Maya Pillai

Trust, but verify. This is a common methodology in the audit world and was even mentioned by the SEC Acting Chief Accountant Paul Munter in his statement on “The Auditor’s Responsibility for Fraud Detection.” [1]  He commented, “[T]he mindset of ‘trust but verify’ may represent potential bias if it is anchored in the belief that management is honest and has integrity.” Well, that is bold. We all want to believe that management has nothing but the purest intentions. But, what happens when this spotlight turns on the investor? Does the same principle exist?

Section 3(a)(11) of the Securities Act, known as the “intrastate offerings exemption,” provides small businesses with options to procure financing. [2]  Rule 147, the “safe harbor” rule under § 3(a)(11), lists objective criteria with which companies must comply. [3]  The newly loosened exemption, Rule 147A, permits issuers to make offers to out-of-state residents, as long as sales are only made to in-state residents and allows for a company to be incorporated out-of-state when its principal place of business remains in-state. [4]  (The limited framework of the SEC’s interpretation of § 3(a)(11) precludes issuers under Rule 147A from offering securities to out-of-state residents.) [5]  Deregulation is good, right? Well, it depends. Based on my study of these changes—and the caution given by Munter— the provision permitting issuers to rely on representations by investors to display their in-state status should be reconsidered.

This criterion removes a key due diligence requirement for issuers. That isn’t really that important, right? Let’s look at current events. One of the many reasons for the downfall of Silicon Valley Bank (“SVB”) was the loosening of regulatory requirements. Had SVB still been subject to regular stress tests, portfolio misrepresentation would likely have been noted much earlier. Relying only on an investor’s representation to satisfy the in-state requirement shows the issuer conducts no additional “test” to verify residency. As such, the issuer is more likely to fail. Therefore, additional measures should be put in place under Rule 147A for issuers to confirm the veracity of a purchaser’s residency. Once again, trust, but verify.

Why is due diligence necessary? Especially in the financial sector, institutions can “uncover any potential risk … of doing business with a specific organization or individual by analyzing information from a variety of sources.” [6]  Due diligence takes on many forms and consists of a wide range of processes. Knowing the individual or organization from whom you receive money helps ensure every party complies with the applicable rules and regulations to avoid exposure to liability, such as imprisonment and fines. There is also a non-tangible consequence: reputational risk. Financial institutions, like law firms, rely heavily on their name and reputation. Public perception holds a significant amount of weight (notice who the sponsors are at the next golf tournament or non-profit fundraiser you attend). If a financial institution receives a fine or shuts down for non-compliance, that makes headlines around the world. (And, of course, reactions are evident in the stock markets.) Nonetheless, the big institutions (e.g., Wells Fargo, Bank of America, Charles Schwab, etc.) manage to stay afloat, despite bad press. Maybe the banks took a page from Kanye West when he said, “Bad publicity is still publicity.”

There should be preventative measures from the issuer to prevent investors from making false representations about their in-state status.

Rule 147A’s language currently reads,

Sales of securities pursuant to this section shall be made only to residents of the state or territory in which the issuer is resident, as determined pursuant to paragraph (c) of this section, or who the issuer reasonably believes, at the time of sale, are residents of the state or territory in which the issuer is resident. [7]

There is the word, “reasonably.” Does the SEC provide further guidance on the rule? Yes, at the end of paragraph (d), a note states, “Obtaining a written representation from purchasers of in-state residency status will not, without more, be sufficient to establish a reasonable belief that such purchasers are in-state residents.” [8] 

Once again, with the term “reasonable,” but now we gain a clearer picture. While the investor’s written representation is expected to be truthful, this is not always guaranteed. Perhaps the SEC should revise the guidance note for paragraph (d) to read, “Obtaining a written and truthful representation from purchasers of in-state residency status will not, without more, be sufficient to establish a reasonable belief that such purchasers are in-state residents.”

This feels a little better. However, these changes introduce a new uncertainty when evaluating a generally recognized valid measure to confirm a truthful representation from an investor. Remember, “trust, but verify!” A residency affidavit (which must be notarized) would certainly suffice,

“It has been verified that on the ___ day of _____, 202_, John Smith’s principal residence is at 123 Main St, Charlotte, NC 28204. The following documents have been presented to corroborate John Smith’s residency: [.]”

In addition to one’s driver’s license containing an investor’s current address, the following documents should also be considered in verifying an investor’s principal residence: (1) most recent mortgage statement or lease agreement; (2) most recent utility statement; (3) vehicle insurance card from your most current policy; and (4) most recent property tax receipt. An investor’s most recent credit card statement may not be the best because the statement could be addressed to your billing address, which may differ from your principal residence address. Even a W2 or 1099 from the most recent tax year could list a different address if you moved after those tax documents were created and provided to you.

Although partial to the suggestions above, I would be remiss if I did not also question whether the reasonable belief standard is best suited for the securities industry. [9]  From tort law, a reasonable belief is the belief that an ordinary person would hold under like circumstances as those faced by the person in question. It is worth noting that the SEC does not explicitly define “reasonable belief.” (For this essay, I assume the SEC adopted the tort law definition of this term.) In Rule 147A, reasonable belief is merely supported by obtaining a written representation from the investor regarding their residency. [10]  The individuals at these financial institutions tasked with reviewing the representations from purchasers are not your average teller or loan officer at Chase or Wells Fargo. These due diligence/compliance employees are held to a higher standard by their employers because of their expected understanding of the applicable rules and regulations for intrastate offerings. The fate of an entire company rests in the hands of those tasked with reviewing the necessary documents. If a single investor is not an in-state resident, then the entire offering is no longer in compliance with the exemption under Rule 147A.  [11]

In his concluding remarks, Munter reiterated, “[T]he value of the audit and the related benefits to investors, including investor protections, are diminished if the audit is conducted without the appropriate levels of due professional care and professional skepticism.” [12]  It is clear that the entire offering depends upon the accuracy of the audit. With such high stakes, this should be a more defined process. Trust, but verify.


[1] Paul Munter, The Auditor’s Responsibility for Fraud Detection, SEC (Oct. 11, 2022),

[2] Intrastate offerings, SEC (Apr. 6, 2023),

[3] Id.

[4] Id.

[5] Joe Green, SEC Adopts New Rules to Facilitate Intrastate Crowdfunding, LinkedIn (Oct. 28, 2016),

[6] What is Customer Due Diligence (CDD)?, SWIFT, (last visited Aug. 7, 2023).

[7] Intrastate sales exemption, 17 C.F.R. § 230.147(A) (2021).

[8] Id.

[9] Amanda M. Rose, The “Reasonable Investor” of Federal Securities Law: Insights from Tort Law’s “Reasonable Person” & Suggested Reforms, 43 Iowa 77, 79 (2017) .

[10] Covington & Burling LLP, SEC Enhances Exemptions for Local Offerings, Covington (Dec. 1, 2016),

[11] Alan Palmiter, Securities Regulation, (8th ed. 2021).

[12] Munter, supra note 1.


Free Cosmetics Makeup Brushes and Powder Dust Explosion Stock Photo

Lexi Brock

Popular documentaries, like “Not So Pretty,” have recently drawn attention to several issues in the cosmetics industry, like asbestos-contaminated products and toxic ingredient lists, that have otherwise gone largely unnoticed and unregulated.[1] The cosmetic industry was able to avoid “strict” regulatory oversight for nearly a century.[2] However, that did not stop Americans from pouring billions of dollars into the cosmetic industry year in and year out.[3]

What Does Clean Mean?

Only recently did popular retailers and brands buy into the “clean beauty” movement.[4] On a broad level, “clean beauty”’ touts better-for-you ingredients and products free from certain parabens, sulfates, oils, phthalates, and more.[5] However, as critics have pointed out, “there is no clear definition of clean beauty — and no consensus on the specific substances and chemicals that should be avoided or embraced. As awareness of the lack of regulation in the beauty industry has risen in recent years, so too has skepticism about the “‘clean’ movement.”[6]

Increased consumer awareness and skepticism have spawned several high-level lawsuits and led to new federal regulations. In fact, a federal class action lawsuit, Finster v. Sephora, was filed in the Northern District of New York in November 2022 which called into question precisely what “clean” means.[7] The complaint accuses Sephora of misrepresenting what “Clean at Sephora” means, and specifically that “a significant percentage” of products labeled “Clean at Sephora” actually “contain ingredients inconsistent with how consumers understand this term.”[8]

Additionally, the complaint gives an example of a supposedly “Clean at Sephora” product which contains several synthetic ingredients inconsistent with the clean product pledge.[9] Therefore, the complaint states that “[a]s a result of the false and misleading representations, the Product is sold at a premium price, . . . higher than similar products, represented in a non-misleading way, and higher than it would be sold for absent the misleading representations and omissions.”[10] This is but one example of how an unregulated cosmetic industry can mislead and potentially harm consumers.

The Modernization of Cosmetics Regulation Act

At the end of 2022, “[a]s part of the Consolidated Appropriations Act . . . President Biden signed into law the Modernization of Cosmetics Regulation Act of 2022 (“MoCRA”). [11] MoCRA is the first update to federal cosmetics regulation in over eighty years.[12] In addition to greatly expanding the regulatory oversight granted to the U.S. Food and Drug Administration (“FDA”) to oversee the cosmetics industry, “MoCRA [also] implements new compliance requirements” for cosmetic companies.[13]

MoCRA requires facilities that produce cosmetics to register with the FDA by December 29, 2023.[14] Cosmetic manufacturers will also be required to include contact information and certain allergens on product labels, and keep adequate records detailing product safety.[15] MoCRA also grants the FDA mandatory recall authority and access to records relating to cosmetic products that represent a health threat to consumers.[16] Further, MoCRA instructs the FDA to implement rules regarding good manufacturing practices (“GMP”), fragrance allergens, and talc.[17]

Johnson & Johnson: Talc and the Texas Two-Step

The Not So Pretty documentary cautioned consumers against products containing talc because of the risk of asbestos contamination.[18] One would assume that potential asbestos contamination in talc-based products would have always been under heavy regulatory scrutiny, but that is not necessarily the case partially due to Johnson and Johnson’s influence in the space, specifically in regard to the company’s infamous” talc-based baby powder.[19] For years, Johnson and Johnson has utilized legal and lobbying efforts to escape regulation and liability.[20]

Most recently, the Third Circuit Court of Appeals unanimously voted to dismiss Johnson and Johnson’s use of a controversial strategy, known as the Texas Two-Step, to resolve claims from consumers alleging that the company’s products cause cancer.[21] The Texas Two-Step “involves a company spinning off a unit and transferring its tort liability to that unit. The spinoff is then put into bankruptcy to manage that liability without putting the assets of the original company into play.”[22] The Third Circuit’s rebuke of this tactic combined with MoCRA’s mandate that the FDA “establish required standardized testing methods for detecting and identifying asbestos in talc-containing cosmetic products[23],” are likely to play a significant role in cracking down on cosmetic regulation from Fortune 500 companies to new indie cosmetic brands.  

The Future of Cosmetic Consumer Protection and Regulation

Recent documentaries, articles, and exposés represent a growing generation of conscious cosmetic consumers that seek to hold the beauty industry accountable. While there are several ways that cosmetic manufacturers can mislead or harm their customers, from dangerous ingredients to misleading advertising, it would seem that the federal government intends to hold the industry as a whole more accountable than in decades past.  The FDA’s implementation of MoCRA has the potential to completely reshape the cosmetic industry and protect consumers at a level not yet seen.

[1]   Linda Reinstein, HBO Max Docuseries “Not So Pretty” Spotlights the Dangers of Asbestos in Talc-Based Cosmetics, Asbestos Disease Awareness Organization (Apr. 26, 2022),

[2] Priyanka Narayan, The Cosmetics Industry Has Avoided Strict Regulation For Over A Century. Now rising health concerns has FDA Inquiring, CNBC (Aug. 2, 2018, 10:08 AM),does%20not%20qualify%20as%20misbranding.

[3]Reinstein, supra note 1.

[4] Elizabeth Paton, The Dirt on Clean Beauty, N.Y. Times (Jan. 9, 2023),

[5] Id.

[6] Id.

[7] Class Action Complaint, Finster v. Sephora USA Inc., (No. 6:22-cv-1187).

[8] Id. at 3.

[9] Id. at 3.

[10] Id. at 5.

[11] Christopher Hanson, First Major Overhaul of Cosmetics Regulation Since FDR Administration, The National L. Rev. (Jan. 18, 2023),

[12] Id.

[13] Id.

[14] Id.

[15] Id.

[16] Id.

[17] Id.

[18] HBO Max Docuseries “Not So Pretty” Spotlights the Dangers of Asbestos in Talc-Based Cosmetics, supra note 1.

[19] Id.

[20] Id.

[21] In re LTL Mgmt., LLC, No. 22-2003, 2023 WL 1098189 (3d Cir. Jan. 30, 2023).

[22] James Nani, J&J’s ‘Texas Two-Step’ Talc Bankruptcy Strategy Remains in Doubt, Bloomberg Law (Apr. 8, 2022, 6:00 AM),

[23] Hanson, supra note 10.

Photo by Marcelo Moreira via Pexels

Grace Genereaux

Whether you are watching television, scrolling on TikTok, or browsing the internet, you are likely to see one particular type of advertisement: prescription drugs. Only the United States and New Zealand allow for drug companies to directly advertise prescription drugs to consumers.[1] Other countries have banned the advertising of prescription drugs over a concern of harmful effects on health outcomes.[2] Drug advertising can cause people to spend more money on a pharmaceutical when there is a cheaper alternative and may provide “distorted drug information, unnecessary prescriptions, and reduced prescribing quality.”[3] This type of advertising is referred to as direct-to-consumer advertising (“DTCA”), and it has remained a controversial topic.[4]

Those who wish to ban DTCA for prescription drugs are concerned about the reliability and effectiveness of these advertisements in actually communicating the benefits and risks of a drug.[5] European countries have chosen to keep the ban on DTCA for prescription drugs due to the sensitive nature of drug information.[6] Countries are concerned with the DTCA of pharmaceuticals because of the “perceived deleterious effects on rational prescribing, pharmaceutical expenditure, and health outcomes.”[7] These issues come into play as drug advertising increases demand for specific, more expensive, pharmaceuticals.[8] Individuals see these advertisements all over in daily life and are then prompted to bring the drug up to their doctor, which may lead their doctor to prescribe them a more expensive drug instead of the cheaper alternative.[9] There is also concern about television and internet advertisements  not properly conveying the message of risks and benefits.[10] Often these warnings come at the end of a commercial and consist of a voice rapidly listing off all of the side effects of a drug, which can result  in the consumer  being unable to fully understand the information.[11]

People on the other side of the issue argue that DTCA of prescription drugs brings several benefits to patients.[12] Drug companies argue that DTCA for prescription drugs “facilitate[s] meaningful discussions between doctors and patients about their health, otherwise unknown diagnoses, and available treatments.”[13] Specifically, drug companies argue that DTCA causes more people to visit their doctor concerning a diagnosis that may have gone unnoticed.[14] Patients also may be more likely to discuss problems with their doctor that they previously did not feel comfortable discussing.[15] The Association of the British Pharmaceutical Industry argues that “the current ban on drugs advertising is unfair and is not in patients’ interests” because it limits the patient’s choices.[16] While the decrease in stigmatization of medical problems and patient autonomy is a positive result of drug advertising, these advertisements do not adequately address the complicated risks associated with prescription drugs.[17] In response to supporters of DTCA, one  European Parliament member points out that in the U.S., the top advertised drugs are also the top selling drugs.[18] This demonstrates that advertising clearly has an effect on the market.

Recently, lawmakers in the U.S. have been pushing the FDA to pass the Banning Misleading Drug Ads Act which would help stop advertisers from using distractions and unclear language in their advertisements.[19] The Act finalizes a prior rule from the FDA which requires a drug advertisement “be presented in a clear, conspicuous, and neutral manner.”[20] This also means that advertisers cannot use images or text that would distract the consumer from the information.[21] Overall, it is an attempt to clarify the past rule and require that “drug ads [must] include a statement related to side effects, contraindications, and effectiveness.”[22] The lawmakers behind the legislation are concerned that drug companies directly advertising to consumers undermines doctors’ opinions.[23] These lawmakers share a substantial concern over   advertisers’ ability to manipulate older consumers who depend on prescription drugs.[24] This Act wants to finish what the FDA started and stop the information from drug commercials taking over the important information that a doctor would provide a patient.[25] The Act promotes patients making informed decisions with the help of their doctor by limiting “drug manufacturers from obscuring dangerous side effects . . . in their  advertisements. . . .”[26]

While the Banning Misleading Drug Ads Act attempts to limit the harm DTCA of prescription drugs can cause on consumers, it has still not passed,[27]and DTCA remains legal in the U.S. Many groups support the Act and further regulation of DTCA, but lawmakers will likely need to do more than pass this legislation to really stop the negative effects of DTCA.[28] Prescription drugs are a unique product that could seriously harm consumers if taken incorrectly. It is important for individuals to have accurate information and that is not distorted by distracting drug advertisements. Clear drug advertisements that communicate accurate risks and benefits of a prescription drug allow consumers to make informed choices and may facilitate more open conversations with their doctors.

 However, DTCA for prescription drugs overall still puts consumers at risk and manipulates the drug market.[29] Drug advertising is a billion-dollar industry that takes advantage of the consumer and can lead to doctors inappropriately prescribing medications.[30] DTCA in the U.S. “helped create an epidemic of prescription drug use, with U.S. sales reaching $425 billion in 2015.”[31] Opioids, for example, were marketed as a safe option for long term pain relief, but, in reality were not.[32] Doctors then feel pressure to provide demanding patients certain medications, and this contributes to extreme health crises like the opioid epidemic.[33] Drug companies that can afford the most advertising will likely continue to gain more popularity, even if there are better, cheaper, and safer alternatives.

 Drugs can be lifesaving, but ones that are extremely addictive and dangerous have no place being marketed to the public.[34] While the Banning Misleading Drug Ads Act is one step closer to more transparency in the pharmaceutical market, lawmakers should continue fighting against DTCA of prescription drugs. Consumers in the U.S. should be protected the same way consumers are protected in every other country besides the U.S. and New Zealand. There are many reasons that DTCA for pharmaceuticals is banned in almost all countries and the U.S. should reconsider their stance.

[1] Deborah Gleeson & David B. Menkes, Trade Agreements and Direct-to-Consumer Advertising of Pharmaceuticals, 7 Int’l J. Health Pol’y & Mgmt. 98, 99 (2018).

[2] Id. at 98.

[3] Id.

[4] Id; Andrew Andrzejewski, Direct-to-Consumer Calls to Action: Lowering the Volume of Claims and Disclosures in Prescription Drug Broadcast Advertisements, 84 Brook. L. Rev. 571, 572 (2019).

[5] Andrzejewski, supra note 4, at 572.

[6] See Giampaolo Velo & Ugo Moretti, Direct-to-Consumer Information in Europe: The Blurred Margin Between Promotion and Information, 66 Brit. J. of Clinical Pharmacology 626, 626–27 (2008).

[7] Gleeson, supra note 1, at 98.

[8] Id.

[9] See id.

[10] Andrzejewski, supra note 4, at 584–85.

[11] See id.

[12] See Gleeson, supra note 1, at 98.

[13] Andrzejewski, supra note 4, at 572.

[14] Id.

[15] See, e.g., Aaron Twerski, Liability for Direct Advertising of Drugs to Consumers: An Idea Whose Time has Not Come, 33 Hofstra L. Rev. 1149, 1151–52 (2005) (discussing patients who are more likely to talk to their doctor about alternative medications when the drug they are on causes negative side effects such as a decrease in libido).

[16] Claire Cozens, Europe Rejects Drug Advertising, Guardian (Oct. 23, 2022, 11:54 AM),

[17] See Twerski, supra note 15, at 1152–53.

[18] Cozens, supra note 16.

[19] Joanne S. Eglovitch, Proposed Legislation Takes Aim at Prescription Drug Advertising, Regul. Affs. Pros. Soc’y (July 11, 2022),

[20] Food and Drug Administration Amendments Act of 2007, Pub. L. No. 110-85, § 906, 121 Stat. 823, 940 (2007).

[21] Spanberger Leads Effort to Crack Down on Drug Companies & Misleading Ads, Increase Transparency for Consumers, (July 5, 2022),

[22] Id.

[23] See id.

[24] Id.

[25] See id.

[26] Id.

[27] All Information for H.R.8289 – Banning Misleading Drug Ads Act of 2022, 117th Cong. (2022),

[28] Eglovitch, supra note 19.

[29] Jeremy A. Greene & David Herzberg, Hidden in Plain Sight Marketing Prescription Drugs to Consumers in the Twentieth Century, 100 Am. Pub. Health Ass’n 793, 793 (2010).

[30] See Bruce M. Psaty et al., Addressing the Opioid Epidemic – Opportunities in the Postmarketing Setting, 376 New Eng. J. of Med. 1502, 1502 (2017).

[31] Id.

[32] Andrew Kolodny, How FDA Failures Contributed to the Opioid Crisis, 22 AMA J. of Ethics 743, 745 (2020).

[33] Miguel J. Franquiz & Amy L. McGuire, Direct-to-Consumer Drug Advertisement and Prescribing Practices: Evidence Review and Practical Guidance, 36 J. of Gen. Internal Med. 1390, 1393 (2020); Twesrki, supra note 15, at 1151.

[34] See Psaty, supra note 30, at 1503.

Photo by Pixabay via Pexels

Taylor Jones

Overhauling United States environmental and labor policies has been a priority of the Biden Administration since the 2020 presidential election.[1]  In fact, the Biden-Harris campaign’s website still displays Biden’s promise to “sign a series of new executive orders with unprecedented reach that go well beyond the Obama-Biden Administration platform”[2] concerning environmental issues.  Likewise, during the campaign, Biden promised to be “the most pro-union president you’ve ever seen[.]”[3]  Biden started strong toward achieving these objectives on his first day in office.[4]  In the words of giddy CNN reporters on Inauguration Day, “[w]ith the stroke of a pen,” “Biden is signing a flurry of executive orders, memorandums and directives to agencies,” “moving faster and more aggressively to dismantle his predecessor’s legacy than any other modern president.”[5]  In one such executive order, Biden committed the US to rejoin the Paris Agreement.[6]  In another, Biden halted construction of the Keystone XL pipeline by revoking its permit.[7]  Further, in a move the CNN reporters failed to discuss, Biden unceremoniously fired Peter Robb, Trump-appointed General Counsel of the National Labor Relations Board, ten months prior to the expiration of his term.[8]

 After seemingly early success on environmental and labor issues, success on the legislative front stalled.  First, the Green New Deal legislation,[9] with its discussions of cow flatulence[10] and the morality of having children in a world facing climate change,[11] was left to compost in the Senate, with three Democrats voting against the resolution.[12]  Then, just as a majority of the American workforce has failed to support unionization,[13] a majority of Senators failed to support both the Protecting the Right to Organize Act of 2021 (“PRO Act”)[14] and the Build Back Better Act.[15]

 With the prospect of environmental and labor reform being achieved by Congress diminished, purportedly independent regulatory agencies have stepped in to fill the legislative void.[16]  Both the National Labor Relations Board (“NLRB”), responsible for administering the National Labor Relations Act (the “NLRA”),[17] and the Securities and Exchange Commission (the “SEC”), established to protect investors, maintain efficient markets, and facilitate capital formation,[18] are defined by statute as independent regulatory agencies.[19]  Distinguished from executive agencies, independent regulatory agencies are intended to operate with greater independence from the executive branch.[20]  In theory, the greater independence is intended to reduce politically motivated interference with the agencies and allow for congressionally-delegated rulemaking independent of executive branch control.[21]

Despite its intended independence from partisan politics, the Biden NLRB has been criticized as “beholden to the interests of organized labor,”[22] and policy oscillation has come to be seen as the natural result of changes in presidential administrations.[23]  Akin to Biden’s aggressiveness on his first day in office, the NLRB has openly attacked Trump-era precedents and attempted to institute changes that Congress was unable to pass legislatively in the PRO Act and Build Back Better Act.[24]

For instance, Jennifer Abruzzo, the Biden-appointed current General Counsel of the NLRB, issued a Mandatory Submissions to Advice memorandum in August of 2020 signaling cases she will bring before the pro-union NLRB in order to establish new precedent.[25]  Additionally, General Counsel Abruzzo made headlines in September 2021 when she issued a memorandum to NLRB field offices that she will consider student-athletes to be statutory employees entitled to the protections of the NLRA.[26]  Likewise, in April 2022, General Counsel Abruzzo issued a similar memorandum declaring she will consider captive audience meetings a violation of the NLRA.[27]  However, while the upheaval at the NLRB signaled the willingness of independent regulatory agencies to come to the rescue of proposed Biden labor policies, the impact of the changes at the NLRB will arguably be negligible.  With a national unionization rate of approximately ten percent,[28] aside from attention-grabbing headlines concerning college athletes during football season, most of the policy shifts at the NLRB have likely flown under the radar of most Americans and not substantially impacted employers.

Perhaps more importantly, the SEC has recently taken a decisive stand to advance the goals of the failed Green New Deal legislation.[29]  Under the SEC’s new proposed rule concerning climate-related disclosures, public companies will be required to include a laundry list of climate-related disclosures in SEC filings, including climate-related goals, board and management oversight of climate risks, and Scope 1 and 2 emissions for all publicly-traded companies, with full Scope 3 emissions data being required of some companies.[30]  As stated in a letter to SEC Chair Gary Gensler signed by nineteen Republican senators in opposition to the SEC’s recent proposed rule on emissions disclosures, “[a]fter failed attempts to enact radical climate policy via legislation, this rule is yet another example of the Biden Administration’s efforts to have unelected bureaucrats implement its preferred agenda through regulation.”[31]  

The public comment period for the proposed rule closes on May 20, 2022.[32]  If the rule adopted by the SEC is substantially similar to the proposed rule, litigation may ensue.[33]  Challenges will likely center around the SEC exceeding its statutory authority and goal of protecting investors,[34] as well as compelling corporate speech in violation of the First Amendment.[35]  In a scathing statement by SEC Commissioner Hester M. Peirce, entitled “We are Not the Securities and Environment Commission – At Least Not Yet,” Commissioner Peirce suggests additional legal hurdles for the rule, including non-delegation issues and vastly inaccurate compliance cost estimates.[36]  Should the rule be struck by the courts on any of the grounds above, or alternative legal theories, we will then be left to see what other avenues the Biden Administration and its allies will seek to exploit to advance its environmental policy agenda as the 2024 presidential election draws closer.


[1] See Emma Newburger, Joe Biden Calls Climate Change the ‘Number One Issue Facing Humanity,’ CNBC (Oct. 24, 2020, 1:45 PM),; see Noah Bierman & David Lauter, Biden May be the Most Pro-Union President Since Truman. But Can He Stop Labor’s Decline?, Los Angeles Times (June 2, 2021),

[2] The Biden Plan for a Clean Energy Revolution and Environmental Justice, Biden-Harris Democrats, (last visited Apr. 22, 2022).

[3] Abigail Johnson Hess, Biden Promises to be ‘the Most Pro-Union President’ – and Union Members in Congress are Optimistic, CNBC Work, (Dec. 2, 2020, 10:05 PM).

[4] See Eric Bradner, Betsy Klein & Christopher Hickey, Biden Targets Trump’s Legacy with First-day Executive Actions, CNN Politics (Jan. 20, 2021, 8:48 PM),

[5] Id.

[6] Id.

[7] Rob Gillies, Keystone XL Pipeline Halted as Biden Revokes Permit, AP News, (Jan. 20, 2021).

[8] See Bradner, supra note 4; Ian Kullgren & Josh Eidelson, Biden Fires NLRB General Counsel After He Refuses to Resign, Bloomberg Law, (Jan. 20, 2021, 9:42 PM).

[9] Recognizing the Duty of the Federal Government to Create a Green New Deal, H.R. 109, 116th Cong. (2019-2020).

[10] Rep. Cortez Repeats Claim that Cow Flatulence Threatens Mankind, Metro Voice News (Apr. 2, 2019),

[11] Isabel Vincent & Melissa Klein, Gas-guzzling Car Rides Expose AOC’s Hypocrisy Amid Green New Deal Pledge, New York Post (Mar. 2, 2019, 7:32 PM), .

[12] Jacob Pramuk, Green New Deal Backed by Alexandria Ocasio-Cortez Fizzles Out in the Senate as Dems Accuse GOP of Putting on a ‘Stunt’ Vote, CNBC, (Mar. 26, 2019, 4:51 PM).  

[13] News Release, Bureau of Labor Statistics, Union Members – 2021 (Jan. 20, 2022), (last visited Feb. 26, 2022).

[14] Diana Furchtgott-Roth, Democrats Can’t Pass the PRO Act, so It’s Buried in the Reconciliation Bill, The Hill (Oct. 09, 2021. 11:01 AM),; see Protecting the Right to Organize Act of 2021, H.R. 842, 117th Cong. (2021).

