beyond the âindirect controlâ of Congress because it âdraws on a source that is itself outside the appropriations processâ (that is, the Fed). As a result, the Fifth Circuit said, any CFPB action using such funds was illegal â and this means all CFPB actions are illegal. This would throw out longstanding rules on mortgages, credit cards, student loans and more.
But what about the Fed itself, as well as all the other banking agencies that use interest, profits, fees, and the like âoutside the appropriations process?â Mustnât all of them fall? Couldnât someone bring a legal challenge to the Fed tomorrow â some are champing at the bit! â and shut down that body?
The Fifth Circuit had soothing words on this point: The constitutional problem is that the CFPB is âdouble insulatedâ from Congress. It tacked on a surplus observation that the consumer bureau has a âcapacious portfolio of authority,â as something that made the constitutional problem of freedom from legislative control worse.
But donât be fooled: As the judges of the Fifth Circuit undoubtedly know, the distinction between âsingleâ and âdoubleâ insulation is not a legally sound one. Indeed, it has been invoked â and collapsed â in a parallel assault upon the regulatory state in the last couple of years.
In 2009, the Supreme Court found a constitutional flaw in a Sarbanes-Oxley innovation called the Public Company Accounting Oversight Board because it had a âdoubleâ layer of insulation from presidential control. Chief Justice John Roberts took great apparent pains to explain why the âsecond level of tenure protection changes the nature of the Presidentâs reviewâ and was so constitutionally improper. Donât worry, the court suggested, âsingleâ layers of insulation are okay.
In 2020, however, Roberts penned another opinion for the court invalidating a âsingleâ layer of removal protection for the head of the CFPB. Rather than hypocrisy, that 2020 opinion can be read as just a more candid expression of the principle set forth in 2009.
There is simply no reason to think the same dynamic would not play out respecting appropriations. Indeed, the text of the Constitution seems flatly inconsistent with the single/double line distinction the Fifth Circuit drew. And of course, the Federal Reserve too has a âcapacious portfolio of authority.â
If the Fifth Circuitâs reading of the Appropriations Clause were to be accepted, then a substantial slice of the federal regulatory apparatus that guides the money supply, the national economy, and even the global financial system would judder to a halt.
Weâve been there before. It wasnât pretty.
To be clear, there are powerful and compelling reasons to think the Fifth Circuit got this question wrong and wonât fully survive an appeal â not least the fact that Congress did pass a âlawâ authorizing the CFPBâs spending through the Dodd-Frank Act. But the larger point remains: The opinion bodes disruption. It is a loaded weapon for those wishing to kick out large parts of the regulatory state.
Would a conservative Supreme Court really knock out the Fed by holding its funding mechanism unconstitutional? The last year of rulings on abortion, gun rights and more has demonstrated the courtâs insouciance when it comes to tipping over apple carts. Whoâs to say it would not do so again? At the very least, however, accepting the Fifth Circuitâs invitation would put it in a nasty double bind: Stick to its conservative legal guns and gut rather more than the hated administrative state, or hue to the more temperamentally conservative position of avoiding national and even international chaos. Itâs frightening that we donât know which the high court will choose.
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