[15] Burgess Everett, Dems Face Sobering Possibility: Build Back … Never, Politico (Feb. 2, 2022, 9:00 AM),; see Build Back Better Act of 2021, H.R. 5376, 117th Cong. (2021).

[16] Brody Mullins & Ryan Tracy, Biden’s Regulatory Drive Sparks Pushback From Business Lobbyists, Wall Street Journal (Feb. 7, 2022, 5:30 AM),

[17] National Labor Relations Act, 29 U.S.C. §§ 151–69 (1947).  

[18] What We Do, United States Securities and Exchange Commission, (Nov. 22, 2021).    

[19] 44 U.S. Code § 3502 (2019).

[20] Robert Longley, Independent Executive Agencies of the US Government, ThoughtCo., (Aug. 2, 2021).  

[21] See generally Congressional Research Service, Congress’s Authority to Influence and Control Executive Branch Agencies (2021),

[22] Tomiwa Aina, Full House: A Fully Constituted Biden NLRB is Here, Fisher Phillips (Aug. 10, 2021),

[23] Joan Flynn, A Quiet Revolution at the Labor Board: The Transformation of the NLRB 1935-2000, 61 Ohio St. L. J. 1361, 1413 (2000).

[24] See NLRB General Counsel Jennifer Abruzzo Issues Memorandum Presenting Issue Priorities, National Labor Relations Board (Aug. 12, 2021),

[25] Steven M. Swirsky & Donald S. Krueger, NLRB General Jennifer A. Abruzzo Issues “Mandatory Submissions to Advice” and “Utilization of Section 10(j) Proceedings” Memos, Outlining Her Priorities and Enforcement Agenda, The National Law Review (Aug. 23, 2021),

[26] NLRB General Counsel Jennifer Abruzzo Issues Memo on Employee Status of Players at Academic Institutions, National Labor Relations Board Office of Public Affairs (Sept. 29, 2021),

[27] NLRB General Counsel Jennifer Abruzzo Issues Memo on Captive Audience and Other Mandatory Meetings, National Labor Relations Board Office of Public Affairs (Apr. 7, 2022),

[28] Bureau of Labor Statistics, News Release: Union Members – 2021 (Jan. 20, 2022, 10:00 AM), (last visited Apr. 22, 2022).

[29]  See The Enhancement and Standardization of Climate-Related Disclosures for Investors, 87 Fed. Reg. 21334 (Apr. 11, 2022) (to be codified at 17 C.F.R. pts. 210, 229, 232, 239, 249).

[30] Id.

[31] Letter from Kevin Cramer, Senator of North Dakota, and 18 United States Senators, to Gary Gensler, Chair, SEC (Apr. 5, 2022), (last visited Apr. 22, 2022).

[32] The Enhancement and Standardization, supra note 29.

[33] Letter from Patrick Morrisey, West Virginia Attorney General, and 15 state Attorneys General, to Gary Gensler, Chair, SEC (June 14, 2021), (last visited Apr. 22, 2022).

[34] Id.

[35] Id.

[36] Hester M. Peirce, Commissioner of the SEC, We are Not the Securities and Environment Commission – At Least Not Yet, Statement U.S. Securities and Exchange Commission (Mar. 21, 2022),

Photo by Aaron Kittredge via Pexels

By: Rena Steinzor*


The congressional debate over whether the government engages in ruinous “overregulation” is only occasionally coherent.  Sometimes it is downright bizarre, and never is it for the faint of heart.  The intensely disturbing dynamic between grandstanding, conservative Representatives and hypersensitive, anxiety-ridden White House operatives has evolved to the point that it threatens the central premise of the administrative state: that expert-driven, science-based, and pluralistic rulemaking is a far preferable way to implement statutes than the alternatives.  When the alternative is policy making that responds on a hair trigger to self-interested demands by politicians driven by potential electoral backlash, the rational, albeit ponderous, traditions of the administrative state seem overwhelmingly more desirable.

Consider the recent case of children paid to work on farms and other agricultural facilities.  In the context of a series of gruesome incidents involving teenagers as young as fourteen who were smothered in grain elevators[1] or lost legs to giant augers used to remove crops from elevators and silos,[2] the United States Department of Labor (“DOL”) issued a Notice of Proposed Rulemaking (“NPRM”) in September 2011 announcing its intention to tighten prohibitions on the “hazardous occupations” where children younger than sixteen are employed.[3]  Existing rules[4] were promulgated four decades ago, before many of the machines and methods now commonplace on today’s farms were developed,[5] and they have proven shockingly ineffective.  The fatality rate for young agricultural workers isfour times greater than for their peers in other workplaces.[6]

Consistent with DOL’s authorizing statute, the Fair Labor Standards Act (“FLSA”), the new requirements would have exempted children who work for their parents or a relative or friend standing in the place of a parent, no matter what their age or the activity for which they are paid.[7]  DOL would have allowed children to raise animals for 4-H competitions and enroll in vocational training programs.[8]  But the proposal would have prohibited children under sixteen years old from working for hire to operate farm machinery;[9] feed, herd, or otherwise handle farm animals when their activities would cause pain to the animal or result in “unpredictable” behavior;[10] manage crops stored in grain elevators or silos;[11] or pick tobacco because children are especially vulnerable to a form of nicotine poisoning known as “green tobacco sickness.”[12]  DOL received more than 10,000 comments on the proposal and was considering revisions through the normal rulemaking process.[13]

In late January 2012, the House Small Business Committee’s Subcommittee on Agriculture, Energy, and Trade held a hearing entitled “The Future of the Family Farm: The Effect of Proposed DOL Regulations on Small Business Producers.”[14]  With witnesses stacked four to one against the proposal, the hearing offered ample opportunity to excoriate DOL on the grounds that the proposed rule would end “family farming” as we know it.  Representative Denny Rehberg (R-Mont.), who is trying to unseat Democratic Senator Jon Tester (D-Mont.), threatened to attach a rider to DOL’s appropriations bill to stop the rulemaking.[15]  The justification?  The proposal might prohibit the congressman from hiring his ten-year-old neighbor to herd his cashmere goats by riding a Kawasaki “youth” motorcycle after the undoubtedly startled critters.  “I think you’re sitting around watching reruns of ‘Blazing Saddles’ and that’s your interpretation of what goes on in the West,” the self-described fifth generation rancher turned member of Congress informed DOL Deputy Wage and Hour Administrator Nancy Leppink.[16]

Other witnesses at the hearing told stories about how rewarding it was for their children to come of age feeding baby calves,[17] milking cows,[18] and helping their parents heft hay bales into the barn.[19]  None of these activities would be prohibited by the rule, of course, provided the child was actually helping her parents or people serving in a parental role, as opposed to working for the minimum wage or less at a farm that may or may not be owned or operated by relatives, but where the children worked under the supervision of unrelated people.[20]  Yet it is worth imagining for a moment the nonagricultural industry analogy to this claim.  How much sympathy would a factory owner elicit if she came to testify about how a child could develop self-respect by spending twelve hours a day in a sweat shop because the experience was equivalent to helping the child’s grandmother do needlework?

The outlandish claims about how the proposal would operate were discouraging to anyone familiar enough with the life-threatening risks faced by young agricultural workers to understand the urgency of the proposed updates.  Unfortunately, though, the proposal did not do nearly enough to help the most beleaguered of these children: migrants as young as ten or twelve years of age who stand, stoop, kneel, and bend side-by-side with their parents, suffering a miasma of injuries from heat stroke to cuts, repetitive motion injuries, and pesticide poisoning.[21]  Instead, DOL promised to consider those problems another day.[22]  In light of the proposal’s untimely and heavily politicized termination, a generation or more may have to wait before the federal government returns to those urgent problems.

On April 26, 2012, when press coverage had ebbed for the day, DOL issued a short, four-paragraph press release announcing it was withdrawing the entire proposal:

The Obama administration is firmly committed to promoting family farmers and respecting the rural way of life, especially the role that parents and other family members play in passing those traditions down through the generations.  The Obama administration is also deeply committed to listening and responding to what Americans across the country have to say about proposed rules and regulations.  As a result, the Department of Labor is announcing today the withdrawal of the proposed rule dealing with children under the age of 16 who work in agricultural vocations. . . .  To be clear, this regulation will not be pursued for the duration of the Obama administration.  Instead, the Departments of Labor and Agriculture will work with rural stakeholders – such as the American Farm Bureau Federation, the National Farmers Union, the Future Farmers of America, and 4-H – to develop an educational program to reduce accidents to young workers and promote safer agricultural working practices.[23]

Why did the White House beat such an explicit retreat on the proposed rule, taking the exceptional step of promising never to revive it for the “duration of the Obama administration”—phrasing that could mean the entire period that the President is in office, even if he wins a second term?  On the most immediate level, Representative Rehberg, of cashmere goats and ten-year-old motorcyclist fame, is locked in a tight Senate race with Democratic incumbent Jon Tester, and the President can ill afford to lose the Senate.[24]  Tester not only implored the White House to pull the rule but was joined by fellow Democrats like Senator Al Franken (D-Minn.).[25]  The Obama campaign is also likely to be worried about competing with Republican candidate Mitt Romney for the rural vote, especially in key “swing” states like New Hampshire and Colorado.[26]  In 2011, about 51 million people lived in areas the United States Department of Agriculture (“USDA”) characterizes as rural, and 260 million lived in areas it characterizes as “urban.”[27]  Of course if either Tester’s or the President’s race is so close that this single, relatively obscure issue could swing the race one way or another, Democrats arguably have far bigger problems.

Pulling the camera back a few steps further to consider the President’s overall stance regarding Republican attacks on “overregulation” provides a more enduring explanation.  President Obama has exhibited a steadfast determination to respond with conciliation to intemperate and relentless demands by his political opponents that he dismantle regulation because it is undermining the nation’s economy.[28]  His concessions have done very little to win the gratitude of national business groups like the Chamber of Commerce.[29]  As important, efforts to meet politicians of the other party halfway seem not only to have failed but have also made matters far worse because, as negotiation experts would remind us, responding to highly competitive negotiation tactics with conciliation incites escalating confrontations and even more extreme demands.[30]

But the long-term implications of this decision, which are by no means isolated,[31] are likely to be remembered long after the President and whoever is elected Senator from the great state of Montana leave office.  In the maddening, heavily politicized scrum where regulatory decisions are up for grabs, the long-standing tradition of expertise-driven administrative decision making seems to be hanging by a thread, dooming Executive Branch agencies to shy away from controversial rulemaking regarding public health, worker and consumer safety, and the environment in the absence of a statutory mandate, no matter how pressing the problem.  Or, as Professor Thomas McGarity rightly warns us, the era of “blood sport rulemaking” is now upon us, with the inevitable result that even the resolution of business-on-business disputes will become far more expensive and unpredictable.[32]

This Article opens with an evaluation of the proposed rule in relation to the allegations that were leveled against it.  Having established that DOL could have resolved legitimate objections from agricultural trade associations like the American Farm Bureau Federation (“AFBF”)[33] fairly easily had the rulemaking process run its course, the Article evaluates the ramifications of the likelihood that rulemaking to protect child labor in agriculture could stall for years in the administrative process.  The Article concludes with some predictions on what it will take to force the Executive and Legislative Branches to return to the administrative process in deciding what to do about such controversies.

I.  The Rule on the Merits

A.    Foregone Benefits

1.     Workplace Fatalities

The category labeled “agriculture, forestry, fishing, and hunting” by the United States Bureau of Labor Statistics (“BLS”) had the highest number and rate of fatal occupational injuries in 2010, the most recent year for which such statistics are public.[34]  Focusing in on agriculture, BLS found that the fatality rate was 26.8 deaths/100,000 workers; this number is seven times higher than the average fatality rate of 3.5/100,000 across all industries.[35]  A special BLS study of the youth labor force completed in 2000 on the basis of thousands of interviews of workers in the field found that “[a]gricultural employment is particularly dangerous work; youths aged 15 to 17 who have jobs in agriculture had a risk of a fatality that was more than 4.4 times as great as the average worker aged 15 to 17.”[36]  Between 1992 and 1998, three-quarters of all deaths of child workers younger than fifteen years of age occurred in agriculture; these fatalities represented more than half of the total number of youth fatalities in the industry.[37]

Work in the “Farm-product Raw Materials, Not Elsewhere Classified” category, which includes loading, unloading, and otherwise maintaining grain elevators and silos, was extraordinarily hazardous.  Fifty-one incidents of “grain entrapment” during the medieval practice of lowering oneself into the giant storage bins and walking on the grain to break up its clumps were reported in 2010; 51% resulted in death, and 12% of those fatalities involved children under sixteen years of age.[38]  Workers performing this very dangerous practice are supposed to wear harnesses so they can be pulled out of an entrapment situation.[39]  But—and this problem would have been front and center had the White House allowed DOL to defend its rule—teenagers younger than sixteen, and even those under twenty-one, are not yet developmentally ready to assess the risk of high hazard work:

Research has shown that the prefrontal cortex is the last part of the adolescent brain to fully mature and that the process is not completed until the early twenties or beyond.  With that maturation, the executive functioning of youth is fine-tuned, improving their ability to understanding [sic] future risks and impulsive actions.[40]

On the whole, policymakers are ambivalent about such research.  States rely on it when they impose stringent requirements for driver’s licenses,[41] but teenagers are allowed to enlist in the military.[42]  Whatever these inconsistencies, appropriate fear of hazards at work is muffled by respect for the boss, habitual acquiescence to authority, and concern about getting fired.  For the teenagers—especially boys—who take such dangerous chances, realization of their implications often comes too late.

As we shall see, the congressional hearing that set the stage for killing the proposed rule involved four individuals who are farmers strongly opposed to the proposal and a DOL official who spent much of her time apologizing for it.[43]  Had the subcommittee invited a lay witness to testify about the hazards that the rule sought to prevent, the tenor of the hearing would have changed:

[M]y 19-year-old nephew, Alex Pacas, was engulfed in grain and suffocated, along with 14-year-old Wyatt Whitebread.

On that day, the boys were sent into a grain bin with 15-year-old Chris Lawton and 20-year-old Will Piper to “walk the corn,” an attempt to break up the corn, which is not allowed unless workers are wearing harnesses to ensure they won’t be engulfed when the corn caves in.

In the course of doing that, the two young ones–Wyatt and Chris–figured out they could break up the corn easier by sliding down it. . . .  Now the corn crusts form a bridge, and there’s a hollow pocket beneath it, and that’s what makes it so dangerous to be in there.

So the crust broke, and Wyatt started sinking into the corn.  The augers were running, and the augers are at the bottom of the bin and they bring the corn down, which is a big “no-no” while there are people inside the silo.

Wyatt started sinking; he was yelling “Help me, help me!”  So Alex and Will tried to get to Wyatt.  They grabbed ahold of him–they almost had Wyatt out–and corn is a great pressure, it takes a lot of pressure on you, so they were really struggling to get Wyatt out of this corn.

They almost freed him when the corn broke beneath Will and Alex.  Wyatt sank awfully fast and was screaming “Help me!  Please save me!” as the corn engulfed him–and Alex, my nephew–his best friend Will, were in there–and they were still trying to get to Wyatt . . . .

As the corn was flowing around my nephew, he said the Lord’s Prayer, and it kept rising and Will kept trying to keep the corn out of his face, he kept brushing it back–trying to get it out and of course, every time, the corn would flow back in, and my nephew was straining his neck back as far as he could and he couldn’t stay above the grain.  So, he became engulfed.

The rescue workers came and they managed to get a grain tube around Will to try to keep the grain from flowing around him anymore.  What people don’t know is that when they did that, it was also around the body of my nephew.  They were best friends–they had been best friends for years.  Will was in there for, I think, six hours while they tried to rescue him, staring at his dead friend–and he said at one point, he passed out, he became unconscious, because it’s really toxic in a grain bin and fell forward and right onto Alex.[44]

The withdrawal of the proposed rule means that this ghastly situation is not covered by DOL’s forty-year-old prohibitions on children sixteen and younger doing dangerous work, although, as we shall see, even the most intemperate critics of the proposal ignored these badly needed safeguards.  The normal rulemaking process is designed to address strategic withdrawals of imperfect provisions at the same time that crucial protections are advanced, but the heavily politicized “process” used to evaluate this proposal is not adept at making such distinctions.

2.     On-the-Job Injuries

BLS data on injuries were limited to youth between sixteen and nineteen years of age and did not include long-latency illness and disability (e.g., loss of hearing because of excessive noise levels on the job or the onset of diseases like cancer caused by pesticide exposure).[45]  BLS did not break this information down for agriculture as an industry.  Nevertheless, the data show that the injury rate for youth workers has steadily decreased over time and is about half the overall rate for adult workers.[46]  Once again, however, work in elevators and silos proved an outlier, with an extraordinarily high injury rate of 6.4 per 100 workers or 6400/100,000 workers.[47]

Unfortunately, injury and illness data are notoriously unreliable in the United States; studies have shown that as many as 50% of such episodes are never reported.[48] The data exclude such categories as the self-employed, farms employing fewer than eleven people, federal government employees, and private household workers.[49]  Employers discourage workers from reporting injuries to avoid inspections by the Occupational Safety and Health Administration (“OSHA”) and claims for workers’ compensation, sometimes offering financial incentives for underreporting.[50]  Workers, especially illegal immigrants, may fear loss of jobs if they report such incidents.[51]  Therefore, even these disturbing statistics on injuries suffered by children doing agriculture work are likely understated to a significant extent.

B.    The Substance of the Rule

The DOL rulemaking proposal would have updated the forty-year-old requirements governing child labor in agriculture in four separate ways.  The proposal (1) clarified (its opponents would say it expanded) the statutory exemption for children who work for their parents or persons standing in place of their parents; (2) updated and expanded  “hazardous orders” specifying work that hired child laborers are barred from doing; (3) updated and expanded the requirements for specialized agricultural training programs run by organizations like the 4-H because participation in such training allows children to do more hazardous work; and (4) strengthened the civil penalties available to punish violators of these requirements.[52]  This Article only addresses the first two changes because they were the primary inspirations for the political backlash that killed the rule.

1.     Standing in a Parent’s Shoes

Despite the willful distortions of the proposal’s opponents, hazardous orders—or, for that matter, any of the requirements enforced by DOL’s Wage and Hour Division (“WHD”) under the FLSA—do not apply to children who work for their parents or parental surrogates on farms that these adults own.[53]  The theory behind this blanket exemption, which has been embedded in the FLSA since 1966, is that parents and parental surrogates would not allow their children to do life-threatening work.[54]  Two realities undermine this theory.  First, a comprehensive report by BLS on occupational fatalities among teenagers found that 30% of fatalities happened when they were working in a “family” business, and 43% of those fatalities occurred in agriculture.[55]  Second, the overwhelming trend in agricultural production is the steady enlargement of farms that operate commercially to produce food (grain, plants, and meat).[56]  At the same time that farms have grown larger through consolidation, the most productive have also remained in the hands of “families”—defined by the USDA as people related by blood or marriage.[57]  Consequently, children can work on family-owned farms without working under the direction of or in proximity to their parents or even to people who fulfill the role of their parents.[58]  DOL’s tightening of its interpretation of the parental exemption, which it insists only codifies informal guidance it has issued to the agricultural industry for decades, was intended to eliminate the exemption for those circumstances.

So, for example, a child under sixteen would lose his exemption if he works for a neighbor like Representative Rehberg or a “non-parental relative,” unless the relative assumes parental duties, even on a temporary basis.[59]  At this point, DOL’s line drawing became arbitrary, as all efforts to control complex situations do.  A child staying with a grandparent for three months during the summer on the farm the grandparent owns would qualify for the exemption, but employment of a child “commuting” to the farm on a “daily or weekend basis” or visiting the farm for a period of one month would not be exempt.[60]  Opponents of the proposal ridiculed these distinctions, but their goal was not to persuade DOL to modify this approach but rather to kill the rule outright.[61]

2.     Dangerous Work

The proposed rule’s updates of existing hazardous orders were informed by a 1998 Institute of Medicine report that led to a study by the National Institute for Occupational Safety and Health (“NIOSH”).[62]  DOL’s contemplation of the study for almost a decade and a half before it mustered the resources and political will to tangle with the agriculture lobby does not bode well for its return to child labor issues any time soon.  Of course, DOL is not alone in succumbing to the relentless backlash this powerful industry can muster, as illustrated by the saga of legislation to reauthorize its subsidies during the spring and summer of 2012.[63]  Nevertheless, DOL’s inability to prevail in the context of protecting children who are among the most vulnerable members of society should give pause to any observer of the Washington, D.C. policy-making process.

The updated orders covered everything from operating heavy machinery to applying pesticides while employed on a farm.[64]  Grain elevators, silos, and augers were targeted,[65] as was handling timber with a diameter larger than six inches.[66]  But, judging from the complaints voiced by opponents during congressional hearings and in the media, the most controversial changes to existing hazardous orders including the following:

Tightening of the restrictions on children younger than sixteen operating tractors of any size either on the farm or on public roads (exceptions are provided for those who participate in training programs and who hold a valid state driver’s license);[67]

Tightening restrictions on the handling of animals by children under 16 years of age to include: (1) working in a yard, pen, or stall occupied by a male horse, pig, cow, or bison older than six months; (2) engaging in animal husbandry practices that inflict pain on animals or result in unpredictable animal behavior; (3) poultry catching or cooping in preparation for slaughter or market; and (4) herding animals in feedlots or on horseback, or using motorized vehicles such as trucks or all-terrain vehicles;[68] [and]

Lowering the prohibited height from 20 feet to six feet for ladders or scaffolding used by children under 16.[69]

Like revisions to the parental exemption, DOL’s efforts to modernize its hazardous orders depended on the drawing of arbitrary lines.  On some farms and with respect to particular teenagers, herding cattle on horseback or climbing a twenty-foot ladder into an apple tree would come as second nature and be easily accomplished.  In other instances, with less agile and physically developed children, these activities are risky.  Because DOL believed that it had exempted all children under sixteen who worked with their parents or parental surrogates, it sharpened the rules to prevent the inadvertent—or advertent—exploitation of children who are unlikely to perceive the risks presented by these activities and work for supervisors committed to getting the job done as quickly and inexpensively as possible.

DOL could have issued vague prohibitions against placing children in dangerous situations and relied on enforcement to flesh out that standard.  This approach would have required far more aggressive and effective enforcement, and the Government Accountability Office (“GAO”) and other experts have criticized DOL’s child labor enforcement program for its infrequent and erratic inspections and lenient settlements with chronic violators.[70]  Further, given the harsh tenor of the campaign to kill the rule, reliance on such a generic standard would not have satisfied DOL’s critics, and instead might well have inspired even more enthusiastic condemnation.

C.    The Rural “Way of Life,” the Myth of the “Family” Farm, Willful Distortions, and the Government Leviathan

1.     Rural Life

As the Obama Administration’s press release terminating the proposed child labor rule indicates,[71] the gist of the arguments made by its opponents was that it would severely undermine the “rural way of life.”[72]  The accusation has multiple, mutually reinforcing assertions embedded within it, but all rest on the fundamental premise that the vast majority of children (no number is ever stated) work for their parents, relatives, or close neighbors and friends on small family farms, where they learn about the traditions of hard work, love of animals, and the bounties of nature and where the adults who supervise them have their best interests as the overriding priority.  As one of the opponents put it:

My name is Chris Chinn.  My husband, Kevin, and I are fifth generation farmers.  We are blessed to be the parents of two wonderful children, Rachelle, 14, and Connor, 10. . . .  The DOL proposal was only unveiled last September, yet, it has created a firestorm among farmers and ranchers around the country, and for good reason. . . . [T]here is virtual unanimity within the agricultural community that these regulations would have an enormous impact on farm families. . . .  If the proposal you are examining today were in effect then, my upbringing and childhood would have been far different and much less fulfilling.  I think I can honestly say I would be a different person.  I wouldn’t give up what I learned for anything in the world.  And my husband and I very much want to pass on that kind of upbringing to our own children.[73]

The concern that the proposal would bar children from becoming acculturated to farming by their parents is a perplexing one because, as explained earlier, in order to be consistent with its statutory authority under the FLSA,[74] DOL exempted those situations from coverage in the Federal Register notice published in September 2011.  In the course of reiterating this statutory—and therefore non-discretionary—exemption, DOL reminded farmers of its long-standing position that the exemption did not extend to children working on larger farms that happened to be owned or operated by relatives unless their direct, adult supervisors were serving in a parental role at the time the work was done.[75]  It may well have been this language that set off such intense opposition to the proposal.  The rulemaking process is well suited to dealing with this kind of confusion, but DOL staff experts never got a chance to respond via a final rule.  Instead, DOL political appointees and White House staff were so intimidated by these intemperate complaints that, without defending the proposal, DOL announced in February 2012 that, before its staff even read the comments and considered changes in the proposal, it would be suspending all changes to the parental exemption.[76]

This concession did not satisfy the AFBF, the trade association that spearheaded opposition to the DOL proposal and sponsored Chinn’s testimony to Congress.[77]  Its leadership of this particular campaign arose in a much broader context of opposition to the regulatory system as a whole.  As its president, Bob Stallman, told his troops at their annual meeting in January 2011:

We face challenges from regulators who are ready to downsize American agriculture, mothball our productivity, and out-source our farms. . . . [O]verregulation endangers our industry.  This pressure is a clear and present danger to American agriculture . . . .  Our membership is comprised of farmers and ranchers who grow conventional crops, biotech crops, organic crops, traditional and specialized livestock . . . big and small.  But the common thread is always—family.  Family-based agriculture—done by those who have the most pride, investment and personal connection to the hard work of farming and ranching—remains the best way to meet the quality and quantity demands we face.[78]

The sense that more is going on here than the preservation of nuclear families on small farms is underscored by the evolving structure of agriculture as an industry.

2.     The “Family” Farm

Annual net farm income, the standard USDA measures for the success of the industry, fluctuates dramatically.  In 2007, it stood at $71 billion; this figure was 18% higher than the total in 2006.[79]  In 2009, net income fell to $55 billion.[80]  The total in 2012 was projected at $122 billion, up 3.7% from 2011.[81]

The vast majority of farms that operate commercially are family operations in the sense that they are owned by people who are related by blood or marriage, although “non-family farms” that account for only 2% of total farm numbers produced 18% of total agricultural output in 2007.[82]  Large farms account for the lion’s share of production—the largest 12% of farms by size, with annual sales above $250,000, generate 84% of total national agricultural output.[83]  The very largest farms, called “million dollar farms” because they generate sales over that amount annually, comprise only 47,600 of the approximately two million farms in the United States but produce 53% of agricultural output.[84] Taken together, these trends suggest that when children under sixteen go out from home to work on the farm, they get hired at places where their supervisors are likely not to be their relatives.

As an occupational class, farmers are aging rapidly, with 28% at least sixty-five years old, in comparison to 8% of self-employed workers in non-agricultural positions who have reached that advanced age.[85]  According to the USDA, these statistics have prompted “concerns about a mass exit of farmers from agriculture in the near future,”[86] allowing opponents of the DOL child labor rule to hint darkly that if farmers are not allowed to inspire their children to stay in farming, agriculture as a whole could stumble and fall.[87]  Senator John Thune (R-S.D.), the sponsor of legislation to block funding for the DOL proposal that attracted forty-four co-sponsors in the Senate and may well have persuaded the Obama Administration to kill the rule, warned that, “[i]f this proposal goes into effect, not only will the shrinking rural workforce be further reduced, and our nation’s youth be deprived of valuable career training opportunities, but a way of life will begin to disappear.”[88]  But the USDA dismisses those anxieties because the largest and most productive farms have operators who are considerably younger.[89]  That fact refutes the notion that unless people are allowed to hire teenagers freely for any job on the farm, agriculture as an industry will fail as young people desert rural life and migrate to big cities.

DOL estimates that only 56,000 children under the age of sixteen would be affected by its proposal, although this number may well be an underestimate.[90]  This estimate is based on 2006 data compiled by NIOSH as part of its Childhood Agricultural Injury Survey.[91]  A March 2011 entry on the NIOSH website states that 1.03 million people younger than twenty resided on farms in 2010.[92]  Although the NIOSH web site does not break down this figure by age, it is difficult to imagine that 974,000 of this total falls in the sixteen to twenty age range, nor is it readily apparent why DOL used 2006 data when 2010 data were available.

Further indication that reliable statistics in this area are elusive is a 2008 evaluation of NIOSH research programs by the National Academies of Science, which estimated that some 993,000 children fifteen years old and younger worked on U.S. farms and ranches in 2006.[93]  Researchers writing for the Journal of Agricultural Safety and Health estimate that half of all youth under twenty who live in farm households worked on farms in 2006, with the largest number deriving from the ten-to-fifteen-year-old age group.[94]  The researchers found that an additional 307,000 people younger than twenty who did not live on farms were hired to do work that same year.[95]

In sum, farms are larger and employ more people than either the agriculture lobby admits or DOL counts.  The universe of children hurt on farms is likely to be significantly larger than the government has yet counted or the agriculture lobby is willing to acknowledge.  The appealing image of children being mentored by their parents as they cuddle baby animals, weed a row of lettuce in the garden behind the farm house, or milk a tranquil cow does not reflect the reality that commercially productive farms are big and getting bigger, and have long since departed from this idyllic image, either in theory or in practice.

3.     Willful Distortions

Comedian Jon Stewart has perfected the practice of juxtaposing videotape of a politician’s statement on one day against a video showing her saying something entirely different years earlier or months later.[96]  He manages to make these opportunistic explorations of the candid camera as humorous for his audience as it should be uncomfortable for his targets.  Similarly uncomfortable but much less amusing is a head-on comparison of what the proposed rule actually said and what its critics claimed it said.  Readers will hopefully keep in mind that none of these provisions, as imagined or in reality, would apply to situations where children are working under the direct supervision of their parents.

Statement of Richard R. Ebert, Will-Mar-Re Farms:

As I understand the proposed rule, DOL would limit the ability of youth to milk cows, which my children have often done.  The rule would also likely restrict the ability of children to work with calves, which is a very rewarding experience and an appropriate life lesson for today’s youth.[97]

Federal Register Notice Preamble for Proposed Rule:

The Department most recently has investigated the serious injury of a 15-year-old female who was pressed against a metal corral by a stampeding calf.  The minor was employed to herd livestock in and out of pens in preparation for sale and/or transport.  The young worker, who was knocked down and then stomped by hooves, suffered a life-threatening laceration of her liver, broken ribs, a cracked femur, and a crushed bile duct.  Complications arising from her injuries prolonged her hospital stay to over five weeks.[98]

Federal Register Notice Text of Proposed Rule:

(4) Certain occupations involving working with or around animals (Ag H.O. 4).  Working on a farm in a yard, pen, or stall  occupied by an intact (not castrated) male equine, porcine, bovine, or bison older than six months, a sow with suckling pigs, or cow with newborn calf (with umbilical cord present); engaging or assisting in animal husbandry practices that inflict pain upon the animal and/or are likely to result in unpredictable animal behavior such as, but not limited to, branding, breeding, dehorning, vaccinating, castrating, and treating sick or injured animals; handling animals with known dangerous behaviors; poultry catching or cooping in preparation for slaughter or market; and herding animals in confined spaces such as feed lots or corrals, or on horseback, or using motorized vehicles such as, but not limited to, trucks or all terrain vehicles.[99]

Statement of Chris Chinn, Owner, Chinn Hog Farm, on behalf of the American Farm Bureau Federation:

For instance, DOL has the authority to designate occupations that are “particularly hazardous.”  But it appears they have gone well beyond that authority in the proposal.  In [hazardous order] #2, for instance, they have outlawed youths under 16 from operating any equipment that is “operated by any power source other than human hand or foot power.”  That would appear to include battery powered tools like screwdrivers or flashlights.  It also appears to mean that a garden hose, which is powered by water pressure, would be off limits as well.  It is simply nonsense for DOL to think Congress gave them the authority to outlaw 15 year olds from watering a lawn.[100]

Federal Register Notice Preamble for Proposed Rule:

The fact that employees of this industry routinely perform a variety of tasks is also evidenced by the number and types of child labor violations that the [DOL] WHD has documented . . . .  WHD has found minors . . . operating several types of power-driven woodworking machines (in violation of HO 5); operating several types of power-driven hoisting apparatus, such as forklifts, manlifts, skid loaders, and back hoes (in violation of HO 7) . . . .[101]

Federal Register Notice Text of Proposed Rule:

(2) Occupations involving the operation of power-driven equipment, other than agricultural tractors (Ag H.O. 2). Operating and assisting in the operation of power-driven equipment.

(i)          Definitions:

Farm field equipment means implements, including self-propelled implements, or any combination thereof used in agricultural operations.

Farmstead equipment means agricultural equipment normally used in a stationary manner.  This includes, but is not limited to, materials handling equipment and accessories for such equipment whether or not the equipment is an integral part of a building. . . .

Implements shall include, but not be limited to, power-driven equipment and tools used in agricultural occupations such as farm field equipment and farmstead equipment as defined in this section.

Operating includes the tending, setting up, adjusting, moving, cleaning, oiling, repairing, feeding or offloading (whether directly or by conveyor) of the equipment; riding on the equipment as a passenger or helper; or connecting or disconnecting an implement or any of its parts to or from such equipment.  Operating also includes starting, stopping, or any other activity involving physical contact associated with the operation or maintenance of the equipment.

Power-driven equipment includes all machines, equipment, implements, vehicles, and/or devices operated by any power source other than human hand or foot power, except for office machines and agricultural tractors as defined in paragraph (b)(1)(i) of this section. The term includes lawn and garden type tractors, and lawn mowers that are used for yard mowing and maintenance.[102]

4.     The Government Leviathan

The congressional leaders of the opposition to the DOL child labor proposal are strongly opposed to big government, Washington bureaucrats, and their interference with the rural life enjoyed by family farmers.  As Senator John Thune put it:

I am pleased to hear the Obama Administration is finally backing away from its absurd 85 page proposal to block youth from participating in family farm activities and ultimately undermine the very fabric of rural America, but I will continue working to ensure this overreaching proposal is completely and permanently put to rest.  The Obama DOL’s youth farm labor rule is a perfect example of what happens when government gets too big.[103]

Congressman Denny Rehberg added: “I’m just appalled.  It really bugs me to read something like this and expect this one-size-fits all knowledge from Washington, D.C., to try and determine what is appropriate for agriculture within a state like Montana.  It just baffles me.”[104]

But they support the maintenance—and, indeed, the expansion—of farm subsidy programs such as crop insurance:

U.S. Senator John Thune says they are . . . crafting a better crop insurance program in the new bill, partly at the request of South Dakota farmers.  “That’s what they told me over and over was the most important thing in this Farm Bill was a good strong crop insurance program, so we worked very hard to have a good strong crop insurance program in the bill,” Thune said.[105]

“Time and again the Obama Administration and their Senate allies have demonstrated how little they understand the challenges folks in Montana face on farms and ranches,” Rehberg said.  “The Farm Bill actually spends more on food stamps for urban populations than supporting our family farms.”[106]

Crop insurance subsidies, which pay two-thirds of the costs of buying such policies for eligible farmers, cost U.S. taxpayers about $7 billion during the last fiscal year.[107]  The government also pays farms to leave unproductive land to lie fallow, but skyrocketing prices for acreage in places like Senator Thune’s and Representative Rehberg’s respective home states of South Dakota and Montana have led farmers to sell large swaths of unproductive land to each other.[108]  Because crop insurance will be available to insure them against the likelihood that they will be unable to generate full production on such acreage, this trend could expand the federal program by billions of dollars.[109]

The inconsistency between furious resistance to “big government” and “Washington” in a regulatory context and avid demands that Washington must continue to supply federal subsidies is hypocritical, to say the least.  But distasteful, inconsistent, and self-interested behavior is common in the political scrum.  In fact, allowing people with special interests to advocate freely before Congress is a central feature of our constitutional system of government.  The premise of that dynamic is that through temperate debate, negotiation, log rolling, and the balancing of regional interests, Congress and the White House will formulate compromises that allow one of the most enduring democracies in the world to go forward.  But, of course, that outcome is far from what happened with respect to the child labor rule.

D.    Collateral Damage: The Migrant Child

Migrant children follow their parents on a yearly odyssey to hand harvest high value crops such as tomatoes and blueberries, moving from south to north throughout the country.[110]  FLSA prohibits parents from withdrawing children under sixteen from school,[111] but this prohibition is often ignored, in part because children cannot sustain the burden of both work and their education.[112]  DOL has found children as young as nine or ten harvesting onions—it even had one case where a child as young as six was discovered doing this work,[113] but the more common age to start work is twelve.[114]

Migrant children confront a range of hazards in the field.  The most common are working in unrelenting heat or cold, for ten or more hours a day, without any opportunity to rest in a more comfortable environment.[115]  They work with sharp implements and use power-driven equipment without adequate training.[116]  They climb tall ladders to pick fruit, often under dangerous conditions.[117]  And they come in constant contact with pesticides, sometimes through drift from adjoining fields, sometimes through residue, and sometimes from working in a field that was being sprayed at the time.[118]

Available studies and reports estimate that anywhere from 165,000[119] to 400,000 child migrants harvest crops in the U.S. on an annual basis.[120]  Some 83% are Hispanic, lending an unpleasant aura of racial prejudice to the AFBF’s determined avoidance of the problem.[121]

The wide range of estimates is not surprising because substantial obstacles prevent the accurate collection of data.  Workers are employed seasonally and may not be present during a particular population survey.[122]  Illegal immigrants decline to participate in surveys out of fear of deportation.[123]  To get around legal restrictions, children even work under other people’s names.[124]  Nevertheless, the federal government’s haphazard and uncoordinated efforts to obtain better statistics are troubling.  The 2008 USDA farm worker profile explains that it relies on two inconsistent survey methods: cross-sectional estimates, which describe the total number of workers at any given time, and annual estimates, describing the total number of workers for the year.[125]  The National Agricultural Workers Survey (“NAWS”), self-described as the “only national information source on the demographic, employment, and health characteristics” of the crop worker population,[126]compiles population data from a series of annual surveys.[127]  The BLS identifies two types of surveys NAWS uses: random interviews with workers aged fourteen to seventeen at their worksite, and interviews with parent farm workers about their children younger than eighteen.[128]

FLSA and its implementing regulations do not address most of the hazards confronted by migrant children.  Under existing regulations, crop workers younger than sixteen are prevented from performing any of the tasks enumerated in the hazardous orders, though very few of the risks that pose the greatest threats to migrant children are listed.[129]  The proposed rule would have reduced the height restrictions for ladders from twenty to six feet,[130] prohibited the use of chain saws to remove stumps,[131] and strengthened pesticide protections.[132]

The preamble to the proposed rule said that DOL was considering adding a hazardous order addressing excessive heat and other egregious working conditions.[133]  The preamble noted that while long days of physical labor, especially during hot summer months, affect all crop workers, “young workers may not have the maturity and judgment to recognize the symptoms of heat stress, which can quickly become fatal.”[134]  Astoundingly, public comments submitted in opposition to the proposal lambast the suggestion of a hazardous order against excessive temperatures.  The Texas Farm Bureau defends the practice of harvesting in excessive heat because it is ubiquitous throughout the state;[135] the Tennessee Farm Bureau fears that the hazardous order would “create a paperwork nightmare”;[136] and a letter from over fifty agricultural organizations and businesses question the science supporting this type of hazardous order.[137]  One can only conclude that these organizations do not count among their membership the twelve-year-old migrant children who harvest crops in the 110-degree heat that is common in southern fields, once again underscoring the difference between the “family” farm experience and the lot of children who work for hire.

II.  Implications

A.     Administrative Law as Blood Sport

In an exceptionally important article published in the Duke Law Journal and entitled Administrative Law as Blood Sport: Policy Erosion in a Highly Partisan Age, Professor Thomas McGarity argues that the fundamental nature of rulemaking has changed drastically over the last few years.[138]  Rather than focusing primarily on convincing federal regulators that the outcome they desire is authorized by the statute and wise public policy, advocates on behalf of potentially regulated industries routinely take their objections to the White House and Congress seeking highly politicized intervention to compel regulators to do what they want.  Soliciting such intervention in regulatory battles with high financial stakes surely did not begin recently.[139]  What is different now, Professor McGarity’s analysis suggests, is that the lawyers who represent clients in such proceedings would be committing a kind of malpractice if they did not pull out all these stops.[140]

The case study Professor McGarity uses to illustrate what he calls “blood sport” rulemakings—the Federal Reserve Board’s (“the Fed”) effort to regulate the interchange fees that banks charge consumers for using debit cards—had heavily moneyed interests on both sides of the table because it affected the distribution of billions of dollars.[141]  Major retailers and consumer groups supported regulatory controls on the fees and, perhaps needless to add, the banking industry opposed them.[142]  The campaign involved trips to court, intense lobbying of the Fed’s staff, campaign contributions to key members of Congress closely associated in time with legislative action on behalf of a warring industry, and even mass advertising in the Washington, D.C. metropolitan area’s metro system.[143]  The banks solicited the support of groups that seemed to have little at stake in the rulemaking, including Americans for Tax Reform and the Christian Coalition of America.[144]

When the banks went to Congress because they did not like the Fed’s rulemaking proposal, they received crucial support from Senator Jon Tester of child labor fame, who offered an appropriations rider to block the Fed from taking action on the rule for two years.[145]  The rider did not pass, so the swarm of lobbyists trudged back downtown to the Fed and across town to the courts for a second round.[146]

Unlike that extravaganza, the battle over the rule regarding child labor in agriculture was an ignominious rout.  The organizations that represent children—especially migrant labor children—could not hire lobbying powerhouses to represent their interests.[147]  The Obama Administration cut and ran at the first sign of trouble.[148]  No one went to court, and no one took a vote in Congress.  Instead, a one-sided and misleading campaign organized by the AFBF that lasted only a period of months ensured that the proposal was swept off the table indefinitely.[149]

Why the AFBF was so ferocious in opposing the proposal remains elusive.  Its staff may have believed with all sincerity that the rules violated long-standing, libertarian values shared by the trade association’s members and that these values were important to uphold regardless of lobbying costs.  But with the so-called “farm bill” containing crop insurance and other subsidies up for reauthorization at the same time that the child labor dispute unfolded, it is difficult to imagine that, despite its large size, the AFBF would devote resources to such an abstract principle.

More cynical answers seem substantially more likely.  The issues posed by the rulemaking, as the AFBF explained them, offered a golden opportunity to whip its membership up into a frenzy of resentment against government, over the long term assisting in the election of sympathetic members of Congress and maybe even the presidency.  Despite President Obama’s rapid retreat at the urging of Democratic Senators Tester  and Franken, AFBF members are unlikely to be converted to the notion that, on a national basis, the two major political parties offer equivalent opportunities to pursue their agenda.

As likely, implementation of the proposal would have imposed significant costs on the commercial farms with the most clout in that organization.  Children provide heavily discounted harvesting services to large farmers because federal law does not require that they earn the minimum wage, and they often do “piece work”; that is, they are paid by the bucket of crop harvested.[150]  It also seems probable that a significantly larger universe than DOL’s estimate of 56,000 covered children would have been protected by the rule.  Despite the weakness of DOL’s enforcement efforts, million dollar and larger farms are simply unwilling to take any chances on violating more stringent requirements.

Professor McGarity predicts that, for the foreseeable future, blood sport rulemaking is likely to dominate the landscape for high-profile, contentious rules with big money at stake.[151]  In the process, rulemaking will become slower and more opaque while Presidents will have a significantly more difficult time attracting the best and brightest to government service.  He sees these developments as gravely threatening to the rule of law in the country, shifting the debate from the rulemaking process and judicial review, with all of their procedural safeguards, to arenas where only the wealthy can play and where the scope of the issues at stake is far larger than the specifics of a single rule:

[T]his Article concerns the possible emergence of a new period, one in which the animating debate is not over the legitimacy of administrative rulemaking but over the legitimacy of any government intervention into private economic arrangements. . . .  When the legitimacy of government intervention is a seriously debated question in the broader political economy, every significant rulemaking exercise becomes a possible occasion for acrimonious debate over the need for government regulation.  Those who contest the legitimacy of any intervention feel free to launch an all-out war against an agency whenever the agency engages in a significant rulemaking effort, without regard to the impact on the agency’s ability to carry out its statutory mandate.[152]

B.     Who Should Care?

I have no doubt that Professor McGarity is right with respect to both his diagnosis and his prognosis.  In fact, the story told here not only supports his analysis but suggests that the trends he identifies are moving faster, and cutting a wider swath through the administrative system than suggested by his case study regarding more equally matched opponents and considerably higher stakes.  The real question is whether anyone but those who cannot afford to play blood sports should regret these developments.

For regulatory beneficiaries without considerable funding, the conversion of administrative policy making into a galactic battle with multiple, expensive fronts is an unmitigated disaster, as is the diminution—arguably to insignificance—of the concept that the federal civil service, when implementing laws like FLSA, has as its primary mission the identification and protection of the public interest defined by Congress until and unless the statutes are repealed.  We can take as a given that whenever a rulemaking proposal would gore the ox of an industry with resources, and its beneficiary is the public as a whole, much less a minority group that inspires hostility in some quarters, the trend toward blood sport rulemaking will mean increasingly frequent victories for the financially endowed side.  As disturbing, for agencies that protect public health, worker and consumer safety, and the environment, unless Congress has bestowed a specific statutory mandate and deadline for the promulgation of a rule, the chilling effect of the blood sport trend cannot be underestimated.[153]  How sanguine potentially regulated industries can be when rules only implicate their own interests is quite another story.

C.     Blood Sport to the Death

The universe of rules that arbitrate intramural (within one industry) and intermural (between different industrial sectors) disputes is difficult to quantify and define.  But at the very least, this universe includes disagreements over taxes, tariffs and other forms of trade restrictions, federal contracting and debarment, receipt of federal grants and loans, communications, securities and banking marketing and sales, and health care reimbursement.  If one contemplates the possibility that trends in rulemaking could infect other administrative decision making—such as permitting, licensing, and enforcement—additional areas include antitrust prohibitions, patents and other forms of intellectual property protections, drug approvals, new chemical marketing and sales, and many others.

The elaborate procedural and substantive constraints on administrative decision making that have been engrafted on the system are also impossible to summarize neatly, but like any area of law, they are designed to offer advance guidance and, even more important, business certainty to potential combatants.  The power of this predictability to encourage private resolution of such disputes cannot be underestimated.

At the very least, the advent of blood sport rulemaking reverses these trends.  One party to a dispute will not be able to ascertain in advance when its opponent will step into the blood sport arena, moving beyond the relatively structured, highly controlled world of rulemaking notices, comments, visits with rulemaking staff or hearings before administrative law judges, visits to the White House Office of Information and Regulatory Affairs when appropriate (and perhaps even when not), requests for the production of data, exhaustion of administrative remedies, appeals to district and circuit courts, standards of review, petitions for rehearing, appeals, and, at long last, a final decision.  Like the difference between English minuets and modern video games, the brave new world of blood sport administrative law will not be for the faint hearted.  The shrewdness of the strategizing, the choice of the most effective lobbying firm, and the avoidance of media attention will all play a role in who wins or loses.  Nevertheless, the resolution of such matters is likely to become far more expensive the higher the stakes, the more numerous the players, and the greater the number of those players who decide to play.


In the short run, President Obama’s efforts to defuse the most extreme accusations regarding the link between the bad economy, loss of jobs, and protections like the child labor rule are misguided, counterproductive, and could jeopardize his legacy whether or not he serves a second term.  Because placating his opponents is impossible, he ends up in a situation where he is exposed to escalating demands that require further, costly concessions.  This defensive posture also means that the White House has assumed de facto control over the agencies and departments that should be making these decisions.  On the inevitable occasion when one of the extraordinarily harmful incidents addressed by the stifled rules recurs, the President will have no buffer to blunt the fury of injured people and their families.

Over the long run, short circuiting the well-worn process of administrative decision making chills initiative and ruins morale at agencies already rendered weak and ineffective by budget cuts, bureaucracy bashing, and outmoded legal authority.  Undoubtedly, blood sport administrative law will cause grave damage to the effective operation of government.  And for regulated industries that cannot resist pursuing such relief, the true lesson may well turn out to be that you should take care what you wish for.  Their own, home-grown version of blood sport could cost a great deal of money and leave few contestants alive.

          *   Rena Steinzor is a professor at the University of Maryland Carey School of Law and the president of the Center for Progressive Reform (, a voluntary association of some fifty-six (primarily legal) academics who work on issues involving the protection of public health, worker and consumer safety, and the environment within the Executive and Judicial Branches.  She thanks Mary Miller, an expert in child labor protections at the Washington State Department of Labor and Industries, for excellent advice on the issues addressed here; Mollie Rosenzweig, Allan Thorson, and Jessica Laws for outstanding research (Ms. Rosenzweig in particular analyzed the plight of migrant children); and Susan McCarty for outstanding editorial assistance.  All errors are the author’s responsibility.

        [1].   Barb Ickes, Grain Bins: Now Defunct Company Paid over $200,000 in Fines over Grain Bin Deaths, Quad City Times (Dec. 6, 2011),
-bin-deaths/article_c4e179c2-206f-11e1-af6b-001871e3ce6c.html.  For a description, photographs, and a diagram of these hazards, see Occupational Safety & Health Admin., Grain Handling, U.S. Dep’t of Lab., (last visited June 25, 2012).

        [2].   Robert Barron, Kremlin Boys Still Critical, Enid News & Eagle (Aug. 8, 2011),  For a description and photographs of these hazards, see Grain Auger Safety, Univ. of Ill. Extension,
(last visited June 25, 2012).

        [3].   Child Labor Regulations, Orders and Statements of Interpretation; Child Labor Violations—Civil Money Penalties, 76 Fed. Reg. 54,836, 54,836–37 (proposed Sept. 2, 2011).

        [4].   29 C.F.R. pt. 570 (2011).

        [5].   See Child Labor Regulations, Orders and Statements of Interpretation; Child Labor Violations—Civil Money Penalties, 76 Fed. Reg. at 54,839, 54,843 (citing 35 Fed. Reg. 221 (Jan. 7, 1970)) (explaining that DOL last promulgated a rule defining hazardous occupations in agriculture that children could not perform in 1970 and describing injury and fatality rates for children working in agriculture).

        [6].   Id. at 54,843 (to be codified at 29 C.F.R. § 570.70).

        [7].   29 U.S.C. § 203(e)(3) (2006) (demonstrating that the definition of “employee” does not include “any individual employed by an employer engaged in agriculture if such individual is the parent, spouse, child, or other member of the employer’s immediate family”).

        [8].   Child Labor Regulations, Orders and Statements of Interpretation; Child Labor Violations—Civil Money Penalties, 76 Fed. Reg. at 54,849–52 (to be codified at 29 C.F.R. § 570.72).

        [9].   Id. at 54,852–58 (to be codified at 29 C.F.R. § 570.71(a)(1)–(3), (7)) (Proposed Ag. H.O. 1–2).

      [10].   Id. at 54,858–60 (to be codified at 29 C.F.R. § 570.99(b)(4)) (Proposed Ag. H.O. 4).

      [11].   Id. at 54,862 (to be codified at 29 C.F.R. § 570.71(a)(8)) (Proposed Ag. H.O. 8).

      [12].   Id. at 54,864–65 (to be codified at 29 C.F.R. § 570.99(b)(13)) (Proposed Ag. H.O. 13).

      [13].   The Future of the Family Farm: The Effect of Proposed DOL Regulations on Small Business Producers, Hearing Before the Subcomm. on Agriculture, Energy, & Trade of the H. Comm. on Small Business, 112th Cong. pt. 1 (2012) [hereinafter Family Farm Testimony] (statement of Nancy J. Leppink, Deputy Wage and Hour Administrator, Wage and Hour Division, United States Department of Labor), available at

      [14].   See generally Family Farm Testimony, 112th Cong. (2012), available at

      [15].   Dave Jamieson, Denny Rehberg, GOP Congressman and Senate Hopeful, Blasts Child Labor Regulations, Huffington Post (Feb. 2, 2012, 3:36 PM),

      [16].   Id.

      [17].   See, e.g., Family Farm Testimony, supra note 13, pt. 3, at 2 (statement of Richart B. Ebert, co-owner and operator, Will-Mar-Re Farms, Blairsville, Pennsylvania), available at

      [18].   Id. at 5–6.

      [19].   Family Farm Testimony, supra note 13, pt. 2, at 1 (statement of Chris Chinn, owner, Chinn Hog Farm), available at

      [20].   29 U.S.C. § 213(c) (2006).

      [21].   See generally Human Rights Watch, Fields of Peril: Child Labor in US Agriculture (2010), available at  For additional background, see generally The Harvest (Shine Global 2011).

      [22].   Child Labor Regulations, Orders and Statements of Interpretation; Child Labor Violations—Civil Money Penalties, 76 Fed. Reg. 54,836, 54,865 (proposed Sept. 2, 2011).

      [23].   Press Release, U.S. Dep’t of Labor, Wage and Hour Div., Labor Department Statement on Withdrawal of Proposed Rule Dealing with Children Who Work in Agricultural Vocations (Apr. 26, 2012) [hereinafter WHD Press Release] (emphasis added), available at  Worth noting is the statement’s exclusion of child labor and farm worker advocates, as well as safety and health experts, from its roster of “rural stakeholders.”  The list suggests that it was more interested in pandering to opponents of the rule than ensuring the implementation of a rigorous and effective training program.  Id.

      [24].   Election 2012: Montana Senate, Rasmussen Rep. (June 19, 2012),
(showing a poll from June 18, 2012 with Rehberg at 49% and Tester at 47% of likely voters) (access to complete article requires subscription).

      [25].   Sam Hananel, Obama Criticized in Reversal on Child Farm-Labor Regulations, Wash. Post (Apr. 29, 2012),

      [26].   Philip Elliott, Romney and Obama Compete for Rural Voters’ Support, Bloomberg Bus. Wk. (June 15, 2012), (reporting that Romney is expected to win the majority of rural voters but that the Obama campaign is trying to keep the margin as narrow as possible, especially in swing states like Colorado and New Hampshire).

      [27].   Econ. Research Serv., USDA, State Fact Sheets (2012), available at

      [28].   In the aftermath of the 2010 midterm elections, with conservatives firmly in charge of the House of Representatives and already mounting an attack on regulations that allegedly cripple the economy, President Obama pivoted from neglect to repudiation, publishing an opinion piece in the Wall Street Journalpromising to create a “21st-century” system that eliminates “dumb” rules and avoids “excessive, inconsistent, and redundant regulation.”  Barack Obama, Op-Ed.,Toward a 21st-Century Regulatory System, Wall St. J., Jan. 18, 2011, at A17; see also Cass Sunstein, Op-Ed., 21st-Century Regulation: An Update on the President’s Reforms, Wall St. J., May 26, 2011, at A17.  The President has not defended the mission of the agencies or the performance of the people he appointed to lead them in the face of blistering Republican attacks on overregulation, except in the context of explaining how far he is willing to go to eliminate unnecessarily burdensome regulations.  See, e.g., Alan Fram, Obama Proposes Revamping Regulations to Aid Businesses, Wash. Post (May 30, 2011),
-revamping-regulations-to-aid-businesses/2011/05/29/AG2QYOEH_story.html (“Overall, the drive would save hundreds of millions of dollars annually for companies, governments and individuals and eliminate millions of hours of paperwork while maintaining health and safety protections for Americans, White House officials said.”).

      [29].   See T.W. Farnam, U.S. Chamber of Commerce Begins Multi-Million Dollar Ad Campaign in Congressional Races, Wash. Post (Feb. 9, 2012),
-commerce-begins-multi-million-dollar-ad-campaign-in-congressional-races/2012/02/09/gIQA1Rr51Q_blog.html; John McCardle & Emily Yehle, Obama Admin Outlines 500 Reforms It Says Will Save Businesses Billions, N.Y. Times (Aug. 23, 2011),
-obama-admin-outlines-500-reforms-it-says-will-24456.html?pagewanted=all; Sam Stein, Obama’s Executive Order Pits Him, Yet Again, Against Chamber of Commerce, Huffington Post (Apr. 21, 2011),

      [30].   Roger Fisher et al., Getting to Yes: Negotiating an Agreement Without Giving In 21 (1991) (arguing that a successful negotiator does not respond to competitive tactics with concessions, but by forcing the other party to negotiate based on the argument’s merit); Roy J. Lewicki et al., Negotiation 37–42 (McGraw-Hill/Irwin 6th ed. 2009) (noting that the negotiator should respond to competitive tactics by mirroring the aggressive behavior or by challenging the use of competitive tactics and treating them as a separate issue from the substance of the negotiation); Robert J. Condlin, Bargaining With A Hugger: The Weaknesses and Limitations of a Communitarian Conception of Legal Dispute Bargaining, Or Why We Can’t All Just Get Along, 9 Cardozo J. Conflict Resol. 1, 70–73 (2007) (finding that a cooperative response to highly competitive tactics is ineffective because conciliatory behavior will be exploited); Donald G. Gifford, A Context-Based Theory of Strategy Selection in Legal Negotiation, 46 Ohio St. L.J. 41, 60–61 (1985) (finding that pursuing a cooperative strategy in the face of competitive negotiation tactics causes the negotiator to lose standing, is perceived as a sign of weakness, and leaves him open to exploitation).

      [31].   See, e.g., Amy Sinden et al., Ctr. for Progressive Reform, Twelve Crucial Health, Safety, and Environmental Regulations: Will the Obama Administration Finish in Time? (2011), available at (cataloguing twelve very important health, safety, and environmental rules that were pending eighteen months before the 2012 presidential election); Rena Steinzor & James Goodwin, Ctr. for progressive Reform, Opportunity Wasted: The Obama Administration’s Failure to Adopt Needed Regulatory Safeguards in a Timely Way is Costing Lives and Money (2012), available at (explaining that six months before the election, the Administration still had not promulgated or proposed the vast majority of these initiatives).

      [32].   Thomas O. McGarity, Administrative Law as Blood Sport: Policy Erosion in a Highly Partisan Age, 61 Duke L.J. 1671, 1680–81 (2012).

      [33].   To get a sense of the AFBF’s mission, staff, and sponsored activities, see generally Am. Farm Bureau Fed’n, (last visited July 16, 2012).

      [34].   Press Release, U.S. Dep’t of Labor, Bureau of Labor Statistics, Nat’l Census of Fatal Occupational Injuries (Preliminary Results) 4 chart 2 (Aug. 25, 2011),available at

      [35].   Id. at 1, 3.

      [36].   U.S. Dep’t of Labor, Report on the Youth Labor Force 58 (rev. ed. 2000) [hereinafter Report on the Youth Labor Force], available at

      [37].   Id. at 60.

      [38].   Child Labor Regulations, Orders and Statements of Interpretation; Child Labor Violations—Civil Money Penalties, 76 Fed. Reg. 54,836, 54,846 (proposed Sept. 2, 2011) (to be codified at 29 C.F.R. pt. 570).

      [39].   29 C.F.R. § 1910.272(g)(2) (2011).

      [40].   Child Labor Regulations, Orders and Statements of Interpretation; Child Labor Violations—Civil Money Penalties, 76 Fed. Reg. at 54,870.

      [41].   Id.

      [42].   10 U.S.C. § 505 (2006) (allowing seventeen-year-olds to enlist in the armed services with parental permission and eighteen-year-olds to enlist on their own).

      [43].   See, especially, the statement of Nancy Leppink, in which she stated:

After receiving a number of comments from the agriculture community on the need to provide the Department with further input on the parental exemption, the Department announced on February 1, 2012, that it would re-propose the parental exemption portion . . . .  The Department recognizes the unique attributes of farm families and rural communities.  The re-proposal process will seek comments and input as to how the Department can comply with statutory requirements to protect children, while respecting rural traditions.

Family Farm Testimony, supra note 13, at 1–2.

      [44].   Catherine Rylatt, Catherine Rylatt on Protecting Young Workers from Tragedy, Coalition for Sensible Safeguards, (last visited June 25, 2012).

      [45].   Report on the Youth Labor Force, supra note 36.

      [46].   Id. at 61–64.

      [47].   Child Labor Regulations, Orders and Statements of Interpretation; Child Labor Violations—Civil Money Penalties, 76 Fed. Reg. 54,836, 54,846 (proposed Sept. 2, 2011) (to be codified at 29 C.F.R. pt. 570).

      [48].   For an overview of these problems and citations to the many studies documenting them, see AFL-CIO, Death on the Job: The Toll of Neglect 10–13 (21st ed. 2012), available at

      [49].   Id. at 11.

      [50].   Id.

      [51].   Id.

      [52].   Child Labor Regulations, Orders and Statements of Interpretation; Child Labor Violations—Civil Money Penalties, 76 Fed. Reg. at 54,836–45.

      [53].   Id. at 54,839 (“The newly enacted FLSA section 13(c)(2) stated that ‘[t]he provisions of section 12 relating to child labor shall apply to an employee below the age of sixteen employed in agriculture in any occupations that the Secretary of Labor finds and declares to be particularly hazardous for the employment of children below the age of sixteen, except where such employee is employed by his parent or by a person standing in place of his parent on a farm owned or operated by such parent or person.’” (emphasis added)).

      [54].   Id. at 54,841 (“The parental exemptions in the FLSA, which permit children to be employed by their parents in some otherwise prohibited occupations, were not predicated on the belief that the children of business owners and/or farmers were more physically or mentally advanced, more safety conscious, or in possession of more cautious work habits than their peers.  Instead, these exemptions were granted in recognition of, and continue to rely upon, the concept that a parent’s natural concern for his or her child’s well-being will serve to protect the child.”).

      [55].   Report on the Youth Labor Force, supra note 36.

      [56].   See Robert A. Hoppe & David E. Banker, U.S. Dep’t of Agric., Structure and Finances of U.S. Farms, Family Farm Report 3 (2010), available at

      [57].   Id. at 2.

      [58].   Child Labor Regulations, Orders and Statements of Interpretation; Child Labor Violations—Civil Money Penalties, 76 Fed. Reg. at 54,841 (“Accordingly, application of the parental exemption in agriculture has been for over forty years limited to the employment of children exclusively by their parent(s) on a farm owned or operated by the parent(s) or person(s) standing in their place.  Any other applications would render the parental safeguard ineffective.  Only the owner or operator of a farm is in a position to regulate the duties of his or her child and provide guidance.  Where the ownership or operation of the farm is vested in persons other than the parent, such as a business entity, corporation or partnership (unless wholly owned by the parent(s)), the child worker is responsible to persons other than, or in addition to, his or her parent, and his or her duties would be regulated by the corporation or partnership, which might not always have the child’s best interests at heart.  As Solicitor of Labor Richard F. Schubert advised Congressman Walter B. Jones in his letter of September 12, 1972, ‘[e]mployment by a partnership or a corporation would not fulfill the [parental] exemption requirement unless the partnership was comprised of the child’s parents only or the corporation was solely owned by the parent or parents.’” (alterations in original)).

      [59].   Id. (“It does not matter if the assumption of the parental duties is permanent or temporary, such as a period of three months during the summer school vacation during which the youth resides with the relative.  This enforcement position does not apply, however, in situations where the youth commutes to his or her relative’s farm on a daily or weekend basis, or visits the farm for such short periods of time (usually less than one month) that the parental duties are not truly assumed by that relative.” (citation omitted)).

      [60].   Id.

      [61].   See Press Release, Nat’l Cattlemen’s Beef Ass’n, NCBA Backs Department of Labor’s Reconsideration of On-Farm Child Labor Regulations (Feb. 1, 2012), (arguing that DOL’s announcement that it would re-propose the rule “did not go far enough . . . [and that DOL] should scrap the provision completely”); Lynne Finnerty, What Went Right on Youth Labor Proposal, FBNews (May 28, 2012), (last visited Sept. 10, 2012) (congratulating the agricultural sector for effectively opposing the regulations, stating that “[e]veryone came together behind one rallying cry: the child labor rule had to go!”); Am. Farm Bureau, Twitter (Dec. 13, 2011), (“#mygoalfor2012 stop the child labor restriction bills”).

      [62].   Child Labor Regulations, Orders and Statements of Interpretation; Child Labor Violations—Civil Money Penalties, 76 Fed. Reg. at 54,844.  See generallyNIOSH, NIOSH Childhood Agricultural Injury Prevention Initiative (2009), available at

      [63].   Ron Nixon, Senate Advances Farm Bill, N.Y. Times (June 7, 2012),
-senate.html (“Among other provisions, the bill would eliminate direct payments to farmers and make expanded crop insurance program the primary safety net for farmers.  The government now spends about $7 billion a year on crop insurance to pay about two-thirds of the cost of farmers’ premiums.  Under the federal program, farmers can buy insurance that covers poor yields, declines in prices or both. . . .  Unlike other farm programs, the crop insurance program does not cap the amount of subsidies.”).

      [64].   The updates are explained in Child Labor Regulations, Orders and Statements of Interpretation; Child Labor Violations—Civil Money Penalties, 76 Fed. Reg. at 54,860–66 (to be codified at 29 C.F.R. pt. 570).

      [65].   According to a study by researchers at Purdue University, the grain storage industry experienced fifty-one entrapment incidents in 2010, with half resulting in death; twelve percent of this total involved children under the age of sixteen.  Id. at 54,846.

      [66].   The National Children’s Center for Rural and Agricultural Health and Safety has prepared a side-by-side comparison of existing requirements and the changes that would have been made by the DOL proposal.  See generally Mary E. Miller, Agricultural Child Labor Hazardous Occupation Orders: Comparison of Present Rules with 2011 Proposed Revisions (2011), available at

      [67].   Child Labor Regulations, Orders and Statements of Interpretation; Child Labor Violations—Civil Money Penalties, 76 Fed. Reg. at 54,852–55 (to be codified at 29 C.F.R. §§ 570.71(a)(1), .72) (“NIOSH notes that tractor-related incidents are the most common type of agricultural fatality in the U.S., and that tractor roll-overs are the most common event among those fatalities.”).

      [68].   Id. at 54,858–60 (to be codified at 29 C.F.R. 570.71(a)(2)–(4), 7)(“NIOSH cites several studies that demonstrate animals are one of the most common sources of injuries to children on farms and notes that, in 1998, it estimated that 20% of all injuries to youth under the age of 20 occurring on farms were animal-related.  NIOSH notes that animal-related farm injuries are a problem for farm workers of all ages, and that the dangers farm animals present are numerous.  Livestock-handling injuries are among the most severe of agricultural injuries; they are more costly and result in more time off work than other causes of agricultural injuries.”).

      [69].   Id. at 54,860–62 (to be codified at 29 C.F.R. 570.71(a)(5)–(6)) (“NIOSH . . . notes that data for all ages of workers suggest that permitting youth to work at heights up to 20 feet is not sufficiently protective, as the majority of fatal falls among agricultural production workers for which the height of the fall is recorded occurred from a height of 20 feet or less.  NIOSH also reports that lowering the height threshold for youth in agriculture to six feet would make the Ag H.O. more consistent with the occupational safety standards applicable to the construction industry. . . .  The Federal child labor provisions for nonagricultural occupations currently prohibit minors under 16 years of age from working from any ladders or scaffolds, regardless of their height.” (citation omitted)).

      [70].   U.S. Gov’t Accountability Office, HEHS-98-193, Child Labor in Agriculture: Changes Needed to Better Protect Health and Educational Opportunities 37–48 (1998), available at (blaming weak enforcement on the agriculture industry’s unique challenges and on declining resources); U.S. Gov’t Accountability Office, GAO-09-629, Wage and Hour Division Needs Improved Investigative Processes and Ability to Suspend Statute of Limitations to Better Protect Workers Against Wage Theft  1 (2009), available at (noting that “GAO found that WHD frequently responded inadequately to complaints . . .” and that GAO created ten fictitious cases for WHD and reported that WHD properly handled only one of the complaints); see also Human Rights Watch, supra note 21, at 73–77 (“[WHD]’s enforcement of child labor laws in agriculture has been extremely weak.”).  President Obama’s DOL Secretary, Hilda Solis, has taken steps to improve this track record.  Erik Eckholm, U.S. Cracks Down on Farmers Who Hire Children, N.Y. Times(June 28, 2010), (“‘I picked blueberries last year, and my 4-year-old brother tried to, but he got stuck in the mud,’ said Miguel, a 12-year-old child of migrants. ‘The inspectors fined the farmers, and this year no kids are allowed.’”).

      [71].   WHD Press Release, supra note 23.

      [72].   Andrea Billups, Child Farmworker Limits Pulled, Wash. Times, Apr. 30, 2012, at 10 (quoting both Democratic and Republican members of Congress who characterized the rule as an attack on the “rural way of life”); Hananel, supra note 25. But see Pam Tharp, Young Farmers Win Rules Battle, Palladium-Item (Richmond, IN), Apr. 30, 2012, at A1 (quoting Future Farmers of America advisor Don Sturgeon as saying that the rule “would have impacted people’s incomes and livelihoods as well.  Labor costs are high enough the way it is, and this would have affected profitability.”).

      [73].   Family Farm Testimony, supra note 13, pt. 2, at 1 (statement of Chris Chinn, American Farm Bureau Federation, owner, Chinn Hog Farm), available at

      [74].   The Act exempts children under sixteen years of age who are working on a farm owned or operated by their parent or a person standing in the place of their parent.  29 U.S.C. § 213(a)(6) (2006).

      [75].   Child Labor Regulations, Orders and Statements of Interpretation; Child Labor Violations—Civil Money Penalties, 76 Fed. Reg. 54,836, 54,876 (proposed Sept. 2, 2011) (to be codified at 29 C.F.R. § 570.97(b)).

      [76].   Press Release, Congressman Danny Rehberg, Rehberg on Youth Ag Rule Changes: Not Enough, Not Even Close (Feb. 1, 2012), available at; Sam Hananel, Child Labor Plan Changed by Labor Department, Huffington Post (Feb. 1, 2012),

      [77].   AFBF Files Comments on Child Labor, Cotton Farming, (last visited June 25, 2012) (noting that the AFBF had organized a coalition of seventy farm groups to oppose the proposal).

      [78].   Bob Stallman, President, Am. Farm Bureau Fed’n, Annual Address to Members, 92nd AFBF Annual Meeting: Producing Results 2, 4 (Jan. 10, 2010),available at

      [79].   Hoppe & Banker, supra note 56.

      [80].   Id.

      [81].   2012 Farm Sector Income Forecast, USDA Econ. Research Serv., (last updated Sept. 21, 2012).

      [82].   Hoppe & Banker, supra note 56, at v.  For these purposes, “family farm” is defined as a place where “the majority of the business is owned by the operator and individuals related to the operator by blood or marriage.”  Id. at 2.

      [83].   Id. at i, iv.

      [84].   Id. at 8–10.

      [85].   Id. at 22.

      [86].   Id. at 23.

      [87].   Family Farm Testimony, supra note 13, pt. 2, at 1, 5 (statement of Chris Chinn, American Farm Bureau Federation, owner, Chinn Hog Farm), available at; Senator Jerry Moran, Labor Dept.’s Overreach Could Threaten Life on the Farm, Politico (Apr. 19, 2012),

      [88].   Lawmakers Introduce Bills to Block Federal Labor Proposal, FBNews, Apr. 16. 2012 at 1, available at

      [89].   Hoppe & Banker, supra note 56, at 23–25.

      [90].   Child Labor Regulations, Orders and Statements of Interpretation; Child Labor Violations—Civil Money Penalties, 76 Fed. Reg. 54,836, 54,873 (proposed Sept. 2, 2011).

      [91].   Id.

      [92].   Nat’l Inst. for Occupational Safety & Health, A Story of Impact: Guidelines for Children’s Agricultural Tasks Demonstrates Effectiveness (2011),available at

      [93].   Nat’l Research Council & Institute of Medicine of the Nat’l Acads., Agriculture, Forestry, and Fishing Research at NIOSH 23 (2008), available at

      [94].   K.J. Hendricks & E.M. Goldcamp, Injury Surveillance for Youth on Farms in the U.S. 2006, 16 J. Agric. Safety & Health 279–91 (2010).

      [95].   Id.

      [96].   For information about the show and video clips from past programs, see generally The Daily Show, (last visited June 29, 2012).

      [97].   See, e.g., Family Farm Testimony, supra note 13, pt. 3, at 2 (statement of Richart B. Ebert, co-owner and operator, Will-Mar-Re Farms, Blairsville, Pennsylvania), available at

      [98].   Child Labor Regulations, Orders and Statements of Interpretation; Child Labor Violations—Civil Money Penalties, 76 Fed. Reg. 54,836, 54,847 (proposed Sept. 2, 2011) (to be codified at 29 C.F.R. § 570.99).

      [99].   Id. at 54,879 (emphasis added).

    [100].   Family Farm Testimony, supra note 13, pt. 2, at 4 (statement of Chris Chinn, owner, Chinn Hog Farm), available at

    [101].   Child Labor Regulations, Orders and Statements of Interpretation; Child Labor Violations—Civil Money Penalties, 76 Fed. Reg. at 54,847.

    [102].   Id. at 54,877.

    [103].   Greta Van Susteren, Department of Labor Drops Child Farm Work Proposal, Gretawire (Apr. 26, 2012),

    [104].   Tim Leeds, Rehberg Drops Gauntlet on Child Farm Labor, Havre Daily News (Feb. 6, 2012),

    [105].   Ben Dunsmoor, U.S. Senate Working on 2012 Farm Bill, Keloland TV (June 13, 2012, 6:06 PM),,133032.

    [106].   Marnee Banks, Rehberg: Farm Bill Doesn’t Support Family Operations, (June 22, 2012, 9:37 PM),

    [107].   Ron Nixon, Crop Insurance Proposal Could Cost U.S. Billions, N.Y. Times (June 6, 2012),

    [108].   Id. (“The sharp rise in the price of corn, wheat, soybeans and other crops, driven in large part by the growth of Asian economies, has caused farmers to plant land long prone to erosion and flooding.  In the prairies and rolling hills of the Northern Great Plains in the Dakotas and in Montana, millions of acres that are home to ducks and other waterfowl, and attractive grounds for hunters, are rapidly being turned into corn, soybean and wheat fields.”).

    [109].   Id. (“By guaranteeing income, farmers say, crop insurance removes almost any financial risk for planting land where crop failure is almost certain.  ‘When you can remove nearly all the risk involved and guarantee yourself a profit, it’s not a bad business decision,’ said Darwyn Bach, a farmer in St. Leo, Minn., who said that he is guaranteed about $1,000 an acre in revenue before he puts a single seed in the ground because of crop insurance.  ‘I can farm on low-quality land that I know is not going to produce and still turn a profit.’”).

    [110].   See generally Human Rights Watch, supra note 21, at 5–11.

    [111].   Family Farm Testimony, supra note 13, at 5-7.

    [112].   Human Rights Watch, supra note 21, at 5 (“Although their families’ financial need helps push children into the fields—poverty among farmworkers is more than double that of all wage and salary employees—the long hours and demands of farmwork result in high drop-out rates from school.”).

    [113].   Family Farm Testimony, supra note 13, at 8.

    [114].   Human Rights Watch, supra note 21, at 5 (“Seventeen-year-old Jose M., who described the shock he felt going to work at age 11, said that when he looks around the field and sees 12-year-olds, ‘I know how they feel.  I used to feel like that.  They have a face that says they don’t want to be here.’  He added, ‘Teachers at school know when kids turn 12.  They see the cuts on their hands.  They know a child at 12 goes to work.  No if’s, and’s, or but’s.’”).

    [115].   Id. at 5–11, 54–55.

    [116].   Id. at 3  (“Marcos told us that the first year he ‘used a chainsaw a couple of times but that was it.  If someone was doing something else, they’d say, Cut there.’  But when he returned to the same farm the next year at age 13, he used a chainsaw like everyone else.  When asked if he was taught how to use it, he replied: ‘You just have to start it, that was the most important thing.’” (internal quotation marks omitted)).  Other equipment used by children such as Marcos, including chemicals, knives, and tall ladders, can result in injury and death.  Id. at 7, 39–42.

    [117].   Id. at 42 (“Children described climbing tall ladders carrying heavy containers to pick fruit.  In the mornings, trees and ground are often wet with dew.  Workers often place one foot on a branch or use the top two steps of the ladder to extend their reach, and pick with one or both arms over their head reaching for fruit.  A young man who picked cherries, pears, and apples around Yakima, Washington, as a teenager said: ‘You carry 20–30 pounds in your bag. . . .  In the morning it’s pretty wet and the ladder gets wet.  If you take a wrong step, you’re down from the ladder.’”).

    [118].   Id. at 47–54 (“Andrea C. in Michigan said that on the farm where she works, pesticides are sprayed from a tractor: ‘Sometimes we’re passing by and they’ll spray anyways.’  Sam B. in Texas told us he was sprayed from an airplane the previous year.  A former child farmworker in North Carolina who now educates workers about pesticides told us that she had personally seen tobacco workers being sprayed with pesticides: ‘People don’t leave. . . .  People say, We can leave but we don’t want to because we’re afraid the patron [boss] will fire us.  They stay there because they’re afraid of their patron.’” (internal quotation marks omitted)).

    [119].   Hendricks & Goldcamp, supra note 94, at 282.

    [120].   The Harvest, supra note 21.

    [121].   U.S. Dep’t of Labor, Emp’t & Training Admin., The National Agricultural Workers Survey, (last updated Jan. 11, 2010) (providing demographic information for all crop workers, not only children).

    [122].   These obstacles include the fact that workers are employed seasonally and may not be present during a particular population survey, unauthorized workers fear authorities, and children who are not legally eligible for work are not counted as officially employed.  See William Kandel, Profile of Hired Farmworkers, A 2008 Update 55 (2008), available at
/media/205619/err60_1_.pdf; Human Rights Watch, supra note 21, at 16.

    [123].   Kandel, supra note 123.

    [124].   The Harvest, supra note 21.

    [125].   Kandel, supra note 123.

    [126].   U.S. Dep’t of Labor, Findings from the National Agricultural Workers Survey (NAWS) 2001–2002, at 1 (2005), available at

    [127].   Id. at 2.

    [128].   Report on the Youth Labor Force, supra note 36, at 52.

    [129].   Current regulations prevent using  a chain saw to cut down trees with a diameter greater than six inches, using ladders at a height greater than twenty feet, and handling certain pesticides and chemicals.  See 29 C.F.R. § 570.71 (2011) for complete list of agricultural hazardous orders.

    [130].   Child Labor Regulations, Orders and Statements of Interpretation; Child Labor Violations—Civil Money Penalties, 76 Fed. Reg. 54,836, 54,860 (proposed Sept. 2, 2011) (to be codified at 29 C.F.R. § 570.71(a)(6)).

    [131].   Id. (to be codified at 29 C.F.R. § 570.99(b)(5)).

    [132].   Id. at 54,863 (to be codified at 29 C.F.R. § 570.99(b)(9)).

    [133].   Id. at 54,865 (“The Department is also considering whether to create a new Ag H.O. that would limit the exposure of young hired farm workers to extreme temperatures and/or arduous conditions.”).

    [134].   Id.

    [135].   Letter from Ned Meister, Dir., Tex. Farm Bureau to U.S. Dep’t of Labor, Wage & Hour Div. 2–3 (Oct. 25, 2011), available at!documentDetail;D=WHD-2011-0001-1156 (“[Y]outh employed in harvesting of fruit, vegetables and berries is not an uncommon practice in Texas.”).

    [136].   Letter from Tenn. Farm Bureau Fed’n to U.S. Dep’t of Labor, Wage & Hour Div. 8–9 (Nov. 29, 2011), available at!documentDetail;D=WHD-2011-0001-4511.

    [137].   Letter from Advanced Ins. Marketers et al. to U.S. Dep’t of Labor, Wage & Hour Div. 23–25 (Dec. 1, 2011), available at!documentDetail;D=WHD-2011-0001-8885.

    [138].   McGarity, supra note 32, at 1679–80.

    [139].   See, e.g., Frank Ackerman et al., Applying Cost-Benefit to Past Decisions: Was Environmental Protection Ever a Good Idea?, 57 Admin. L. Rev. 155, 160–72 (2005) (describing the epic political battles over EPA’s early decision to ban lead in gasoline).

    [140].   McGarity, supra note 32, at 1748–50.

    [141].   Id. at 1682–84.

    [142].   Id. at 1684–85.

    [143].   Id. at 1682–1703 (describing the arduous twists and turns in this saga).

    [144].   Americans for Tax Reform advocates for a national, single rate, flat income.  For more information, see generally Am. for Tax Reform, visited July 18, 2012).  The Christian Coalition describes itself as “offer[ing] people of faith the vehicle to be actively involved in impacting the issues they care about.”  For further information, see generally Christian Coalition of Am., (last visited July 18, 2012).

    [145].   McGarity, supra note 32, at 1699–1700.

    [146].   Id. at 1700–03.

    [147].   See Lee Fang, Big Ag Industry Rallies to Support New Pro-Child Labor Legislation, Republic Rep. (Apr. 23, 2012, 9:00 AM), (“[The] children who might benefit from the labor regulations do not have the political resources to push back against the lobbying might of the industrial farms.”).

    [148].   Hananel, supra note 25.

    [149].   See, e.g., Robert Koenig, Critics Say “Misinformation” Killed Rules to Restrict Child Labor on Farms, St. Louis Beacon (May 1, 2012, 12:01 PM),!/content/24734/rules_on_child_labor_scuttled (detailing the “ads, talk radio shows, and social media” campaign waged by groups such as the AFBF and FFA in lieu of “serious debate”).

    [150].   29 U.S.C. § 213(a)(6) (2006) (exempting piece in agriculture work from minimum wage requirements); see also Human Rights Watch, supra note 21, at 6, 31–32 (explaining that many migrant children do piece work and that many more do not earn the minimum wage).

    [151].   McGarity, supra note 32, at 1721.

    [152].   Id. at 1723–24.

    [153].   Id. at 1761–62 (describing how blood sport strategies have combined with national and international crises to make agencies increasingly less capable of producing effective regulations).


By: Dorit Rubinstein Reiss


[N]ot all capture is bad.  It surely is bad for regulators to believe that ‘what’s good for General Motors is good for America’; but it is also undesirable for regulators to believe that ‘what’s bad for General Motors is of no consequence to America’.[1]

Observers of the administrative state warn against capture of administrative agencies and lament its disastrous effects.  This Article suggests that the term “capture,” applied to a close relationship between industry and regulator, is not useful; by stigmatizing that relationship—judging the relationship as problematic from the start—the stigmatization hides the relationships potential benefits.  The literature on capture highlights its negative results: lax enforcement of regulation, weak regulations, and illicit benefits going to industry.  This picture, however, is incomplete and in substantial tension with another current strand of literature which encourages collaboration between industry and regulator.  The collaboration literature draws on the fact that industry input into the regulatory process has important benefits for the regulatory state.  Industry usually has information no one else has and has more incentive to give that information to a friendly regulator.  Furthermore, working with industry can substantially improve the impact of regulation; voluntary compliance is cheaper and can be more effective than enforced compliance, and industry can help regulators minimize negative unintended consequences.  This Article suggests that instead of engaging in name calling, we should focus on identifying when a close industry-regulator relationship will work in the public interest and when it is likely to undermine it.  That is an empirical question.

For decades, scholars have discussed capture of administrative agencies—mainly, though not exclusively, by industry[2]—strictly in terms of the negative consequences.[3]  If “accountability” is often seen as the “hurrah word” of the administrative state,[4] capture can be seen as the “boo-word”; historically, up until quite recently, few have had anything good to say about it.[5]  The term capture itself is a discussion ender; if an agency is said to be “captured,” the regulatory results are presumed to be bad.  Like most negative labels, this presumption tends to obstruct efforts to arrive at the kind of clear understanding that leads to good policy prescriptions.

Capture refers to an extremely close relationship between regulators and industry.[6]  Some believe such a relationship is inherently dangerous and negative.  Reports prepared by Ralph Nader’s associates, the “Nader’s Raiders,”[7] reflect that spirit.  For example, the Nader report on the Food and Drug Administration (“FDA”) saw the FDA as a puppet in the hands of industry and claimed that “when the law allows administrative discretion, industry, not the consumer, benefits.”[8]  It evaluated the FDA’s supervision of firms and criticized its presumption that almost all manufacturers can be trusted to place the public interest before profit.[9]  The report strongly criticized the FDA’s decisions to attempt to educate firms about the need for compliance rather than punish them for noncompliance.[10]

In the same vein, the group’s study of the Federal Aviation Administration (“FAA”) accused the regulators of being so closely related to the industry that they promoted the industry’s interests over consumers’ safety.[11]  The problem with this approach is that it is one sided.  Yes, a cozy relationship between regulator and industry creates risks and may (though not inevitably) lead to terrible outcomes.  But an adversarial relationship between industry and regulator has its own costs, can itself lead to extremely negative outcomes, and thus has also been justifiably criticized.[12]

But it’s not just about what is the least worst choice.  A close relationship between agency and regulators can provide substantial benefits.  It can improve the information available to an agency, and it can improve regulatory results by increasing compliance and preventing negative unintended consequences.[13]  This is why, in the last few decades, a substantial amount of literature promoted more collaborative government with closer ties and even partnerships between the private sector and regulators.

While capture has benefits on its own, it should not be evaluated in a vacuum.[14]  Rather, we should ask what the realistic alternatives are and which realistic alternative will achieve the best result.  Sometimes capture will achieve better results than other options.[15]  Other times it will at least achieve results that are good enough, or better than, the previous status quo.[16]

The real question is not simply whether “it is good or bad.”  What we should be studying is when would a cozy agency-industry relationship lead to benefits and when would it lead to harm, in light of existing alternatives.  To understand the effects of agency-industry relationship and to make informed policy decisions with that information in mind, we should examine that question theoretically and empirically with as little bias as possible.

This Article makes three contributions to the literature.  First, it makes the point that there is an overlap between the literature on capture and the literature on collaboration, since both address a close relationship between regulator and industry and the results of such a relationship.  It then explicitly analyzes possible distinctions between the two concepts, concluding that the distinction between a situation of capture and a situation of collaboration is a matter of degree or of post-hoc evaluation of the results.  Second, it suggests that a close relationship between industry and regulator has important benefits and describes those benefits.  Finally, it argues that, thus far, the question of which factors increase the potential benefits and which factors increase the risks has been understudied.  This is an empirical question.  A proper study of this question requires theorization and careful examination in real life context.  This Article takes a first stab at answering this question by suggesting such factors.

This Article is a thought piece.  It draws on existing work and current examples to suggest a rethinking of existing scholarship.  It sets out a research agenda for future empirical research.  It does not itself, however, contain new empirical data (though I am in the process of conducting three such empirical studies).

Part I defines the terms capture and collaboration and describes the literature addressing them.  It demonstrates that the terms overlap and there is no clear distinction.  While the literature on capture and collaboration teaches us important insights about the relationship between agencies and industry, a discussion that goes beyond each alone is necessary.  Part II addresses the potential risks and promises of a close relationship between industry and regulator.  Part III suggests factors that can determine whether a close relationship is beneficial or harmful.  The Article then concludes by summarizing the paper’s contribution and explaining avenues for future research.

I.  Capture v. Collaboration

Consider the following two examples of agency-industry interaction.

Since 1975, the FAA has been making use of voluntary reporting programs to allow airlines and airline personnel to report safety problems in return for a guaranteed waiver of sanctions.[17]  Between 1990 and 2009, the FAA entered into agreements for voluntary reporting programs with seventy-three carriers.[18]  In 2001, the FAA promulgated a regulation[19] guaranteeing that it would not use voluntarily submitted safety information for punitive actions, nor would the information be released to third parties under the Freedom of Information Act.[20]  This removed a substantial source of concern for the airlines in relation to the voluntary reporting programs and increased the use of such programs.[21]  Cynics would say this is exactly what industry wanted and is clearly the result of capture.  It allows airlines to get away with violations of safety regulations without sanction because their close connections with the regulators assure them there will be none.

In 2007, a large number of Southwest Airlines planes were found to be in violation of an airworthiness directive,[22] and in some cases, parts were showing fatigue cracks (such cracks themselves are not an immediate problem, but their presence is the first sign of the approach of catastrophic failure).[23]  Apparently, an FAA inspector warned of the cracks as early as 2003, but nothing was done because of the close relationship between Principal Maintenance Inspector Douglas Gawadzinski and senior management at Southwest Airlines.[24]  The connections were so close that FAA personnel allowed Southwest to fly problematic aircraft and even warned Southwest in advance of upcoming inspections.[25]

In April 2011, a tragedy was narrowly averted when a Southwest plane was forced to make an emergency landing because of a catastrophic failure of sections of fuselage skin[26]—the inevitable result of neglected fatigue cracks.[27]  This may be seen as an indication that the FAA and Southwest have returned to their cozy relationship with potentially dangerous results, but this is probably not the case.  Mistakes can be made even without capture, and the National Transportation Safety Board’s (“NTSB”) investigation suggested this was such a case; apparently, none of the parties involved believed the part of the airplane in which the cracks occurred was stressed in a way that would lead to catastrophic failure.[28]  The FAA responded to the near accident by immediately issuing an emergency directive requiring detailed inspections of certain aircraft models when they accumulated 30,000 flight cycles, and thereafter at intervals of 500 flight cycles.[29]  The combination of the NTSB’s findings and FAA’s rapid response suggests a common mistake rather than regulatory failure.

This complex picture suggests that the relationship between the FAA and industry could give critics substantial cause for concern.  But if you take a step back and look at the general picture, what were the effects on air safety?

Allowing the airlines to disclose information without penalty increased the availability of information.[30]  A study by an independent scholar put the total number of reports generated at approximately 900,000 (compared to no avenue to submit such reports before the program was created).[31]  As pointed out by the Government Accountability Office (“GAO”), such data provide information that cannot be found in any other way.[32]  It may have led to fewer punitive measures against airlines, but if the goal was to make air travel safer—not just punish airlines—it seemed to help by increasing the available information.  In a recent piece, Russell Mills, who has been studying these programs for a long time, demonstrated a connection between the voluntary reporting and the FAA’s airworthiness directives, showing that they made a difference (presumably—though it’s hard to measure—for the better) in the regulation of air safety.[33]

An independent review team said the following about the programs: “We are phenomenally impressed with what this agency has achieved, in collaboration with the aviation industry, in driving accident rates down to extraordinarily low levels.”[34]

The rate of fatal accidents among commercial carriers is extremely low, and has dropped dramatically since the 1960s.[35]  While I cannot connect the reduction causally to voluntary reporting—because there were many other factors—the close relationship certainly did not harm, and possibly helped, the situation.

Now consider as a counter the story of the Minerals Management Service (“MMS”).[36]  The MMS received negative attention on two occasions between 2005 and 2010.  In the first case, a lengthy investigation of its Royalty in Kind program exposed a series of ethical problems (described by the Inspector General of the Department of the Interior as a “[c]ulture of [e]thical [f]ailure”).[37]  The MMS collected royalties from companies harvesting minerals from the continental shelf and some federal lands pursuant to leases.[38]  The Royalty in Kind program allowed the agency to receive a percentage of the oil or gas collected by the companies and sell it in lieu of cash royalties.[39]  This became a substantial source of revenue.[40]  The investigation by the Department of the Interior revealed a culture of receiving gifts from industry members—mostly of food, drinks, and lodging (in violation of federal ethics guidelines)—and of alcohol and drug abuse during industry-organized parties (in two cases agency members had to be lodged by the industry because they were too drunk to go home).[41]  There was evidence of relaxation of the rules in favor of the regulated companies, especially in allowing industry members to change bids after winning them.[42]

To complete the picture of a captured agency in thrall to its regulatees, other government officials accused the MMS of lax regulation and carelessness in providing BP with its drilling permit after the BP scandal.[43]  Mary Kendall, Acting Inspector General for the Department of the Interior, criticized MMS regulation as being “heavily reliant on industry to document and accurately report on operations, production and royalties” and pointed out that “[b]ecause MMS relies heavily on the industry that it regulates in so many areas, however, the possibility for, and perception of, undue influence will likely remain.”[44]  The agency was criticized for exempting BP from producing an Environmental Impact Statement—something the agency regularly did for offshore drilling in the Gulf of Mexico.[45]

In spite of this image of a captured agency and the clearly problematic behavior of some of its employees, a recent in-depth empirical examination of the agency’s structure and its history suggests that the accusations of capture obfuscate potentially deeper causes of the problems in the way the MMS functions; many of the problems the MMS ran into are the result of conflicting roles assigned to it, which may have influenced its collaborative approach, and this will not be fixed by the reorganization of the agency.[46]

These two examples serve two purposes.  First, at least some of the behaviors of both agencies can be classified as either collaboration or capture, depending on the observer’s point of view.  Second, they highlight the fact that the kind of close relationship that can be classified as capture can either yield benefits or lead to disastrous results.

A.     Capture in the Literature

Capture focuses on close connections between a regulator and the industry it regulates.[47]  The literature uses a variety of definitions to explain the results or features of capture.  One definition suggests that in a situation of capture, regulated industry members “persuade regulators to alter rules or be lenient in enforcing those rules.”[48]  A somewhat different definition emphasizes the consequences, suggesting that captured regulatory agencies are “persistently serving the interests of regulated industries to the neglect or harm of more general, or ‘public,’ interests. . . . [T]he accusation implies excessive regulated industry influence on regulatory agencies.”[49]

Carpenter and Moss suggest that capture “is the result or process by which regulation (in law or application) is, at least partially, by intent and action of the industry regulated, consistently or repeatedly directed away from the public interest and towards the interests of the regulated industry.”[50]

Braithwaite and Makkai made the capture analysis more nuanced by breaking it into three related but not necessarily simultaneous behaviors—sympathy to industry (implying excessive sympathy), identification with industry’s interest, and (unduly) lax enforcement.[51]

This Article defines capture by emphasizing intentional influence rather than whether the result deviates from the public interest since, at the point of decision, agency decision can often be plausibly seen to be in the public interest—or at least one definition of it; the many aspects of the concept of public interest make a focus on it less than helpful.[52]  It also does not distinguish between influence and control, as Webb Yackee’s article does,[53] since I see the distinction as a matter of degree, a continuum rather than a dichotomy; at some point, influence is so strong as to become control, but in the regulatory context, we are not usually talking about absolute control by industry.

Any of these definitions inherently implies regularly repeated interactions between the regulator and a certain industry.  Capture of the agency is not usually an issue when interaction between the industry and the regulator is sporadic.[54]

This type of relationship has been known for a long time among those inside the regulatory state.  In an open letter about the Interstate Commerce Commission (“ICC”), a famous practitioner acknowledged that:

The Commission, as its functions have now been limited by the courts, is, or can be made, of great use to the railroads.  It satisfies the popular clamor for a government supervision of railroads, at the same time that the supervision is almost entirely nominal.  Further, the older such a commission gets to be, the more inclined it will be found to be to take the business and railroad view of things.  It thus becomes a sort of barrier between the railroad corporations and the people and a sort of protection against hasty and crude legislation hostile to railroad interests.[55]

Research on capture surged in the 1950s, with Marver Bernstein’s influential work on independent commissions.[56]  Bernstein suggested that, while a regulatory regime starts vigorously and with energy, over time its supporting coalition dissolves, the energy dissipates, and the agency starts to kowtow to the preferences of industry, finally seeing its own interests as completely identical to that of the regulated industry.[57]

Bernstein’s work was extremely influential—though it was not without critics from early on.[58]  In the subsequent public policy literature, capture was uniformly seen as a substantial concern.[59]  Even the more “optimistic” studies were optimistic either by suggesting that sometimes agencies avoid capture[60] or by challenging the prevalence of the phenomenon.[61]

In 1971, capture was discovered by the economic literature with Stigler’s seminal article[62] in which he claimed that regulation will, in the end, work for the benefit of the regulated industry, not the public, and that industry will have the most influence on its content.[63]  His approach was given some refinement and algebraic formulation by Peltzman.[64]  The Stigler-Peltzman approach was a challenge to the then-existing conventional wisdom that regulation was justified as a response to market failure, since it was the only way to protect against such failures.[65]  In contrast, Stigler-Peltzman’s findings suggested that regulation was not the answer because it would not work to prevent market failures but would instead reinforce them by giving more power to the regulated industry.[66]  The implied corollary was that market mechanisms are a better solution to market failures.[67]

The Stigler-Peltzman approach achieved prominence and generated substantial follow-up work,[68] though the economic literature on the causes and consequences was mostly theoretical with scant empirical support.[69]  The political science literature on the topic, however, did offer one careful, detailed cross-agency study on the factors leading to capture: Paul Quirk’s 1981 study of the factors increasing the potential for capture.[70]

Much of the literature examined the potential incentives industry can offer regulators to encourage cooperation.[71]  A more specialized strand of literature focused on the revolving door effects, and strongly argued that movement from industry to the regulator and back leads to capture and to regulators wanting to curry favor with industry.[72]

Not exactly fitting into either category, studies in regulation and law found similar results.  Studies of the rulemaking process in the United States found substantive influence by industry on the content of regulation.[73]  In a recent study, Shapiro and Steinzor not only found such influence but explained that it is especially strong where salience (towards the public) is low and technological complexity high.[74]

Most of these studies accept capture as a reality—and a negative one—and discuss what leads to capture and how to prevent it.  Two exceptions stand out.

Recently, Dan Carpenter challenged the existing evidence used in previous studies of capture from Stigler onwards.  In a study that straddled economic and political science literature, Carpenter suggested that deducing capture from regulatory results that seem to favor established firms is problematic since there are other reasons for that kind of advantage, some of which are actually in the public interest.[75]  In other words, you cannot conclude that, just because established firms, large firms, and repeat players do better under the regulatory system, the regulator is captured; there may be other reasons for those results.[76]

In two more studies, regulation scholar Braithwaite and several collaborators went beyond previous literature and suggested that capture may be positive or negative, depending on the circumstances.

In the first study, Ayres and Braithwaite suggested, as part of their discussion of Responsive Regulation,[77] that there are some forms of capture that actually enhance social welfare and are efficient.[78]  For example, one possible effect of capture is that it motivates the agency and the industry to move from a situation in which neither cooperates—a firm evades the law and the agency behaves in a punitive manner—to one where both cooperate—the firm obeys the spirit of the law and works to achieve the regulatory goal, and the agency moves to flexible enforcement, ignoring technical violations.[79]  This situation, explain Ayres and Braithwaite, “is clearly Pareto efficient. . . . [And] will unambiguously increase welfare” since it forces the agency to also consider the firm’s welfare when making decisions—and the firm is part of society.[80]  This analysis is based on theoretical game modeling.

A second study added empirical support to the view that some types of capture are beneficial.  This study, by Makkai and Braithwaite, examined the concept of capture using empirical data from the Australian nursing home industry.[81]  Makkai and Braithwaite suggested that capture should be seen as a more complex concept than was previously suggested, including three factors: sympathy to problems industry confronts, identification with industry, and lack of toughness in enforcement.[82]  They found very limited evidence that ties with industry (coming from industry or returning to industry—the “revolving door” idea) increase capture, and what evidence they found suggested weak effects.[83]

B.     Collaboration

Especially in the past few decades, a whole strand of literature has promoted reforms supporting closer ties between industry and regulators and stronger industry participation in policy making and enforcement.  Much of this literature started as a response to the problems of excessive regulation, command and control models, and conflictual, adversarial relations between agencies and industry; the solution proposed was generally the adoption of more negotiated, consensus-based modes of regulation.[84]

There are two classical examples.  First, in 1982, Bardach and Kagan made a strong, compelling case for the “Good Inspector” acting with forbearance and enforcing regulation with flexibility (and toughness).[85]  Second, in Responsive Regulation, Ayres and Braithwaite argued for a pyramid of enforcement that starts with persuasion and escalates degrees of enforcement on the basis of industry behavior.[86]

Some studies promoted self-regulation by industry as a way to make regulation more efficient and flexible.[87]  Others recommended “public-private partnerships” that would give more of a role to private industry in making policy.[88]  The Endangered Species Act is one example of a program designed to give industry a direct input into the content of regulation.  The Act has been a source of controversy between environmentalists and business interests for a long time.[89]  An amendment to the Act in 1982 allowed the Secretary to approve a Habitat Conservation Plan, allowing a landowner to interfere with an endangered species (“take” it) under certain conditions.[90]  In theory, the option is available to any kind of landowner; however, in practice, timber companies and real-estate developers create most Habitat Conservation Plans.[91]  A Habitat Conservation Plan is, in essence, an official compromise between the private actor (usually a company) and the United States Forestry and Wildlife Service, the agency in charge of implementing the Endangered Species Act.[92]  It is an invitation for businesses to participate in policymaking.[93]  Does this actually protect the environment?  The literature is undecided.  Many studies express concerns and criticisms.[94]  Others express cautious optimism as to the process and its results.[95]

A movement emphasizing the use of Alternative Dispute Resolution tools in enforcement of regulation also emphasizes the need for more cooperation with industry in achieving compliance and less stringent, punitive enforcement modes.[96]  More recently, we see programs that relax enforcement in exchange for voluntary cooperation.  The Environmental Protection Agency has experimented with a number of such programs, with mixed results.[97]  The FAA, as already mentioned, has used voluntary reporting programs with some success.[98]

C.     Lack of Analytical Clarity

While consensus-based regulation and collaboration are not capture, both promote a close relationship between the agency and industry, and the distinction is blurry.  Ayres and Braithwaite openly say that “[t]he very conditions that foster the evolution of cooperation are also the conditions that promote the evolution of capture and indeed corruption.”[99]  Similarly, Shover suggests that “the establishment of cooperative relationships for the solution of problems” is one of the factors leading to capture.[100]

More negatively, an opponent of collaborative government described collaboration as follows: “[T]he very entities subject to regulatory compulsion should engage in the design of rules that will dictate their conduct, self-monitoring for compliance with those rules, and self-enforcement when the entity discovers a violation of those rules.”[101]

Nonetheless, the terms are not supposed to be interchangeable.  What, then, are the differences between collaboration and capture?  Three things stand out.  First, supporters of collaboration want others besides industry involved.  Second, collaboration envisions equal status or the agency as the dominant partner; capture implies the industry is the dominant partner.  Third, collaboration has good consequences; capture has bad consequences.

The first and probably clearest distinction is that most of the pro-collaboration literature does not suggest allowing industry to be the only voice.  In fact, most of this literature wants industry to be a part of a dialogue in which other interest groups are just as well represented and have at least as much influence, if not more.[102]  This potential “countering” role for non-business interest groups is not a new idea, of course.  It was behind some of the moves to more participatory government in the 1960s and1970s,[103] but has since become an integral part of the pro-collaboration literature of recent decades.

For example, Ayres and Braithwaite’s influential Responsive Regulation reserves an important role for Nongovernmental Organizations (“NGOs”) serving as equal participants in the negotiation and enforcement of rules.[104]

For Sabatier too, the solution to capture is participation by third parties, either initiated by the agency or initiated by the interest groups themselves.[105]  Other scholars have also shown positive influence of third-party interest groups as a remedy for capture.[106]

As I will elaborate in Part III, my approach is pragmatic.  I believe in the art of the possible.  In some cases, a third party interest group may be a viable alternative and a good counter to capture (or at least may have the potential to reduce the power of the capturing industry).[107]  In some cases, it will be an excellent option.[108]  However, it will not work in every case.[109]  At least in the American context, there is reason to be skeptical about it working in many cases.[110]

First, it may not always be feasible.  Ayres and Braithwaite believe a suitable NGO—defending the public interest or a relevant private interest—will generally be available.[111]  I am not so sure—and not just in the case of their example of an NGO for the Internal Revenue Service.[112]  In the FAA context, the pilots’ union may be seen as a potential counter to the industry on matters of safety.  However, the pilots’ union’s interests on the issue are mixed since it also has an interest in increasing jobs and the profitability of the industry, so it does not quite represent the public interest.  Further, consider the MMS.  In that context, what NGO promotes “honesty in dealing with the oil industry”?  Environmental organizations may be watchdogs for compliance with environmental requirements, but what about the rest?  For many regulatory issues, the problem of diffused interests mentioned in the economic literature is all too real.[113]  Furthermore, being at the negotiating table requires resources—even if all information the regulator has is made available,[114] the NGO will still have to invest in processing the information and involvement—especially in more complex regulatory areas, where there are many decisions.  There may not always be a group with the required dedication or the ability to constantly engage.  We can learn something about this from the United States’ notice and comment rulemaking process which provides an opportunity to any interested party to participate, at least to some degree.[115]  In spite of the apparently open access, many studies suggest that industry participates more than others in this process.[116]  The same reasons that industry captures agencies operate here too.  Industry has the most interest in the content of regulation, and it is a long-term, substantive interest, which keeps industry involved after other participants have left the field.[117]  Industry has substantial resources to invest in affecting the content of regulation, and strong incentives to do so.[118]  In some situations, there will be an NGO with the same dedication and the ability to persevere; in others there will not.

Furthermore, even where such an NGO is available, it will not necessarily solve the problem.  One question is who will guard the guardian: how do we prevent the capture of the NGO by the regulated industry?[119]  Ayres and Braithwaite suggest as the solution a contested representation.[120]  This, however, requires not one but multiple suitable NGOs able and willing to undertake the role.

Similarly, if an NGO exists that is willing to counter the influence of the capturing industry it may improve the regulatory result—or not.  It all depends on which interests it represents.  Not all clashes between private interests protect the public interest.  Just as important, “[e]verything has a price.”[121]  Allowing a third party to counteract the influence of industry carries the cost of added delays, and depending on the level of trust between actors, can cause a return to a more contentious process.  It thus has the potential to thwart the original intent of the collaboration altogether.  Sometimes the price will be worth paying.  Other times, if the results of capture are good enough and the level of conflict high enough, it will not be.

A second distinction between collaboration and capture is that the term collaboration does not imply, as capture does, that the dominant partner is industry.  It implies a partnership of equals.  Calling a regulatory relationship capture suggests that industry usually gets its way, often because the agency really buys into the industry’s views.[122]  This is an important difference, but it seems more a matter of degree than of kind; how much real influence does industry have in practice?  If an agency accepted industry’s view, was it captured, or was it convinced by industry’s arguments?  Determining the degree of industry’s influence may be difficult in practice.  And even where that is possible, the argument still stands that mechanisms of collaboration facilitate and create opportunities for capture.

The final difference is a difference in results.  Calling a relationship between industry and regulator collaboration implies a positive outcome; capture implies a negative one.  But evaluation criteria based solely on results are not very useful as a conceptual tool to identify capture or other phenomena.  Results, obviously, can only be examined in hindsight.  In terms of normative judgment, they do not help assess the behavior itself.  Results do not provide a very useful guide, especially since it’s not so obvious we can identify capture when we see it.  For starters, identifying whether regulation works for the benefit of a certain industry is not easy.  In an early study, Etzioni challenged Stigler and Friedland’s early finding that utilities had captured regulators[123] by using their original data to arrive at the alternative conclusion—that regulation actually benefited consumers and therefore the regulators were not captured.[124]

Even if regulation does work for the regulated industry, it is not at all clear that capture is at work.  In an innovative piece, Carpenter demonstrated that there are other reasons besides capture that regulation may benefit large, established firms.[125]  These firms have real advantages.  For example, they are more known to the regulator, who can therefore make quicker decisions in relation to them, may enter niches earlier that are politically valuable, and can better withstand delays in decision making.[126]

Besides the difficulty of identifying capture, given the negative implications of the term, if used as a basis for policy prescriptions, it is problematic to say to the agency after the fact, “at first we thought you were collaborating and all was well, so we encouraged you to keep at it, but now we see that, since things turned out badly, you were in fact captured, and therefore there will be consequences.”[127]

Both capture and collaboration address situations of a close relationship between agency and industry.  The analytical distinction between them is problematic, and even when it can be used, collaboration mechanisms can be seen at least as “capture facilitators.”  The question is, therefore, what are the possible consequences of such a close relationship?

II.  The Risks and Benefits of a Close Relationship

A.     The Risks

The risks of a close relationship between agency and industry are that it could lead to weak (or absent) protection of the public, result in benefits to the industry at the expense of the public (“rent-seeking”),[128] and lead to straight out corruption.

One common justification for regulation is protecting the environment, public health, or other important values against economic interests of private firms.[129]  When it comes to protecting other important values (such as health, safety, or the environment), industry members naturally want to minimize their costs in order to increase their profits; in fact, it can be argued that they have a duty (to their shareholders) to do so.[130]  One result of this, goes the argument, is that industry’s influence will lead to ineffective, weak, and watered-down regulations that, in fact, do not provide adequate protections in these areas.  For example, one study suggests that, because of industry influence, the Food Safety and Inspection Service in the United States Department of Agriculture (“USDA”) had done nothing in relation to E. Coli-contaminated meat for over a decade (1982–1995).[131]  This neglect continued in spite of repeated outbreaks of illnesses related to E. Coli and after a report by the National Academy of Sciences, which pointed out the shortcomings of the USDA’s method of inspection and suggested a different one.[132]  The situation only changed after a very widespread outbreak of E. Coli, which was traced to contaminated meat and had dramatic and obvious effects (including the deaths of two children).[133]  Even then, the final rule was a watered-down version of the original, with most of the effective protections removed—a result of intensive efforts by industry.  Industry wanted a weak rule, and it succeeded in getting just that.[134]

Similarly, Etzioni suggests that a rule by the Department of Transportation was “profoundly shaped” by the railroad industry.[135]  The Department of Transportation allowed railroads to choose the routes acceptable for dangerous cargoes based on their own weighing of the factors involved (including the costs).[136]  Etzioni discusses a claim by Melberth from OMBWatch that the lobbyists from the industry actually provided the text of the rule.[137]  This rule, according to critics, failed to require rerouting of dangerous cargoes around major cities—including those designated by the Department of Homeland Security as targets for future terrorist attacks—with the result that the railroads continued to route such cargoes through population centers, potentially endangering lives.[138]

Etzioni offers another example.  In 2000, when the FDA prepared to publish information about the mercury content of various foods, the tuna industry—realizing canned tuna was going to be classed as dangerous—lobbied the FDA.[139]  The FDA recalibrated its categorization, and an FDA official, Clark Carrington, admitted that the staffers designed the three categories of mercury danger so that canned tuna fell into the “low” category to “keep the market share at a reasonable level.”[140]

Furthermore, capture can also lead to complete removal of regulations—deregulation—a phenomenon described by Carpenter as “corrosive capture.”[141]

The risks of a close relationship between agency and industry are also found in relation to enforcement.  Due to the close relationship between the regulators and the regulated companies, the regulators will be unlikely to do their job and rigorously enforce the regulations.[142]  This will lead to decreased protections for the public.  The regulators will be unwilling to penalize their good friends in the industry.  On the contrary, they may seek to please and promote those to whom they are personally connected.  After all, Great Walls can always be brought down by great lunches; in other words, the separation into regulated and regulator may not survive close personal contacts.  This is especially true where there is an exchange of personnel and close interpersonal connections between agency officials and industry employees.  Indeed, much of the economic literature about capture focuses on the negative effects of the “revolving door”—people moving between industry and the regulators.[143]  This tendency was described by the Department of the Interior’s Acting Inspector General, Mary L. Kendall, as part of the reason for the ethical problems discovered in the MMS, where there was “a culture where the acceptance of gifts from oil and gas companies were [sic] widespread throughout that office.”[144]

Of greatest concern to me is the environment in which these inspectors operate—particularly the ease with which they move between industry and government. . . . [W]e discovered that the individuals involved in the fraternizing and gift exchange—both government and industry—have often known one another since childhood.  Their relationships were formed well before they took their jobs with industry or government.[145]

Even without corruption, close connections can foster excessive trust that will lead to accepting the words of the industry at face value and, therefore, not finding out about violations.  For example, in relation to the FAA, a report by the Nader group found that FAA inspectors often missed industry violations because they relied on paperwork provided by the industry to discover problems, and the industry would lie in writing—a practice termed “pencil whipping.”[146]

In another example, the Bureau of Land Management (“BLM”), the agency handling on-shore oil drilling, was found by the GAO to regularly approve drilling permits without an Environmental Impact Statement, relying on exclusions provided in section 390 of the Energy Policy Act.[147]  The GAO found that the MMS (acting under the aegis of the BLM) used such exclusions in more than a quarter of drilling permits between 2006 and 2008,[148] frequently “out of compliance with both the law and BLM’s implementing guidance.”[149]

Preparing an Environmental Impact Statement, as required by the National Environmental Policy Act (“NEPA”),[150] is costly and difficult, and removing the requirement is a break for industry, but it raises concerns about adequately identifying environmental consequences and thus environmental protection.  In a specific example, the MMS (at the time under the BLM) apparently granted an exclusion from the NEPA to BP’s drilling in the Gulf of Mexico—drilling that ended with a catastrophic, far-reaching oil spill.[151]  The natural accusation is that cozy relationships between the agency and the company led to lax enforcement of the legal requirements, sacrificing the environment to the company’s interest.  According to a member of an environmental group quoted in the article, “[t]he agency’s oversight role has devolved to little more than rubber-stamping British Petroleum’s self-serving drilling plans.”[152]

Another common justification for tight regulation is that it can correct market failures (e.g., by limiting monopolies and cartels).[153]  The situation here is somewhat different.  In a monopoly situation, industry will want to place barriers on new entrants to the market and make access difficult.[154]  For example, one of the common struggles in relation to telecommunications liberalization is to allow potential new entrants access to the existing network to prevent them from having to invest the tremendous costs of creating a network anew.[155]  Research found that opening the market to competition required regulation to prevent the incumbent from setting access prices too high, and thus abusing their market power.[156]  Close connections between the incumbent and the regulator can lead to setting the access prices high.[157]

When it comes to rate setting, established industry will want a lax regime that provides it with maximum freedom.  For example, in his study of railway prices, Huntington demonstrated that, since the late 1920s, the ICC, captured by railroads, consented to any rate increase the railroad wanted.[158]

B.     The Benefits

While the risks of a close relationship are real enough, industry involvement in writing regulations is a recurring phenomenon,[159] as is flexible (or lax) enforcement.  Many studies have found that regulators rarely act punitively and generally prefer to negotiate and work with industry rather than prosecute or punish it.[160]  And that is not just because of the problems of the administrative state; there are good reasons to want industry involvement in the creation and enforcement of regulation, in spite of the obvious risks.

The first is that the best information about what is going on in industry is found in the hands of industry.  The second is that working with industry can lead to better results; enforcing compliance, without cooperation, is costly and, at best, only partly efficient—because, among other things, an industry unwilling to cooperate can find many ways to obstruct or avoid enforcement.[161]  The third is that it can also lead to better results because there is a societal advantage in preventing unanticipated negative consequences for industry,[162] and industry is often in the best position to anticipate and warn against such consequences.

1.     Industry and the Information Advantage

Good regulation requires good information.  Not only is this self-evident, but the legal framework is designed to increase the information available to agencies.[163]  At least one goal of the notice and comment process the Administrative Procedure Act (“APA”) mandates for informal rulemaking is to provide information.[164]  Many of the other requirements added to the process require the agency to undertake research that will make its decision more informed.[165]

A serious problem with this process is the fact that often the best information about what is going on in a given industry is in the hands of members of that industry.  Agencies are regularly understaffed and overworked[166]—a reality that is getting worse in these days of budget deficits and in this “age of austerity”[167] when agency resources are constrained and reduced.[168]  They cannot, even with the best will, collect all the needed information about industry to either devise the best regulations or catch those who violate them.  For example, the FAA is, on its face, a large agency with over 50,000 employees.[169]  But many of these employees are air traffic controllers.[170]  There are only about 4000 inspectors overseeing all the planes in the United States.[171]  As a second example, the Food Safety and Inspection Service of the USDA has to oversee the safety of meat and poultry in the United States.  The growth in meat consumption and sale has left its inspectors overburdened; one author estimates that “[a]t ninety-one birds per minute, inspectors have to examine over 12,000 poultry carcasses each day.  It is estimated that inspectors have an average of just two seconds to inspect a poultry carcass and twenty to thirty seconds to examine a 2,000 to 3,000 pound beef carcass.”[172]  A similar claim has been made concerning FDA resources.[173]

It is easy to claim that the solution should be for Congress to provide more funding,[174] but the chances of that happening are not very high in a political climate that calls for reducing government size and limiting spending.[175]

Along the same lines, producing information costs money.  And in an era of budget cuts, the agency often has to choose between producing the information and doing other things.  On the other hand, industry often needs the information in question for other purposes (e.g., information on safety problems in airplanes) and may be collecting it anyway.  Getting the information from industry can save money.  But to whom will industry be more likely to provide the information: the cop who monitors it and is prepared to punish it or the friendly regulator who goes out to lunch with it?

Most importantly, even if an agency had all the personnel and funding it could wish for, its information would still be secondhand (or we might say thirdhand since the information inspectors collect still needs to go up the agency hierarchy and be processed before it reaches central decision makers).[176]  It is the industry people who work on the ground and know what is really happening.[177]  They have the best opportunities to spot problems, and they can be the first line of defense.[178]  The problem, of course, is that industry members will have no incentive to provide information that might later hurt them.  They will have even less incentive to provide such information in an adversarial, punitive, hostile environment.[179]  If the relationship with the agency is good, and especially if industry members believe regulators care about industry’s interests, industry will have more incentive to provide information and will be more willing to trust the agency with it and to try and convince the agency in noncontentious ways of its point of view.[180]

Of course, another solution to the “not having good enough information” problem is requiring industry to provide such information and heavily punishing any parties that withhold it.  However, that may backfire.  Industry can respond by providing too much information.[181]  Information, even when provided, needs to be processed and considered.  In fact, one of the most common problems in the modern world is the problem of “info glut”—having too much information.[182]  Sorting through information also requires resources; extracting nuggets of meaning from a mass of verbal gravel can be very labor intensive when information is not well presented.[183]  Close relationships can reduce the motivation to practice this sort of information dumping and can incentivize industry to provide the information in a more useable form.[184]

Information overload is not the only potential risk of coercive or punitive information gathering.  As with any other issue, achieving compliance through coercion is neither simple nor straightforward.  Getting the information voluntarily through cooperation is often more efficient and easier.[185]  There is at least one study that suggests it may incentivize industry to conduct more research.[186]

If industry has a direct involvement in writing regulations, the regulation may be self-serving and weaker than it might otherwise be, but it will probably be well informed.  That will help prevent ineffective or erroneous regulation that may have substantial unintended consequences.

At the same time, relying on the regulated industry for information raises at least two real problems.  First, industry will probably provide information that supports its interests, place emphasis on things that support its views, or tend to downplay the things it prefers not to have regulated.  Industry may even do that without intending to; a known cognitive bias is the confirmation bias, which suggests that people (or companies) tend to emphasize and be more receptive to things that support their initial point of view.[187]  Almost automatically, the tendency will be to downplay or ignore adverse information—to rationalize it away.[188]  This is not true just of industry.  Sabatier pointed to the tendency of advocacy coalitions to “resist” information that suggests their core beliefs are wrong or their preferred outcomes unattainable, and to embrace information that supports their preferred point of view.[189]  Thus, simply by the nature of things, industry will tend to believe in, and provide, information that represents its interest in the best available light.  Close connections do not reduce the risk of self-serving information—but neither does the absence of such connections.  And the absence of information from industry can sometimes be much more costly than the receipt of self-serving information, as in the example of the FAA’s voluntary disclosure programs.

Another danger is that industry will lie.[190]  One could argue that a close relationship might increase the risk of lying because the industry will expect the agency to believe it and therefore expect the chances of getting caught to go down.  But the risk of lying exists regardless of the relationship with the agency.  One could equally argue to the contrary—that the industry will be more likely to lie (and will be more inclined to feel that lies are justified) if the government is “the enemy”[191] than if the relationship is good, and especially if industry expects the regulator to have a realistic regard for its legitimate interests.

A more subtle, but just as real, danger involved in capture is the effect of trust on the testing of information.  The problem here is that if the agency and industry have close connections, the agency may see information provided by its good friends in industry as reliable and not make adequate efforts to confirm or verify it.  Mistakes can happen even with a completely transparent, cooperative, and honest industry, and thus verifying information is useful and important.  In fact, for anything but perfection, it is crucial.  For example, the “pencil whipping” described by Nader and Smith can be traced in part to the FAA’s trust that the airlines provided reliable information, when they clearly did not.[192]  Similarly, another Nader report—this time on the FDA—suggests that, in relation to food additives, the FDA bought into industry assumptions and accepted some self-serving and misleading research results without doing its own testing.[193]  On the other hand, this kind of thing is not limited to close regulatory relationships.  Even an agency that is not “captured” will have trouble carefully scrutinizing data provided by industry.  Staffing problems and lack of inside information means agencies do not—cannot—test most of the information they get from industry.  Instead, they often rely on self-reporting.  A close relationship can improve the quality of self-reporting since relationships work both ways; the industry, too, will not want to disappoint its regulator allies or jeopardize the connection.

At the end, it comes down to a question of which problem one would rather face.  Is it better to have more information, at the risk of that information being self-serving or even unreliable, or is it better to lack information and make mistakes because of that?  If regulation is the art of the possible, lack of information makes very little possible.  The information provided by industry may well be partial and self-serving, but it is more than the agency will have in a more conflictual scenario.

2.     Improving Regulatory Results: Compliance

A close relationship—up to the level of capture—can also improve regulatory results by improving compliance.  Thoughtful students of regulation demonstrated that beyond a certain point, strict enforcement can backfire and lead to less, not more, compliance.[194]  The reason is that it can create resentment, which will lead to resistance and passive compliance.[195]  That is not to say that having strict sanctions is not useful, but it is useful most of all as a tool of last resort and as a background for strategies of negotiation and cooperation.[196]

Many studies have demonstrated the limits and problems of coercive enforcement.  A scholar of regulation recently said:

Research on second-generation regulatory agencies made clear to many that there are inherent shortcomings and limitations of strict rule-based enforcement.  Investigators from Australia to the U.S. found that despite the content of regulations, oversight of business firms was exceedingly imperfect. . . .  It was obvious to a host of investigators that a rigorous deterrence-based approach to oversight of privileged offenders that the level of political and fiscal resources it would require may [sic] it unlikely if not impossible.[197]

Studies suggest that many agencies do not use punitive sanctions even when they are available.[198]  And if they do use punitive sanctions regularly, the costs—not just the direct costs, but the negative effects—can be very high.[199]

Voluntary compliance is, by many standards, better than punitive enforcement.  It is cheaper—the agency does not have to invest as much in monitoring and in prosecuting wrongdoers.[200]  Punitive actions have costs in terms of personnel and time.  In the United States, many actions against wrongdoers also involve the courts,[201] which is another consideration.  Litigation is expensive.[202]  Even more importantly, quite often to achieve the regulatory results, you need the regulated firms to be willing to make an effort and occasionally suggest creative solutions.[203]  Even if it is not strictly necessary, industry creative involvement can lead to more efficient solutions.[204]  An adversarial relationship will discourage such behavior while a positive one will promote it.  Not to mention that punitive enforcement requires appropriate rules to be specified in advance—and in complex modern realities, regulations are almost always going to be over or under inclusive.  Cooperation by industry with the goal of the regulation can achieve better results.[205]

The side effects are less negative with voluntary compliance than with strict punitive enforcement.  Bardach and Kagan demonstrated the pitfalls of strict punitive enforcement: creating resentment on the part of the regulated, which see enforcement as arbitrary;[206] leading the regulated companies, even the “good apples” among them, to just do what the regulator demands and not invest in additional responsible behavior;[207] undermining cooperative problem solving;[208] and possibly leading the regulated industry to give up on the rule of law.[209]  Many subsequent studies suggested that punitive enforcement can harm cooperation.[210]

Close relations between industry and regulator—and influence of industry on the regulator’s view of sanctions—certainly reduce aggressive enforcement or even enforcement in general.[211]  But they can also increase voluntary compliance—at a price, and with an attendant risk.  If industry is involved in writing the regulations, it presumably agrees to the content and can be expected to comply with that content.  If enforcement is flexible and negotiated with the regulated industry—if it is done by agreement instead of by fiat—it is more likely the agreed-upon modifications will be put in place.

The price is sacrificing some of the results that could be achieved by top-down regulation.  If industry is going to agree to a regulatory scheme limiting it or imposing costs on it, it will probably agree to less than the supporters of the regulation want, to what can be seen as watered-down regulation.  In some circumstances, the regulation may be watered down to such a degree that the result will be the sacrifice of the other values.  But it does not have to be.  Industry has other reasons for not going too far in weakening regulation.  Among other things is the concern of reaction.  If regulation is too weak, there may be a public backlash, at least if there is a bad result.  The harsh reaction to the perceived cozy relationships between FAA and Southwest described in Part I is one example; the pressure led the FAA to substantially increase its enforcement, possibly too much.  In the following days, it grounded large numbers of American Airlines planes too, disrupting travel.[212]  Concerns about regulation have been a reason for industry to self-regulate.[213]  The same logic can lead industry to support a higher level of regulation than it would absent any outside pressures: better to have a hand in the process and cooperate (and be seen to cooperate) than to have the regulations imposed.

Furthermore, in many circumstances, industry will be at least partly on board with the goal of regulation.  In terms of the FAA, quite a bit of support for voluntary reporting programs came from the pilots working for the allegedly capturing airlines.[214]  Obviously, safety is also a major interest of the pilots and staff on the planes, who have constant exposure to whatever hazards exist.  A similar point is true for nuclear plants: a nuclear explosion endangers not only the public but also everyone in the plant, and makes it harder to get a permit to build another plant or fix things, when needed.[215]  And after all, industry is not one skin; top management may have an interest in avoiding scandals—be they airplane crashes, fatalities because of negligently manufactured drugs (such as when Chinese manufacturers deliberately used a cheap substitute instead of dried pig intestines to make the drug Heparin, leading to eighty-one deaths),[216] or nuclear explosions.

Other studies suggest that at least some corporations can have real commitment to social values, such as the environment.  That is one justification for voluntary compliance programs, some of which focus on “high performers.”[217]  From the point of view of the more socially conscious companies (the “knights,” drawing on Le Grand’s terminology),[218] the absence of regulation may disadvantage them since it allows less conscientious companies to cut corners and thus produce products more cheaply.  Those companies may have an interest in pushing for stricter regulation.[219]

Not only might the sacrifice be less than anticipated; there is, again, a question of “the art of the possible.”  Sometimes it is better to compromise on the content of the policy and end up with a policy that is easier to implement and more workable in practice than have a stronger policy that does not work.  And as long as the goal of regulation is to achieve results and not just punish industry for being industry or for being big industry, a compromise that achieves something may not only be the best possible solution under the circumstances, but it is itself a positive thing.  After all, strict enforcement or more adversarial mechanisms do not usually achieve one hundred percent compliance either.[220]

3.     Capture and Regulatory Results: Unintended Consequences

Regulation is not often planned with the intent to harm an industry.[221]  For example, in spite of views to the contrary, the goal of most environmental regulation is not to destroy any branch of industry or put workers out of jobs.  It is to protect the environment.  Unfortunately, sometimes the precautions needed to protect the environment, public health, competition, or any of the other things regulation tries to achieve are costly.  They can be costly in terms of direct monetary costs to the industry,[222] or in terms of reducing industry’s competitive edge compared to industry in other countries.[223]  They can be costly in other ways; for example, they can work to the advantage of large companies and against small businesses, thus pushing a sector towards oligopoly.[224]  They can have costs in unanticipated directions, such as delay on large construction projects.[225]

Strong involvement of industry in creating the regulation and allowing it substantial influence on the way regulation is enforced takes seriously concerns about negative effects on industry.  When designing regulation, industry can warn agencies in advance of potential costs and work with them to mitigate such costs.  Industry can negotiate enforcement that will not lead to unintended consequences.

At the same time, two risks are attendant.  The first is that, while capture allows us to take seriously the risks to industry from a certain kind of regulation, it may not give the same weight to unintended consequences for other groups, such as low-income people or small business.  The second is that capture may take such account of the risks to industry that the attendant regulation will not protect other important values—they will have no “bite.”

Again, the challenge is one of achieving maximum results with minimum sacrifice.

III.  Discussion: Factors Affecting the Results of Capture

Part II suggests that a close relationship between industry and regulator—up to the level of capture—carries risks and can result in very bad consequences, but also has important potential benefits.  In fact, some degree of close relationship may be necessary for a functional relationship between regulator and regulated industry.

My approach is pragmatic.  Regulation aims to achieve specific goals.[226]  Regulation is not in place to decorate shelves with rulebooks (or not only; leather-bound rulebooks certainly add to a room’s atmosphere).  Therefore, most discussions surrounding regulations rightly focus on what the results should be and how to achieve them.  If capture can, in certain circumstances, promote those goals—or promote them better than other tools—it should be used for that goal.

In that vein, when looking at the relationship between industry and regulator, we should focus on how to maximize its positive results and minimize its dangers.  To some extent, that is an empirical question, but at least some factors can be suggested.  As a starting point, the benefits highlighted in this Article are information, improved compliance, and avoiding unintended consequences.  The most important factors will relate to those benefits.

A.     Information

The importance of industry-only information is significant here.  A close relationship will be more beneficial where information is really difficult or expensive to come by without industry cooperation.  The problem is that the risks of a close relationship—because of the difficulty of verifying the information—are also extremely real in this situation.  If industry knows its information cannot be verified, and especially if there are other pressures, it may be tempted to massage such information.  This may be a situation where a close relationship between industry and regulator is essential, but close external supervision of the regulator—or at least occasional close scrutiny—is a necessary corollary.  At least some literature suggests that monitoring itself can prevent abuse.[227]

A stronger factor is where within industry information is available.  Industry is not one skin.  While the question needs empirical investigation, I suggest that the benefits will be higher where the information an agency needs is in the hands of the lowest and highest echelons of industry, in contrast to middle managers.  Lowest echelons may have less incentive to hide information from agency and, if the relationship is good, may be closer to the regulator than to management.  They are also the ones that may suffer from some problems—such as airline accidents.  Highest echelons may buy into the regulatory goals, and at any rate, have much to lose from scandals.[228]  But middle managers, who are often under substantial pressure to get results and get things done, may find themselves cutting corners more often and may wish to hide those cut corners from both management and regulators.

Second, while the risks do exist, the benefits are higher when understanding the way industry works “on the ground” is critical to effective regulation.  As pointed out by Makkai and Braithwaite:

[I]nspectors who come from the industry bring with them not only some special insight into the difficulties the industry faces, but they also bring special insight into the tricks of the trade used to get out of those difficulties.  Industry experience can be helpful in finding the skeletons in the corporate closet.  Admittedly, inspectors take the tricks of the regulatory trade across to the industry as well.  But it is clearly the government that gets the better of this particular exchange.  This is because most of the regulator’s job involves dealing with industry, while only a little of the business person’s job will concern dealing with regulators, unless she becomes a regulatory affairs specialist in a large firm.[229]

B.     Compliance

The incentives for industry to comply with regulation are also an important factor.  Noncompliance can be costly for industry.  One important factor is the existence of potential victims of noncompliance.  Potential victims of noncompliance who can complain or sue increase the risk of detection and of negative reactions, and therefore increase industry incentive to comply with regulation.  Deaths from airplane accidents, children harmed by specific products, and people who lost their homes following the mortgage crisis are more likely to generate sympathy and lead to outrage than harm to the general taxpayers’ base.

The benefits to the industry from the regulatory regime are also important; does regulation help coordinate between parts of industry?  Do regulatory requirements help management achieve values it already wants to achieve?

Finally, there is a question of what is on the other side of the scales.  If the costs of compliance are really high, the best relationship in the world may not push industry to comply.  So if the costs of compliance—direct or indirect—are substantial, the risks of capture are more likely to materialize.

Second, the incentives for an agency to stay true to its mandate are also important, and the salience of the regulated industry matters here.  A less-noticed agency may feel more comfortable allowing industry to deviate from the public interest than one that is under scrutiny.  The FAA regularly receives critical media attention after air crashes, leading some commentators to see it as a “tombstone agency”—an agency that only acts when someone dies (and in proportion to the number of deaths).[230]  The negative attention puts pressure on both the FAA and the airline industry, criticized together, to act.  In that sense, a close relationship may be a benefit.  When the pressure comes from outside the agency and is directed at both agency and industry, the close connections may make acting more effective: “We have a common problem.  Let’s solve it.”

The MMS, on the other hand, was hidden from the view of anyone outside Washington or oil companies until the scandals related to it occurred (the accusations of corruption due to gift taking by its employees and the accusations of lack of enforcement of environmental regulation in connection to the BP oil spill); even now, most people will have difficulty recognizing its name.  With no external exposure, there was no reason for the agency officials identifying with industry to beware or act differently.  In relation to the Royalty in Kind program, there came a point where the rest of the administrative state caught on and stepped in to correct the problem.[231]

Third, we have to ask what the real-world alternatives to capture actually are.  If an agency has enough funding and aid from external constituencies or from other sources in enforcing rules, or is facing a very divided industry, it may get a great deal done without capture.  In that case, the risks of capture may stand out more (though even there, the benefits are important).  But if the agency is substantially understaffed for its assigned role, or underfunded, capture may be the only way to get anything done.  In that case, achieving what an industry is willing to give through cooperation and due to its good relationship with the regulator may be enough, or at least better than nothing.  Capture will provide more benefits if there is a credible possibility of sanctions in the background.

In other circumstances, alternatives to capture may exist—command and control regulation, or a very comprehensive process, may be possible—but capture will still derive more benefits, or derive them more cheaply (and so may be better).

In the words of Komesar:

The correct question is whether, in any given setting, the market is better or worse than its available alternatives or the political process is better or worse than its available alternatives.  Whether, in the abstract, either the market or the political process is good or bad at something is irrelevant.  Issues at which an institution, in the abstract, may be good may not need that institution because one of the alternative institutions may be even better.  In turn, tasks that strain the abilities of an institution may wisely be assigned to it anyway if the alternatives are even worse.[232]

If an institution works well, but others would work better, others should be used; if an institution has problems, but the alternatives are even worse, that institution is the best possible for the specific context.[233]  In this context, capture, in spite of its manifest drawbacks, can sometimes be the best alternative we have available.  Thus, before finding fault, any critic must address the issue of what better course might have been taken.


Concerns about capture are still very real—though, these days, the belief in the value of collaboration provides something of a counterargument.  This Article suggests a way to reconcile the extensive literature denouncing the dangers of capture with the literature emphasizing the benefits of collaboration by suggesting that indeed, there is an overlap—at least a potential overlap—between them since both highlight a close relationship between industry and agency, but that overlap is more than just a cause of concern. Such a relationship has its benefits.

The devil is, as always, in the details—what is the relationship between the regulator and the industry, who else is on the playing field, what are we trying to achieve, and what else is available?  These are empirical questions.  A blanket condemnation of close relationships between industry and regulators by naming them capture is problematic and can lead to sacrificing potential advantages.

We need to start empirically studying and evaluating the factors that make a close relationship between industry and regulators work or vice versa.  We need to tackle the formidable task of assessing its real effects on public policy.  It is formidable because it requires defining what the “public interest” is in the relevant area and assessing the effects on it, neither easy tasks.  But it is important.

         * Associate Professor, UC Hastings College of the Law.  I would like to thank Mark Aaronson, Hadar Aviram, Ash Bhagwat, Abe Cable, Daniel Carpenter, Marsha Cohen, David Coolidge, John Crawford, Annie Daher, Ben Depoorter, Christopher Elmendorf, Heather Field, Beth Hillman, Alicia Jovais, Robert Kagan, Chimene Keitner, Heather Kelly, Evan Lee, Ethan Leib, John Leshy, David Levine, Richard Marcus, Jerry Mashaw, Osagie Obasogie, Roger Park, Radhika Rao, Reuel Schiller, David Schorr, Darien Shanske, Gail Silverstein, Brendon Swedlow, David Takacs, and Joan Williams for invaluable comments and suggestions in earlier stages of the project and on earlier drafts, and Erica Anderson and Fatemeh Shahangian for excellent research assistance.  All errors are, of course, my own.

        [1].   Toni Makkai & John Braithwaite, In and Out of the Revolving Door: Making Sense of Regulatory Capture, 12 J. Pub. Pol’y 61, 72–73 (1992).

        [2].   Scholars have also discussed concerns about capture by Nongovernmental Organizations (“NGOs”) and other interest groups.  See, e.g., Dieter Helm,Regulatory Reform, Capture, and the Regulatory Burden, 22 Oxford Rev. Econ. Pol’y 169, 172–75 (2006); Richard L. Revesz & Allison L. Westfahl Kong,Regulatory Change and Optimal Transition Relief, 105 Nw. U. L. Rev. 1581, 1604–07 (2011).  However, most of the scholarship focuses on the connection between industry and the regulator, and the case studies explore that situation.  I will therefore use language focusing on industry, while acknowledging that there can be capture by other actors.

        [3].   Capture has been discussed at least since the 1950s.  See Marver H.  Bernstein, Regulating Business by Independent Commission 268–71, 277–79 (1955).  Kenneth Culp Davis describes Bernstein’s work as “[t]ypical of the prevailing attitude among the present generation of political scientists.”  1 Kenneth Culp Davis, Administrative Law Treatise § 1.03, at 16 n.2 (1958).  It is still a topic of discussion today.  See, e.g., Steven P. Croley, Theories of Regulation: Incorporating the Administrative Process, 98 Colum. L. Rev. 1, 1–7 (1998); Amitai Etzioni, The Capture Theory of Regulations—Revisited, 46 Soc’y 319, 319–20 (2009); Michael E. Levine & Jennifer L. Forrence, Regulatory Capture, Public Interest, and the Public Agenda: Toward a Synthesis, 6 J.L. Econ. & Org. 167, 178–79 (1990); Makkai & Braithwaite, supra note 1, at 62; Sidney A. Shapiro & Rena Steinzor, Capture, Accountability, and Regulatory Metrics, 86 Tex. L. Rev. 1741, 1742, 1745–46, 1756, 1759 (2008); Wendy E. Wagner, Administrative Law, Filter Failure, and Information Capture, 59 Duke L.J. 1321, 1321, 1328–34 (2010).

        [4].   Mark Bovens, Public Accountability, in The Oxford Handbook of Public Management 182, 182 (Ewan Ferlie et al. eds., 2005) (“As a concept, however, ‘public accountability’ is rather elusive.  It is a hurrah-word, like ‘learning,’ ‘responsibility,’ or ‘solidarity’—nobody can be against it.”).

        [5].   See infra notes 60–61 and accompanying text for a discussion of the more “optimistic” strands of literature about capture.

        [6].   See infra Part I.A for a more thorough definition of capture.

        [7].   Martha Chamallas, The Disappearing Consumer, Cognitive Bias and Tort Law, 6 Roger Williams U. L. Rev. 9, 18 (2000).

        [8].   James S. Turner, The Chemical Feast: The Ralph Nader Study Group Report on Food Protection and the Food and Drug Administration 18 (1970).

        [9].   Id. at 37.

      [10].   Id.

      [11].   Ralph Nader & Wesley J. Smith, Collision Course: The Truth About Airline Safety 83–89 (1994).

      [12].   Eugene Bardach & Robert A. Kagan, Going by the Book: The Problem of Regulatory Unreasonableness 102–19 (1982); Robert A. Kagan, Adversarial Legalism: The American Way of Law 195–98 (2001) [hereinafter Kagan, Adversarial Legalism]; George J. Busenberg, Collaborative and Adversarial Analysis in Environmental Policy, 32 Pol’y Sci. 1, 1–2 (1999).

      [13].   Russell W. Mills, The Promise of Collaborative Voluntary Partnerships: Lessons from the Federal Aviation Administration 14–16 (2010).

      [14].   See generally Neil K. Komesar, Imperfect Alternatives: Choosing Institutions in Law, Economics, and Public Policy 3–7 (1994) (arguing for a comparative institutional analysis); Jeb Barnes, In Defense of Asbestos Tort Litigation: Rethinking Legal Process Analysis in a World of Uncertainty, Second Bests, and Shared Policy-Making Responsibility, 34 Law & Soc. Inquiry 5, 6–7, 11 (2009) (arguing that under an institutional analysis, as opposed to a pure legal process analysis, asbestos litigation serves as a reasonable use of judicial power).

      [15].   Ian Ayres & John Braithwaite, Tripartism: Regulatory Capture and Empowerment, 16 Law & Soc. Inquiry 435, 451–56 (1991).

      [16].   Id.

      [17].   Except in narrow circumstances, the FAA would not waive sanctions for problems resulting from criminal behavior or for problems disclosed in anticipation of an FAA inspection or during one.  Mills, supra note 13, at 17–19.  Other agencies have also adopted voluntary reporting programs.  See, e.g., Jodi L. Short & Michael W. Toffel, Coerced Confessions: Self-Policing in the Shadow of the Regulator, 24 J.L. Econ. & Org. 45, 46, 62–65 (2008).

      [18].   Russell W. Mills, The Development of Collaborative Regulatory Partnerships with Industry: A Historical Institutionalist Investigation of the Federal Aviation Administration’s Voluntary Safety Reporting Programs 26 (Apr. 2, 2010) (unpublished manuscript) (on file with author) [hereinafter Mills, Collaborative Regulatory Partnerships]; see also Mills, Collaborative Voluntary Partnerships, supra note 13.

      [19].   14 C.F.R. § 193 (2011).

      [20].   Id.; see also 5 U.S.C. § 552 (2006).

      [21].   Mills, supra note 13, at 28.

      [22].   Airworthiness directives are rules through which the FAA requires airlines to employ certain safety measures in certain types of aircraft.  See id. at 12.

      [23].   Press Release, Fed. Aviation Admin., FAA Proposes $10.2 Million Civil Penalty Against Southwest Airlines (Mar. 6, 2008), available at; Judson Berger, Southwest Has History of Triggering FAA Action, (Apr. 4, 2011),

      [24].   Mills, Collaborative Regulatory Partnerships, supra note 18, at 4–5.

      [25].   Id. at 5–6.

      [26].   The relevant part broke up and immediately lost all functionality.  Walter Berry & Lien Hoang, ‘Fuselage Rupture’ Forces Emergency Landing On Southwest Airlines Flight, Huffington Post (Apr. 2, 2011),

-landing-southwest_n_843925.html.  The plane shed five feet of exterior skin, “an approximately 9-inch wide by 59-inch long rectangular-shaped hole,” and opened the passenger cabin to the outside environment, which was the stratosphere.  Rapid Decompression Due to Fuselage Rupture, Nat’l Transp. Safety Board, (last visited Sept. 2, 2012).  That in itself is life threatening even if the plane does not fall out of the sky.  See id.

      [27].   Press Release, Fed. Aviation Admin., FAA Will Mandate Inspections for Early Models of 737 Aircraft (Apr. 4, 2011), available at

      [28].   The NTSB’s press release on the accident suggested that all maintenance inspections were conducted, there were no discrepancies, and there was no sign of apparent wrongdoing.  Press Release, Nat’l Transp. Safety Bd., NTSB Continues Investigation of Southwest Flight 812 (Apr. 25, 2011), available at  What seemed to happen is that the FAA, the airline, and the manufacturer did not believe the specific part of the plane warranted attention on a plane of this age; therefore, they did not expect cracks in it, and so no one checked for it.  NTSBgov, NTSB Final Press Briefing SWA Flight 812 Apr 4 2011, YouTube (Apr. 4, 2011),  “It was not an area that was believed could fail,” said the NTSB board member.  Id.

      [29].   FAA Docket No. 2011-0348, Airworthiness Directive 7 (May 6, 2011), available at$FILE/2011-08-51.pdf.

      [30].   Mills, supra note 13, at 32–33.  This view is also raised in the medical context.  See, e.g., Michael R. Cohen, Why Error Reporting Systems Should be Voluntary, 320 Brit. Med. J. 728, 729 (2000).  Cohen, president of the Institute for Safe Medication Practices and a well-credentialed pharmacist and scholar, argues that when disclosure is used primarily to punish the wrongdoer (creating a “fear of retribution”) rather than to create solutions, it has a stifling effect on disclosure: “[N]on-punitive and confidential voluntary reporting programmes provide more useful information about errors and their causes than mandatory reporting programmes. . . .  Practitioners who are forced to report errors are less likely to provide in depth information because their primary motivation is self protection and adherence to a requirement . . . .”  Id. at 729.

      [31].   Mills, supra note 13, at 17.

      [32].   U.S. Gov’t Accountability Office, GAO-10-414, Aviation Safety: Improved Data Quality and Analysis Capabilities are Needed as FAA Plans a Risk-Based Approach to Safety Oversight (2010), available at

      [33].   Russell W. Mills, Collaborating with Industry to Ensure Regulatory Oversight: The Use of Voluntary Safety Reporting Programs by the Federal Aviation Administration 156–57 (May 2011) (unpublished Ph.D. dissertation, Kent State University), available at

      [34].   Edward W. Stimpson et al., Managing Risks in Civil Aviation: A Review of the FAA’s Approach to Safety 56 (2008), available at

      [35].   Id. at 65 app. 3.

      [36].   Following a reorganization in 2010, the agency was restructured and is now named the “Bureau of Ocean Energy Management, Regulation and Enforcement.”  Salazar Swears-In Michael R. Bromwich to Lead Bureau of Energy Management, Regulation and Enforcement, Bureau of Ocean Energy Mgmt., Reg. & Enforcement (Jun. 21, 2010),  Here, however, all the examples described date from before the reorganization, and the sources I used refer to the agency as the “Mineral Management Service.”  I therefore considered it less confusing to use the old name here.

      [37].   Memorandum from Earl E. Devaney, Inspector Gen., U.S. Dep’t of the Interior, to Dirk Kempthorne, Sec. of the Interior 1–3 (Sept. 9, 2008), available at
-OIG_Report_2008.pdf (regarding OIG investigations of MMS employees).

      [38].   Dep’t of the Interior, Office of Inspector Gen., Investigative Report of MMS Oil Marketing Group – Lakewood 1 (2008) [hereinafter Investigative Report],available at .

      [39].   Id. at 1–2.

      [40].   Id. at 1–2, 4.

      [41].   Id. at 10–31.

      [42].   Id. at 11.

      [43].   See, e.g., Perry Bacon, Jr. et al., Lawmakers Assail Minerals Management Service, Wash. Post (May 26, 2010), (explaining that members of both parties of Congress criticized the MMS); see also Kathy Finn, Two Years After BP Oil Spill, Tourists Back in U.S. Gulf, Reuters (May 27, 2012), (discussing oil spill from BP oil well in Gulf of Mexico on April 20, 2010).

      [44].   The Deepwater Horizon Incident: Are the Minerals Management Service Regulations Doing the Job? Hearing Before the S. Comm. on Energy & Mineral Res., 111th Cong. 13–15 (2010) (statement of Mary L. Kendall, Acting Inspector General, Department of the Interior), available at

      [45].   Jaclyn Lopez, BP’s Well Evaded Environmental Review: Categorical Exclusion Policy Remains Unchanged, 37 Ecology L. Currents 93, 95–98 (2010).

      [46].   But see Christopher Carrigan, Minerals Management Service and Deepwater Horizon: What Role Should Capture Play?, in Preventing Capture: Special Interest Influence in Regulation, and How to Limit It (Daniel Carpenter & David Moss eds., forthcoming) (manuscript at 56–58) (discussing that the MMS was not, as a whole, captured).

      [47].   Bernstein, supra note 3, at 268; Jean-Jacques Laffont & Jean Tirole, A Theory of Incentives in Procurement and Regulation 475–80 (1993); Jon Hanson & David Yosifon, The Situation: An Introduction to the Situational Character, Critical Realism, Power Economics, and Deep Capture, 152 U. Pa. L. Rev. 129, 202–05 (2003); Richard B. Stewart, The Reformation of American Administrative Law, 88 Harv. L. Rev. 1667, 1685 (1975).

      [48].   Craig W. Thomas et al., Special Interest Capture of Regulatory Agencies: A Ten-Year Analysis of Voting Behavior on Regional Fishery Management Councils, 38 Pol’y Stud. J. 447, 448 (2010).  There is room in the literature for an article identifying different types of behavior that fall under the definition of capture and then addressing each type separately.  That is not this Article.  As the literature review demonstrates here, scholarship focusing on a specific type of capture, such as the revolving door, exists.  See, e.g., Ernesto Dal Bó, Regulatory Capture: A Review, 22 Oxford Rev. of Econ. Pol’y 203, 214–15 (2006).  But much of the literature speaks in much more general terms.  See, e.g., Steven P. Croley, Regulation and Public Interests: The Possibility of Good Regulatory Government 26–29 (2008); Malcolm K. Sparrow, The Regulatory Craft: Controlling Risks, Solving Problems, and Managing Compliance 35, 37 (2000); Ayres & Braithwaite,supra note 15, at 436–39; Makkai & Braithwaite, supra note 1.

      [49].   Paul J. Quirk, Industry Influence in Federal Regulatory Agencies 4 (1981).

      [50].   Daniel Carpenter & David Moss, Introduction, in Preventing Capture: Special Interest Influence in Regulation, and How to Limit It, supra note 46 (manuscript at 20).

      [51].   Makkai & Braithwaite, supra note 1, at 64, 66.

      [52].   James Kwak, Cultural Capture and the Financial Crisis, in Preventing Capture: Special Interest Influence in Regulation, and How to Limit It, supra note 46 (manuscript at 4–7).

      [53].   Susan Webb Yackee, Reconsidering Agency Capture During Regulatory Policymaking, in Preventing Capture: Special Interest Influence in Regulation, and How to Limit It, supra note 46 (manuscript at 10).

      [54].   See Ian Ayres & John Braithwaite, Responsive Regulation: Transcending the Deregulation Debate 55–56 (Donald R. Harris et al. eds., 1992) (“Where relationships are ongoing, where encounters are regularly repeated with the same regulator, corruption is more rewarding for both parties: the regulator can collect recurring bribe payments and the firm can benefit from repeated purchases of lower standards.  Moreover, ongoing relationships permit the slow sounding out of the corruptibility and trustworthiness of the other to stand by corrupt bargains (and at minimum risk because an identical small number of players are involved each time).”); Neil Gunningham, Assessing Responsive Regulation ‘on the Ground’: Where Does It Work? 3 (2011) (unpublished manuscript) (on file with the author).

      [55].   Letter from Richard Olney, Att’y Gen., to Charles E. Perkins, President of the Chi., Burlington & Quincy R.R. (1892), quoted in Louis L. Jaffe, The Effective Limits of the Administrative Process: A Reevaluation, 67 Harv. L. Rev. 1105, 1109 n.7 (1954).

      [56].   Bernstein, supra note 3, at 3–8.

      [57].   Id. at 83–102.

      [58].   For a summary of previous criticisms and an additional one, see Paul Sabatier, Social Movements and Regulatory Agencies: Toward a More Adequate—and Less Pessimistic—Theory of “Clientele Capture”, 6 Pol’y Sci. 301, 303–05 (1975).  Among the criticisms mentioned is that often legislation is designed to promote close connections between industry and regulator and that Bernstein’s assumptions that the agency cannot mobilize a supporting constituency to counteract industry influence and that the supporting coalition inevitably disperses or loses interest are problematic.  Id. at 305.

      [59].   See, e.g., Nader & Smith, supra note 11, at 59–60, 83–86; Turner, supra note 8, at 37–41, 120–21.

      [60].   William D. Berry, An Alternative to the Capture Theory of Regulation: The Case of State Public Utility Commissions, 28 Am. J. Pol. Sci. 524, 524–27 (1984); Sabatier, supra note 58, at 304.

      [61].   Croley, supra note 48, at 50–51; Richard A. Posner, The Behavior of Administrative Agencies, 1 J. Legal Stud. 305, 315–16 (1972).

      [62].   See generally George J. Stigler, The Theory of Economic Regulation, 2 Bell J. Econ. & Mgmt. Sci. 3 (1971) [hereinafter Stigler, Economic Regulation].  This essay followed a previous article by Stigler and Friedland, in which they examined the effect of regulation in the electricity sector and concluded it had little effect.  See George J. Stigler & Claire Friedland, What Can Regulators Regulate? The Case of Electricity, 5 J.L. & Econ. 1, 11–12 (1962).

      [63].   Stigler, Economic Regulation, supra note 62, at 3–7.

      [64].   Sam Peltzman, Toward a More General Theory of Regulation, 19 J.L. & Econ. 211, 211–13 (1976).  Among other things, Peltzman suggests that where industry influence conflicts with other influences, the result will usually not be completely caving to industry or to consumers but somewhere in between—though it will lean towards industry.  Id. at 227–30.

      [65].   Sam Peltzman, The Economic Theory of Regulation After a Decade of Deregulation, 1989 Brookings Papers on Econ. Activity Microeconomics 1, 4–5.

      [66].   Id.; see also Dal Bó, supra note 48, at 206–07.

      [67].   Dal Bó, supra note 48, at 204, 207–11.

      [68].   Croley, supra note 48, at 9–13, 20–21, 59–60; Fiona Haines, The Paradox of Regulation: What Regulation Can Achieve and What It Cannot 12–30 (2011); Dal Bó, supra note 48, at 204, 206.

      [69].   Dal Bó, supra note 48, at 215–16.

      [70].   Quirk, supra note 49, at 16–21.

      [71].   Dal Bó, supra note 48, at 207–13.

      [72].   Id. at 214–15.  Dal Bó also addresses two studies that suggested some positive influences to the revolving door.  Id. at 217–19.

      [73].   Cornelius M. Kerwin, Rulemaking: How Government Agencies Write Law and Make Policy 182–84 (3d ed. 2003) (“Businesses . . . are involved in rulemaking more often than are other groups, and they devote to it greater slices of their likely larger budgets and staffs.”); Berry, supra note 60, at 525–26; Croley,supra note 3, at 126–31; Marissa Martino Golden, Interest Groups in the Rule-Making Process: Who Participates? Whose Voices Get Heard?, 8 J. Pub. Admin. Res. & Theory 245, 259–64 (1998); Jason Webb Yackee & Susan Webb Yackee, A Bias Towards Business? Assessing Interest Group Influence on the U.S. Bureaucracy, 68 J. Pol. 128, 133–35 (2006).  But see Mariano-Florentino Cuéllar, Rethinking Regulatory Democracy, 57 Admin. L. Rev. 411, 435–59, 497–99 (2005) (finding substantial participation by lay people and public interest groups in three rulemakings and finding that the sophistication of the comments, rather than the identity of the commentator, determines whether a comment influences the agency’s decision).

      [74].   Shapiro & Steinzor, supra note 3, at 1752–55.

      [75].   Daniel P. Carpenter, Protection Without Capture: Product Approval by a Politically Responsive, Learning Regulator, 98 Am. Pol. Sci. Rev. 613, 614–15, 625–26 (2004).

      [76].   Carpenter & Moss, supra note 50 (manuscript at 10–13, 17) (elaborating upon and discussing the idea that claims of capture are often supported by sketchy and problematic evidence).

      [77].   In discussing the idea of “tripartism,” the authors suggest NGOs can serve as a counter to industry influence.  Ayres & Braithwaite, supra note 54, at 54–73.

      [78].   Id. at 65–69; Ayres & Braithwaite, supra note 15, at 452–56.

      [79].   Ayres & Braithwaite, supra note 54, at 65.

      [80].   Id.

      [81].   Makkai & Braithwaite, supra note 1, at 62–64.

      [82].   Id. at 64–66.

      [83].   Id. at 69–72.

      [84].   See, e.g., Deborah S. Dalton, Negotiated Rulemaking Changes EPA Culture, in Federal Administrative Dispute Resolution Deskbook 135, 135–52 (Marshall J. Breger et al. eds., 2001); Daniel J. Fiorino & Chris Kirtz, Breaking Down Walls: Negotiated Rulemaking at EPA, 4 Temp. Envtl. L. & Tech. J. 29, 29–30, 40 (1985); Daniel J. Fiorino, Regulatory Negotiation as a Form of Public Participation, in Fairness and Competence in Citizen Participation 223–25 (Ortwin Renn et al. eds., 1995); Daniel J. Fiorino, Regulatory Policy and the Consensus Trap: An Agency Perspective, 19 Analyse & Kritik 64, 74–75 (1997); Jody Freeman,Collaborative Governance in the Administrative State, 45 UCLA L. Rev. 1, 97–98 (1997); Philip J. Harter, Assessing the Assessors: The Actual Performance of Negotiated Rulemaking, 9 N.Y.U. Envtl. L.J. 32, 32–38, 52–54 (2000); Laura I. Langbein & Cornelius M. Kerwin, Regulatory Negotiation Versus Conventional Rule Making: Claims, Counterclaims, and Empirical Evidence, 10 J. Pub. Admin. Res. & Theory 599, 599–600 (2000); Siobhan Mee, Negotiated Rulemaking and Combined Sewer Overflows (CSOs): Consensus Saves Ossification?, 25 B.C. Envtl. Aff. L. Rev. 213, 213 (1997).

      [85].   Bardach & Kagan, supra note 12, at 134–40.

      [86].   Ayres & Braithwaite, supra note 54, at 25–35.  The authors expressly address the tension between their approach and capture, and suggest a solution, which I will address in Part I.C.

      [87].   Virginia Haufler, A Public Role for the Private Sector 4 (2001); Neil Gunningham & Joseph Rees, Industry Self-Regulation: An Institutional Perspective, 19 Law & Pol’y 363, 363–66 (1997).  For a detailed analysis of self-regulation, including its strengths and weaknesses, see Ayres & Braithwaite, supra note 54, at 102–28.

      [88].   For a recent overview of that literature, see Dominique Custos & John Reitz, Public-Private Partnerships, 58 Am. J. Comp. L. 555, 555 (2010).  For an article expressing concerns about the effects of public-private partnerships on accountability, see Martha Minow, Public and Private Partnerships: Accounting for the New Religion, 116 Harv L. Rev. 1229, 1255–59 (2003).  For examples of promoting such partnership in practice, see Noel P. Greis & Monica L. Nogueira, Food Safety—Emerging Public-Private Approaches: A Perspective for Local, State, and Federal Government Leaders 6–9 (2010); Cassandra Moseley, Strategies for Supporting Frontline Collaboration: Lessons from Stewardship Contracting 6–8 (2010).

      [89].   Kenneth M. Murchison, The Snail Darter Case: TVA Versus the Endangered Species Act 1–6, 193–98 (2007).

      [90].   George F. Wilhere, Three Paradoxes of Habitat Conservation Plans, 44 Envtl. Mgmt. 1089, 1089–90 (2009).

      [91].   Id. at 1090.

      [92].   Id. at 1089.

      [93].   Errol E. Meidinger, Laws and Institutions in Cross-Boundary Stewardship, in Stewardship Across Boundaries 87, 101 (Richard L. Knight & Peter B. Landres eds., 1998).

      [94].   AIBS Co-Sponsors HCPs Study, 48 BioScience 228, 228–29 (1998); Cameron W. Barrows et al., A Framework for Monitoring Multiple-Species Conservation Plans, 69 J. Wildlife Mgmt. 1333, 1343–44 (2005); Frances C. James, Lessons Learned from a Study of Habitat Conservation Planning, 49 BioScience 871, 873–74 (1999); Jennifer Jester, Habitat Conservation Plans Under Section 10 of the Endangered Species Act: The Alabama Beach Mouse and the Unfulfilled Mandate of Species Recovery, 26 B.C. Envtl. Aff. L. Rev. 131, 147–54 (1998); M. Nils Peterson et al., A Tale of Two Species: Habitat Conservation Plans as Bounded Conflict, 68 J. Wildlife Mgmt. 743, 743–45 (2004); Matthew E. Rahn et al., Species Coverage in Multispecies Habitat Conservation Plans: Where’s the Science?, 56 BioScience 613, 616–19 (2006); Wilhere, supra note 90, at 1089.

      [95].   Leigh Raymond, Cooperation Without Trust: Overcoming Collective Action Barriers to Endangered Species Protection, 34 Pol’y Stud. J. 37, 52–54 (2006); Craig W. Thomas, Habitat Conservation Planning: Certainly Empowered, Somewhat Deliberative, Questionably Democratic, 29 Pol. & Soc’y 105, 118–24 (2001).

      [96].   Lisa Blomgren Bingham, Avoiding Negotiation: Strategy and Practice, in The Negotiator’s Fieldbook 113, 113–20 (Andrea Kupfer Schneider & Christopher Honeyman eds., 2006); Amy J. Cohen, Negotiation, Meet New Governance: Interests, Skills, and Selves, 33 Law & Soc. Inquiry 503, 534 (2008).  For criticism of this development, see Jonathan D. Mester, The Administrative Dispute Resolution Act of 1996: Will the New Era of ADR in Federal Administrative Agencies Occur at the Expense of Public Accountability?, 13 Ohio St. J. on Disp. Resol. 167, 168–69 (1997).

      [97].   Martina Vidovic & Neha Khanna, Can Voluntary Pollution Prevention Programs Fulfill Their Promises?  Further Evidence from the EPA’s 33/50 Program, 53 J. Envtl. Econ. & Mgmt. 180, 180–82, 189–92 (2007).

      [98].   Mills, Collaborative Regulatory Partnerships, supra note 18, at 45.

      [99].   Ayres & Braithwaite,  supra note 54, at 55.

    [100].   Neal Shover et al., Enforcement or Negotiation: Constructing a Regulatory Bureaucracy 5 (1986); see also Barry M. Mitnick, The Political Economy of Regulation: Creating, Designing, and Removing Regulatory Forms 38 (1980); Sparrow, supra note 48, at 18, 35.

    [101].   Mark Seidenfeld, Empowering Stakeholders: Limits on Collaboration as the Basis for Flexible Regulation, 41 Wm. & Mary L. Rev. 411, 412 (2000).

    [102].   See, e.g., Ayres & Braithwaite, supra note 54, at 57–60; Moseley, supra note 88, at 9.Busenberg;Freeman;Chris Ansell & Alison Gash, Collaborative Governance in Theory and Practice, 18 Journal of Public Administration Research and Theory 543,  (2008);Archon Fung, et al., Full Disclosure: The Perils and Promise of Transparency (Cambridge University Press. 2007);Doug  Henton, et al., Collaborative Governance: A Guide for Grantmakers   (William and Flora Hewlett Foundation. 2006);Charles Koch, Collaborative Governance in the Restructured Electricity Industry, 40 Wake Forest L. Rev. 589,  (2005);Janet   Newman, et al., Public Participation and Collaborative Governance, 33 Journal of Social Policy 203,  (2004).

    [103].   Reuel E. Schiller, Enlarging the Administrative Polity: Administrative Law and the Changing Definition of Pluralism, 1945–1970, 53 Vand. L. Rev. 1389, 1405–13 (2000).

    [104].   Ayres & Braithwaite, supra note 54, at 57–60.

    [105].   Berry, supra note 60, at 525–26; Paul A. Sabatier et al., Hierarchical Controls, Professional Norms, Local Constituencies, and Budget Maximization: An Analysis of U.S. Forest Service Planning Decisions, 39 Am. J. Pol. Sci. 204, 221, 226, 229 (1995); Sabatier, supra note 58, at 325–26.

    [106].   Berry, supra note 60, at 542; William T. Gormley, Jr., Alternative Models of the Regulatory Process: Public Utility Regulation in the States, 35 W. Pol. Q. 297, 302–05, 309–10 (1982); Shapiro & Steinzor, supra note 3, at 1742; Guy L. F. Holburn & Pablo T. Spiller, Interest Group Representation in Administrative Institutions: The Impact of Consumer Advocates and Elected Commissioners on Regulatory Policy in the United States 14–16 (Univ. of Cal. Energy Inst., Energy Policy & Econ. Working Paper No. 002, 2002).

    [107].   Peltzman points out that capture does not mean that the regulator will only follow the industry’s wishes; if there is a competing group, it might have some influence but less than that of the capturing group.  Peltzman, supra note 65, at 9–14; Peltzman, supra note 64, at 217–19.

    [108].   See, e.g., Sabatier et al., supra note 105, at 229–32.  The authors demonstrate that there is strong influence of community and environmental groups, and, in some cases, an influence equal to that of business groups.  Id.

    [109].   This is because some aspects of responsive regulations may not work in every case.  See Gunningham, supra note 54, at 1–4, 10–12.

    [110].   Sabatier, supra note 58, at 325–27.  The author presents this as a solution that is sometimes available, but certainly one that is not always available.  Id.

    [111].   Ayres & Braithwaite, supra note 15, at 444–45.

    [112].   Id. at 444.

    [113].   The argument is that, for many regulatory issues, affected members of the public have too low of a stake in the outcome to invest sufficiently in acquiring information and monitoring.  Peltzman, supra note 64, at 212–13.

    [114].   See Ayres and Braithwaite, supra note 15, at 472–73, 478–87.

    [115].   Croley, supra note 48, at 138–39; Jeffrey S. Lubbers, The Transformation of the U.S. Rulemaking Process—For Better or Worse, 34 Ohio N.U. L. Rev. 469, 471, 481–82 (2008); Dorit Rubinstein Reiss, Tailored Participation: Modernizing the APA Rulemaking Procedures, 12 N.Y.U. J. Legis. & Pub. Pol’y 321, 330–37 (2009).

    [116].   See Golden, supra note 73, at 247–48, 259–61 (noting that those with money, particularly businesses, are the most influential); Reiss, supra note 115, at 332 (noting that it is rare for others beyond interest groups, particularly business interest groups, to participate in rulemaking); Shapiro & Steinzor, supra note 3, at 1752–55 (noting that “many more business groups lobby the Executive Branch than public interest groups” (citaton omitted)); Webb Yackee & Webb Yackee, supranote 73, at 128–30 (“[B]usiness interests dominate bureaucratic policymaking . . . .”); William F. West, Formal Procedures, Informal Processes, Accountability, and Responsiveness in Bureaucratic Policy Making: An Institutional Policy Analysis, 64 Pub. Admin. Rev. 66, 66–68 (2004) (noting that public comment “was numerically weighted in favor of business groups”).

    [117].   Bernstein, supra note 3, at 269–71.

    [118].   Id.; Sabatier, supra note 58, at 317–20.

    [119].   Ayres & Braithwaite, supra note 15, at 439–40.

    [120].   Id. at 440.

    [121].   Anne Bishop, Daughter of the Blood 108 (1998).

    [122].   Bernstein, supra note 3, at 270–71; Ayres & Braithwaite, supra note 15, at 449; Hanson & Yosifon, supra note 47, at 214 (explaining that the second layer of capture is where “the interior situation of relevant actors is also subject to capture. . . . [T]argets include the way that people think and the way that they think they think.”).

    [123].   Stigler & Friedland, supra note 62.

    [124].   Amitai Etzioni, Does Regulation Reduce Electricity Rates? A Research Note, 19 Pol’y Sci. 349, 351–52 (1986).

    [125].   Carpenter, supra note 75, at 614.

    [126].   Id. at 614–15.

    [127].   Cf. Robert D. Behn, Rethinking Democratic Accountability 3 (2001) (“Those whom we want to hold accountable have a clear understanding of what accountability means: Accountability means punishment. . . .  Moreover, the definition of a ‘screwup’ is constantly changing. . . .  Public officials may not realize that something is a ‘screwup’ until someone holds them accountable for doing what many others have been doing for quite a while.”).

    [128].   Croley, supra note 48, at 28–29; Peltzman, supra note 65, at 9–10; Paul Eric Teske et al., The Economic Theory of Regulation and Trucking Deregulation: Shifting to the State Level, 79 Pub. Choice 247, 248–49 (1994).

    [129].   See Croley, supra note 48, at 14; Cary Coglianese & David Lazer, Management-Based Regulation: Prescribing Private Management to Achieve Public Goals, 37 Law & Soc’y. Rev. 691, 696, 698, 700 (2003); Cary Coglianese et al., Performance-Based Regulation: Prospects and Limitations in Health, Safety, and Environmental Protection, 55 Admin. L. Rev. 705, 706, 711–15, 723 (2003); Lars Noah, The Little Agency That Could (Act with Indifference to Constitutional and Statutory Strictures), 93 Cornell L. Rev. 901, 901–04 (2008).

    [130].   Robert Sprague & Aaron J. Lyttle, Shareholder Primacy and the Business Judgment Rule: Arguments for Expanded Corporate Democracy, 16 Stan. J.L. Bus. & Fin. 1, 4–5 (2010).  While still dominant in practice, that notion is challenged in some corporate law scholarship.  See, e.g., Robert Charles Clark, Corporate Law 677–81 (1986).  The author claims that corporations have duties to society at large, not just to their shareholders, and that those duties require corporate responsibility.  Id. at 695; see also C. James Koch, Social Responsibility, Corporate Strategy and Profits, 1 Harv. Envtl. L. Rev. 662, 664–68 (1976); Colin Scott,Reflexive Governance, Meta-Regulation and Corporate Social Responsibility: The ‘Heineken Effect’, in Perspectives on Corporate Social Responsibility 178–82 (Nina Boeger et al. eds., 2008).

    [131].   Dion Casey, Agency Capture: The USDA’s Struggle to Pass Food Safety Regulations, Kan. J.L. & Pub. Pol’y, Spring 2008, at 142, 147–48.

    [132].   Id.

    [133].   Id.

    [134].   Id. at 153–56.

    [135].   Etzioni, supra note 3, at 320.

    [136].   Id.

    [137].   Id.

    [138].   Id.

    [139].   Id. at 321.

    [140].   Id.

    [141].   Daniel Carpenter, Corrosive Capture? The Dueling Forces of Autonomy and Industry Influence in FDA Pharmaceutical Regulation, in Preventing Capture: Special Interest Influence in Regulation, and How to Limit It, supra note 46 (manuscript at 3–5).

    [142].   Peter Grabosky & John Braithwaite, Of Manners Gentle: Enforcement Strategies of Australian Business Regulatory Agencies 198–201, 203–07 (1987); Christopher D. Stone, Where the Law Ends: The Social Control of Corporate Behavior 93–110 (1st ed. 1975); Turner, supra note 8, at 17–18, 37–45; Etzioni, supranote 3, at 320.

    [143].   Sparrow, supra note 48, at 35; Dal Bó, supra note 48, at 214–15, 217–18.  But for a more positive view of the revolving door, see Ayres & Braithwaite,supra note 15, at 436–37.

    [144].   Memorandum from John E. Dupuy, Assistant Inspector Gen. for Investigations, to S. Elizabeth Birnbaum, Dir., Minerals Mgmt. Serv. (Apr. 12, 2010) (on file with the author).

    [145].   Memorandum from Mary L. Kendall, Acting Inspector Gen., to Ken Salazar, Sec. of the Interior (May 24, 2010) (on file with the author).  But seegenerally Carrigan, supra note 46 (suggesting a different, historical explanation from Kendall’s assessment of the problem and its source).

    [146].   Nader & Smith, supra note 11, at 99–101.

    [147].   42 U.S.C. § 15942 (2006).

    [148].   U.S. Gov’t Accountability Office, GAO-09-872, Energy Policy Act of 2005: Greater Clarity Needed to Address Concerns with Categorical Exclusions for Oil and Gas Development Under Section 390 of the Act 12 (Sept. 2009), available at

    [149].   Id. at 23–29.  Note that the GAO did not attribute these deviations to wrongdoing: “We did not find intentional actions on the part of BLM staff to circumvent the law; rather, our findings reflect what appear to be honest mistakes stemming from confusion in implementing a new law with evolving guidance.” 29; see also Juliet Eilperin, U.S. Exempted BP Rigs from Impact Analysis, Wash. Post, May 5, 2010, at A4.

    [150].   42 U.S.C. § 4332 (2006).

    [151].   Eilperin, supra note 149.

    [152].   Id. (quoting Kierán Suckling, Exec. Dir., Ctr. for Biological Diversity).

    [153].   Haines, supra note 68, at 50–52, 203; David Levi-Faur, Regulatory Capitalism: The Dynamics of Change Beyond Telecoms and Electricity, 19 Governance 497, 503–04 (2006).

    [154].   See Carpenter, supra note 75, at 613 (focusing on the entry-barrier aspect of capture).

    [155].   Damien Geradin, The Opening of State Monopolies to Competition: Main Issues of the Liberalization Process, in The Liberalization of State Monopolies in the European Union and Beyond 181, 182–84 (Damien Geradin ed., 2000); Pierre Larouche, Telecommunications, in The Liberalization of State Monopolies in the European Union and Beyond, supra, at 15, 44–45; Michael J. Legg, Verizon Communications, Inc. v. FCC—Telecommunications Access Pricing and Regulator Accountability Through Administrative Law and Takings Jurisprudence, 56 Fed. Comm. L.J. 563, 565–67, 575 (2004).

    [156].   Steven K. Vogel, Freer Markets, More Rules: Regulatory Reform in Advanced Industrial Countries 65–66, 88–92 (1996); Viktor Mayer-Schönberger & Mathias Strasser, A Closer Look at Telecom Deregulation: The European Advantage, 12 Harv. J.L. & Tech. 561, 564–66 (1999); Vincent Wright, Public Administration, Regulation, Deregulation and Reregulation, in Managing Public Organizations: Lessons from Contemporary European Experience 244, 245 (Kjell A. Eliassen & Jan Kooiman eds., 1993).

    [157].   In telecommunications, see the articles described in Dal Bó, supra note 48, at 216.  Beyond utilities, the railroads’ capture of the ICC led to increased fares.  See Samuel P. Huntington, The Marasmus of the ICC: The Commission, the Railroads, and the Public Interest, 61 Yale L.J. 467, 478, 480–81 (1952); Teske et al., supra note 128, at 249.

    [158].   Huntington, supra note 157, at 481–85.

    [159].   See supra note 66.

    [160].   Grabosky & Braithwaite, supra note 142, at 190–95; Keith Hawkins, Environment and Enforcement: Regulation and the Social Definition of Pollution 7 (1984); Ayres & Braithwaite, supra note 15, at 457–58 n.54; Seidenfeld, supra note 101, at 419, 424–25; Gunningham, supra note 54, at 4–8.

    [161].   Haines, supra note 68, at 24–26.

    [162].   Ayres & Braithwaite, supra note 15, at 453 (noting that the regulated firm is also a member of society, and increasing its welfare should count in calculating the effects to the general welfare).

    [163].   For a description of the APA framework and its goals, see Reiss, supra note 115, at 326; Reuel E. Schiller, Rulemaking’s Promise: Administrative Law and Legal Culture in the 1960s and 1970s, 53 Admin. L. Rev. 1139, 1140, 1145, 1162–63 (2001); Stewart, supra note 47, at 1713–14.  A thorough discussion of the APA is beyond this paper.

    [164].   5 U.S.C. § 553 (2006); see also Mathew D. McCubbins et al., Administrative Procedures as Instruments of Political Control, 3 J.L. Econ. & Org. 243, 258 (1987); Richard B. Stewart, Administrative Law in the Twenty-First Century, 78 N.Y.U. L. Rev. 437, 446–49 (2003); West, supra note 116, at 67.

    [165].   Lubbers, supra note 115, at 476–78.

    [166].   Sparrow, supra note 48, at 35; Richard J. Pierce, Jr., Judicial Review of Agency Actions in a Period of Diminishing Agency Resources, 49 Admin. L. Rev. 61, 62–64 (1997); see also Croley, supra note 48, at 17.

    [167].   Paul Pierson, From Expansion to Austerity: The New Politics of Taxing and Spending, in Seeking the Center: Politics and Policymaking at the New Century 54, 60–61, 73 (Martin A. Levin et al. eds., 2001).  The author uses the term “fiscal austerity” to discuss the possible retrenchment of the welfare state due to economic troubles of the twentieth century.  Id. at 55.  The term, however, also nicely reflects the current reality of financial crises and the need to tighten government spending—a reality felt at least for several decades.

    [168].   Shapiro & Steinzor, supra note 3, at 1758–62.

    [169].   Roger W. Cobb & David M. Primo, The Plane Truth: Airline Crashes, the Media, and Transportation Policy 16 (2003).

    [170].   Mills, supra note 13, at 12.

    [171].   Id.

    [172].   Casey, supra note 131, at 146.

    [173].   David C. Vladeck, The FDA and Deference Lost: A Self-Inflicted Wound or the Product of a Wounded Agency? A Response to Professor O’Reilly, 93 Cornell L. Rev. 981, 983–84 (2008); Lorna Zach & Vicki Bier, Risk-Based Regulation for Import Safety, in Import Safety: Regulatory Governance in the Global Economy 151, 153–54 (Cary Coglianese et al. eds., 2009).

    [174].   See Thomas O. Sargentich, The Critique of Active Judicial Review of Administrative Agencies: A Reevaluation, 49 Admin. L. Rev. 599, 602–03 (1997); David Schoenbrod, The EPA’s Faustian Bargain, Regulation, Fall 2006, at 36, 41–42; Vladeck, supra note 173, at 984–85 (arguing that, until Congress provides the FDA with adequate funding to protect public health, the agency will be unable to ameliorate its reputation).

    [175].   Pierce, supra note 166, at 62–65.

    [176].   See Sabatier et al., supra note 105, at 207 (“Given that information is costly to acquire and that individuals have limited information-processing capabilities, information must be condensed as it moves up the hierarchy.  Such condensation provides an opportunity for distortion, usually to flatter the officials involved and to mirror their policy views.  As a result, top officials may hold incomplete, and often biased views of the situations confronted by their subordinates.”).

    [177].   Alexander S. P. Pfaff & Chris William Sanchirico, Environmental Self-Auditing: Setting the Proper Incentives for Discovery and Correction of Environmental Harm, 16 J.L. Econ. & Org. 189, 189–91 (2000).

    [178].   Mills, supra note 13, at 14; Anna Alberini & Kathleen Segerson, Assessing Voluntary Programs to Improve Environmental Quality, 22 Envtl. & Resource Econ. 157, 158 (2002).

    [179].   Edward P. Weber & Anne M. Khademian, Wicked Problems, Knowledge Challenges, and Collaborative Capacity Builders in Network Settings, 68 Pub. Admin. Rev. 334, 343 (2008) (“[U]sing only government-based public managers and coercion to solicit information and bring about compliance may lead to short-term, incomplete, high-cost successes at the expense of long-term problem-solving effectiveness . . . .”).

    [180].   Dal Bó, supra note 48, at 214.

    [181].   Wagner, supra note 3, at 1331.

    [182].   David Shenk, Data Smog: Surviving the Information Glut 15–16 (1997); Wagner, supra note 3, at 1331.

    [183].   Archon Fung et al., Full Disclosure: The Perils and Promise of Transparency 171–72 (2007); Shenk, supra note 182; Ira S. Nathenson, Internet Infoglut and Invisible Ink: Spamdexing Search Engines with Meta Tags, 12 Harv. J.L. & Tech. 43, 51–53 (1998).

    [184].   Alberini & Segerson, supra note 178 (“[I]ncreased cooperation between polluters and regulators can improve information flows and reduce implementation lags.”).  On the importance of the format in which the information is presented (easy versus hard to digest), see Fung et al., supra note 183, at 57–64.

    [185].   Mary F. Evans et al., Regulation with Direct Benefits of Information Disclosure and Imperfect Monitoring, 57 J. Envtl. Econ. & Mgmt. 284, 285–86 (2009).

    [186].   A. Mitchell Polinsky & Steven Shavell, Mandatory Versus Voluntary Disclosure of Product Risks 4 (Nat’l Bureau of Econ. Research, Working Paper No. 12776, 2006), available at (“[V]oluntary disclosure will induce firms to acquire more information about product risks because they can keep silent if the information is unfavorable.”).

    [187].   Max H. Bazerman, Judgment in Managerial Decision Making 34–35 (5th ed. 2002).

    [188].   Id.

    [189].   Paul A. Sabatier, An Advocacy Coalition Framework of Policy Change and the Role of Policy-Oriented Learning Therein, 21 Pol’y Sci. 129, 133 (1988);see also William D. Leach & Paul A. Sabatier, To Trust an Adversary: Integrating Rational and Psychological Models of Collaborative Policymaking, 99 Am. Pol. Sci. Rev. 491, 494 (2005).

    [190].   Frédéric Boehm, Regulatory Capture Revisited – Lessons from Economics of Corruption 11, 16 (Internet Ctr. for Corruption Research, Working Paper No. 22, 2007), available at  Lying is also what the Nader report accuses the airlines of doing to the FAA.  See Nader & Smith, supra note 11, at 99–101.

    [191].   Bardach & Kagan, supra note 12, at 210–13 (noting the “regulatory ratchet” limitation on flexible regulatory enforcement and the persistence of unreasonableness).

    [192].   Nader & Smith, supra note 11, at 99–101.

    [193].   Turner, supra note 8, at 99–106.

    [194].   Grabosky & Braithwaite, supra note 142, at 190–91, 198–201; Roberto Pires, Promoting Sustainable Compliance: Styles of Labour Inspection and Compliance Outcomes in Brazil, 147 Int’l Labour Rev. 199, 200–02 (2008); John T. Scholz, Cooperation, Deterrence, and the Ecology of Regulatory Enforcement, 18 Law & Soc’y Rev. 179, 179–80, 185–87 (1984) [hereinafter Scholz, Cooperation]; Jodi L. Short & Michael W. Toffel, Making Self-Regulation More Than Merely Symbolic: The Critical Role of the Legal Environment, 55 Admin. Sci. Q. 361, 366–69 (2010).  But see generally John T. Scholz & Wayne B. Gray, Can Government Facilitate Cooperation? An Informational Model of OSHA Enforcement, 41 Am. J. Pol. Sci. 693 (1997) (emphasizing the importance of sanctions and supporting the view that they make a difference); John T. Scholz & Wayne B. Gray, OSHA Enforcement and Workplace Injuries: A Behavioral Approach to Risk Assessment, 3 J. Risk & Uncertainty 283 (1990) (emphasizing the importance of penalizing those who do not comply and supporting the view that penalties make a difference).

    [195].   Short & Toffel, supra note 194, at 368.

    [196].   Joseph V. Rees, Reforming the Workplace: A Study of Self-Regulation in Occupational Safety 12–13 (Keith Hawkins & John M. Thomas eds., 1988); Short & Toffel, supra note 194, at 368–69.  This mirrors the famous “bargaining in the shadow of the law” insight.  See Malcolm Feeley, Coercion and Compliance: A New Look at an Old Problem, in Compliance and the Law: A Multi-Disciplinary Approach 51, 60–62 (Samuel Krislov et al. eds., 1972); Robert H. Mnookin & Lewis Kornhauser, Bargaining in the Shadow of the Law: The Case of Divorce, 88 Yale L.J. 950, 950–51 (1979).

    [197].   Neal Shover, The Season of Responsive Regulation 7, 10–11 (June 3, 2011) (unpublished manuscript) (on file with the author).  For a discussion of the literature on the issue and many more citations, see id. at 6–13.

    [198].   Grabosky & Braithwaite, supra note 142, at 190–91, 203; Pires, supra note 194, at 200.

    [199].   Bardach & Kagan, supra note 12, at 292–97; Kagan, Adversarial Legalism, supra note 12, at 198, 200–04; Robert A. Kagan, The Consequences of Adversarial Legalism, in Regulatory Encounters: Multinational Corporations and American Adversarial Legalism 372, 373–74, 389–94, 400–05 (Robert A. Kagan & Lee Axelrad eds., 2000) [hereinafter Kagan, Consequences of Adversarial Legalism]; Pires, supra note 194; Weber & Khademian, supra note 179.

    [200].   Louis Kaplow & Steven Shavell, Optimal Law Enforcement with Self-Reporting of Behavior, 102 J. Pol. Econ. 583, 583–85 (1994); Michael W. Toffel & Jodi L. Short, Coming Clean and Cleaning Up: Does Voluntary Self-Reporting Indicate Effective Self-Policing?, 54 J.L. & Econ. 609, 618 (2011).

    [201].   For example, many enforcement actions by the EPA involve litigation.  See 42 U.S.C. §§ 7413, 9607 (2006); see also R. Shep Melnick, Regulation and the Courts: The Case of the Clean Air Act 200–02 (1983); Lynn Peterson, Promise of Mediated Settlements of Environmental Disputes: The Experience of EPA Region V, 17 Colum. J. Envtl. L. 327, 327–30 (1992).

    [202].   Kagan, Adversarial Legalism, supra note 12, at 29–32; James Q. Wilson, Bureaucracy: What Government Agencies Do and Why They Do It 282–84 (1989).

    [203].   Kagan, Consequences of Adversarial Legalism, supra note 199, at 380–81; Robert A. Kagan et al., Explaining Corporate Environmental Performance: How Does Regulation Matter?, 37 Law & Soc’y Rev. 51, 51–53, 82–84 (2003).

    [204].   Scholz, Cooperation, supra note 194, at 204, 208.

    [205].   Id. at 180–81.

    [206].   Bardach & Kagan, supra note 12, at 104–07.

    [207].   Id. at 64–66, 107–09.  This effect is termed “minimal compliance” by the authors.  Id. at 107–09.

    [208].   Id. at 109–11.

    [209].   Id. at 112–16.

    [210].   Edward L. Deci et al., A Meta-Analytic Review of Experiments Examining the Effects of Extrinsic Rewards on Intrinsic Motivation, 125 Psychol. Bull. 627, 627–28, 658–59 (1999); Deepak Malhotra & J. Keith Murnighan, The Effects of Contracts on Interpersonal Trust, 47 Admin. Sci. Q. 534, 534–35 (2002); Scholz,Cooperation, supra note 194, at 179–80; Short & Toffel, supra note 194, at 367–69.

    [211].   Grabosky & Braithwaite, supra note 142, at 203; Hawkins, supra note 160, at 3–6, 182–88; Makkai & Braithwaite, supra note 1, at 77.

    [212].   Mills, supra note 13, at 24.

    [213].   Haufler, supra note 87, at 3–4; Gunningham & Rees, supra note 87, at 401–02.

    [214].   Mills, supra note 13, at 25.

    [215].   Cass R. Sunstein, Risk and Reason: Safety, Law, and the Environment 144 (2002); Elizabeth Heger Boyle, Political Frames and Legal Activity: The Case of Nuclear Power in Four Countries, 32 Law & Soc’y Rev. 141, 155 (1998).

    [216].   Alicia Mundy, Generic Drug Makers Line Up Behind Proposal for FDA Fees, Wall St. J., Feb. 16, 2011, at B1.

    [217].   Alberini & Segerson, supra note 178, at 157–58; Vidovic & Khanna, supra note 97, at 182.

    [218].   Julian Le Grand, Knights, Knaves or Pawns? Human Behaviour and Social Policy, 26 J. Soc. Pol’y 149, 149, 154 (1997).

    [219].   Grabosky & Braithwaite, supra note 142, at 183–84; Gunningham, supra note 54, at 10–11.

    [220].   See Kagan, Adversarial Legalism, supra note 12, at 191–94.  Kagan demonstrates, citing extensive literature, that strict enforcement and adversarial approaches in the United States did not produce better regulatory results than in other countries and very likely resulted in the expenditure of more time and money to achieve essentially equivalent results.  Id. at 194–95, 198–205.

    [221].   Initially, this sentence read: “Nobody plans regulation with the intent to harm industry.”  But my colleague, John Leshy, pointed out that statement’s inaccuracy.  For example, he suggests, some mining regulation actually serves to restrict, and even undermine, mining operations.

    [222].   Bardach & Kagan, supra note 12, at 313–15; Clyde Wayne Crews, Jr., Ten Thousand Commandments: An Annual Snapshot of the Federal Regulatory State 1–2 (2008); Winston Harrington, Grading Estimates of the Benefits and Costs of Federal Regulation 1–4 (Res. for the Future, Discussion Paper No. 06-39, 2006), available at

    [223].   Geoffrey Garrett, Shrinking States? Globalization and National Autonomy in the OECD, 26 Oxford Dev. Studies 71, 95–96 (1998).

    [224].   Grabosky & Braithwaite, supra note 142, at 215–17; Cosmo Graham, Regulating Public Utilities: A Constitutional Approach 153–54 (2000).

    [225].   For a telling example, see Kagan’s description of the Oakland Port dredging and the effects the regulatory framework had on it.  Kagan, Adversarial Legalism, supra note 12, at 25–29.

    [226].   On the reasons for regulation, see Shapiro & Steinzor, supra note 3, at 1741.

    [227].   Short & Toffel, supra note 194, at 386–87 (suggesting that monitoring can increase compliance, though sanctions may not).  For a discussion of the literature on the issue and many more citations, see id. at 371.

    [228].   This may lead them to try to hide problems, but in a complex corporation, upper management may itself be unaware of the problems until very late, and finding the information sooner will be important to them.

    [229].   Makkai & Braithwaite, supra note 1, at 73.

    [230].   Cobb & Primo, supra note 169, at 17; see also Nader & Smith, supra note 11, at 61–68.

    [231].   Investigative Report, supra note 38, at 1–4.

    [232].   Komesar, supra note 14, at 6.

    [233].   Id.



By: José Gabilondo*


The financial sector has by now mostly sprung back from the crisis that began in 2007, as have corporate profits; but the labor market still sags, mortgage credit is scarce, and the future prospects for the economy, while not bleak, are not rosy either.  Seeing this ongoing harm to the real economy caused by financial activities, Congress enacted the Dodd-Frank Act (“Act”) with an eye to limiting future financial instability.[1]  The Act hopes to do this by updating financial regulation and creating better incentives for the private sector.

To see how the crisis developed and whether the Act will work, we need to understand how financial instability develops in capitalist market systems like ours.  Economist Hyman Minsky claimed that the financial sector in capitalist market systems tends to chase returns by gorging on risk until its own financial structure becomes unstable, leading to a crisis like the last one that started in 2007.[2]  The claim—known as the financial instability hypothesis—merits our attention because, though critical of the financial sector, evidence for it is derived from observing how banks actually operate over the business cycle.

I use the hypothesis in Part I to show what animated the last corporate leverage cycle: escalating expectations for profit financed on progressively riskier credit terms.  In fact, the hypothesis belongs to a larger critique of conceptual approaches that deny the intrinsic instability of capitalist market systems, so I also use Minsky’s work to challenge claims made by nabobs of neoliberal negativism who are resisting the implementation of the Act.  Part II addresses two aspects of the Act that bear directly on how the financial sector creates potentially destabilizing liabilities: (i) new requirements that leverage caused by financial swaps be margined and cleared; and (ii) a new mandate that federal regulatory capital requirements go in the opposite direction of the boom-bust dynamics characteristic of the business cycle.

I.  Liability Structures Do Matter

Hyman Minsky was an economist trained at Harvard in the 1940s under economic historian Joseph Schumpeter.[3]  His theoretical work on the financial system was informed not only by the then recent memory of the Depression but by his service as a bank director.[4]  Minsky observed that “[i]t turns out that the fundamental instability of a capitalist economy is a tendency to explode—to enter into a boom or ‘euphoric’ state,” followed by a bust.[5]  When times were good, he said, firms took on riskier debt to invest in speculative assets, an unsustainable strategy that would lead, in time, to a crash.[6]  He believed that government policy could contribute to the long term viability of capitalism by slowing down these boom-bust cycles.[7]  Doing this would mean going against prevailing market sentiment.

Minsky’s conceptual framework was not widely received by the academic establishment of his day, which followed the direction of Platonic quantitative modeling that assumed away the grittiness of economic life.[8]  The last crisis painfully illustrated the financial instability hypothesis, which is now being reappraised and adopted more widely.  As before, though, the idea that the government should actively intervene in the financial market faces renewed political opposition.

A.            Borrowing by Firms

Minsky’s analysis starts by looking at a firm’s balance sheet, an accounting report that estimates a firm’s net worth for a given moment in time by subtracting what the firm owes to creditors from what the firm owns and is owed by others.  Assets are the firm’s claims on others.  Liabilities are what the firm owes to others.  Assets minus liabilities leaves what belongs to owners, called “equity.”  In the analysis, liability structure as a whole is central because it suggests how much and when the firm will face demands for payment, which must be settled with liquid resources or refinanced with another liability.[9]

Among firms in general, the liability structure of those that borrow to lend—so called “financial intermediaries”—is particularly telling of potential troubles because these firms influence how nonfinancial firms fund themselves.  A manufacturing or a services firm will have financial items—liability and equity—on the right-hand side of its balance sheet, but a financial intermediary has financial claims on both sides of its balance sheet because it invests borrowed money in the liabilities of other firms.

Commercial banks are the typical example of a firm that borrows to lend, but if we define lending functionally then investment banks, hedge and private equity funds, pension funds, sovereign wealth funds, and other pools of investment capital are also financial intermediaries.  Like all firms, they leverage themselves, borrowing to increase their ability to invest in other firms, both financial and nonfinancial ones.  Leveraging is a fact of business life, but when a firm borrows too much, it risks its solvency and its ability to honor contracts to others, because the firm’s liability structure becomes unsustainable.

Minsky saw a troubling pattern in the liability growth of firms that borrow to lend.  Again and again, their balance sheets would become more fragile because they took on more debt and borrowed on deteriorating credit terms.[10]  This cycle took place during good times as firms would borrow at more speculative rates so as to hunt for return in riskier investments, adding fragility to both sides of the balance sheet.  The rub was that these firms had to re-enter the credit market to refinance liabilities.  This was fine when interest rates were stable, but tighter money meant certain loss when refinancing at higher rates.  Now that serial refinancing and secondary trading are more common in the credit market, this analysis is more relevant than ever.

He classified debt into three types based on its propensity to require future refinancing, even in a rising interest rate environment: hedged, speculative, and Ponzi.[11]  In hedged borrowing, the borrower could pay all maturing interest and principal payments from the cash flow proceeds of the investment made with the borrowed funds.[12]  In speculative borrowing, the borrower could pay only interest from investment proceeds without refinancing, having to re-enter the market to refinance some amortization of principal.[13]  The riskiest of the three was Ponzi borrowing because the initial terms of the debt meant that the borrower would have to re-enter the credit market for all contractual payments of interest or principal.[14]  So there is nothing shady per se about Ponzi finance—it simply assumes that investment return will keep escalating, which can be true for a while but not forever.  The distinction matters because many financial assets have useful lives longer than an investor’s holding period, so the asset’s longer-term value matters, especially on re-transfer.[15]

This classification focuses on the borrower to emphasize its liability structure.  But it can also sort the lender’s loan assets by their risk from refinancing.  For an asset to be deemed hedged, it would have to be serviced from a dedicated income stream produced by the investment of the loan proceeds.  If the lender assumed that the borrower would have to refinance some of the principal payments—perhaps by further borrowing from the lender, as is common with home equity lines of credit when the principal begins to amortize—then the loan would be a speculative asset on the lender’s balance sheet.  If the lender knew that the borrower would need to refinance during each scheduled payment period, then the loan asset would be Ponzi to both the lender and the borrower.

As the cycle accelerated during the last crisis, firms borrowed and lent at increasingly speculative and Ponzi terms, setting up their balance sheets for loss in the event that market prices ever stopped escalating, which they always do.  And when they did, this fragility would devolve into a crisis in which financial promises could not be kept on a grand scale, a so called “Minsky moment.”[16]  Citigroup’s chief executive officer Charles Prince said it best: “As long as the music is playing, you’ve got to get up and dance.”[17]  The result was borrowing and lending yourself (and others) into financial instability.

The fragility cycle in the financial crisis of 2007 emerges in time series data of the Securities Industry and Financial Markets Association.[18]  Figure 1 compares gross corporate debt issuance from 1990 to 2009 by firms, both financial and nonfinancial.  The increase in debt issuance starts in 2000.  After peaking in 2006 (the last full year before the crash), issuance dropped, with the low numbers in 2008 and 2009 reflecting the challenges firms faced in raising new debt capital after the crash.

Figure 1



Gross debt issuance tells only part of the story. A firm with enough equity can sustain a corresponding debt load, even during periods of financial stability.  It is rising leverage that adds up to financial instability.[19]  So Figure 2 tracks leverage trends by dividing the amount of debt that corporations issued by the equity capital raised during the same period.  Between 1990 and 2001, the leverage ratio ranged from between 4:1 and 6:1, suggesting the “old normal.”  During 2001, the Federal Reserve began to tamp down interest rates,[20] and from then on, easy money fed the cycle, which peaked in 2006.  That year, corporations issued fourteen dollars of debt for every dollar of equity—double and, in some cases, triple the leverage ratios of the old normal.

Figure 2



The financial correction originated during the third quarter of 2007 as markets began to be spooked, and by the end of that year the leverage ratio had dropped to 10:1.  During the heart of the financial crisis, in 2008 and 2009, the ratio was back to the old normal, although it feels like deprivation after the bubble.

Insofar as they were securitized into private-label mortgage-backed securities bought by commercial banks, some of these liabilities ended up on the balance sheet of the Federal Reserve (“Fed”).  Doing just what a central bank should, the Fed lent money against collateral and bought bank assets outright during the crisis, although the ultimate quality of some of these acquisitions remains to be seen.[21]  As a result, the Fed’s financial structure morphed.  Figure 3 compares its balance sheet in March 2007[22] (before the trouble started) with those of March 2009[23] and March 2010,[24] after the Fed’s liquidity and credit programs had been largely completed.  During this period, the Fed’s leverage ratio increased from 27:1 to 44:1.

Figure 3

Trends in Fed Balance Sheet Composition (in millions)





Total Assets




Securities held outright




U.S. Treasuries




Total Liabilities




Deposits from depository institutions




Total Capital




Leverage Ratio
(Leverage ratio is calculated by comparingTotal Capitalto Total Assets)




During this period, the asset portfolio of the Fed more than doubled, while the credit quality and liquidity of the assets declined.  In 2007, U.S. Treasury securities were almost 90% of the Fed’s asset portfolio.[25]  By 2010, they made up only 33% as the Fed acquired investments in private-label mortgage-backed securities (“MBS”), which were then trading at a steep discount.[26]  Though riskier than Treasury securities, these investments are not themselves subprime, as they tend to be super-senior investment-grade rated tranches of MBS.[27]  This means that junior tranches in these MBS will be the first to shoulder losses if borrowers default on the underlying loans.  Time may show that the market discounted their value too much, giving the benefit of the bargain to the Fed.[28]  In this case, it will be the taxpayer who benefits—the Fed is a proxy for the country’s general fund because each year, the central bank transfers its net profit to the Treasury, which, in a corporate finance sense, is the Fed’s residual claimant.[29]

As the Fed took on these new assets, its own leverage spiked since it funded its balance sheet growth by borrowing, mainly through taking deposits of commercial banks.  In 2007, these deposits made up just over 2% of the Fed’s liability base.[30]  By 2010, they had increased sixty-fold, amounting to 50% of the institution’s liability base.[31]  In large part, these deposits represent resources that the Fed had made available to banks through stabilization programs.  Even commercial banks know that few things feel as good as money in the bank, so they deposited these resources rather than making new loans to firms and individuals, which would have created new loan assets for these banks.

Though it seems to be a monolith, the new Fed is best understood as a complex of separate balance sheets, each with its own distinct asset-liability schedule and an ad hoc governance regime that serves different public purposes.[32]  With respect to the special-purpose balance sheet created by taking on the private label MBS of commercial banks, the central bank lent its balance sheet to the banks by letting them substitute a Fed-backed asset with no credit risk but some inflation risk (the bank’s Fed deposit) for the private label MBS about which a panicked market was being finicky.  In effect, this on-balance sheet venture takes the place of a free-standing resolution vehicle, like the Resolution Trust Corporation used after the savings and loan crisis.[33]

In Minsky’s analysis, the Fed validated the speculative and Ponzi investment decisions of banks by buying their assets closer to par than to their then-impaired market value.[34]  This probably made the Fed the last bank in the cycle to do a speculative Ponzi trade, albeit for the public interest.  Although these credit terms are unsustainable for private firms, a central bank can depart more freely from hedged borrowing and lending because it has a monopoly on the production of legal tender and, hence, faces no short-term pressure to be profitable in a real sense.  And because the Fed can hold debt to maturity more freely than private banks, it has time to ride out the troughs of economic cycles.

Overall, the financial sector has been substantially mended through this Fed initiative, other efforts to recapitalize the banking system by shoring up assets, and troubled asset relief program (“TARP”) support for the liability side of bank balance sheets.  What has not worked as well is the spreading of this recovered stability onto consumers and other firms, as banks remain cautious about lending.  This bottleneck of liquidity in the financial sector may reflect that chastened banks have yet to reenter the early stage of the cycle, in which more hedged borrowing and lending takes place.  More research is needed to understand the links between the financial sector and the real economy—the topic of the Levy Economics Institute’s 2011 Minsky Conference.[35]

B.            Contesting Market Primacy in the Age of Ideology

Minsky’s financial instability hypothesis addressed how individual firms borrow and invest and how these behaviors—in the aggregate—lead to sectoral tendencies.[36]  As noted above, this was so because, left to their own devices, financial markets tended to overheat, leading the public sector to intervene as needed against the confidence (panic) cycle.  At the same time, the public sector could precipitate instability by removing regulatory restraints on speculative and Ponzi financial activity.  Implicated in this are political economy questions about whether real markets work as theorized, how much state influence over economic life is justified, whether individuals are rugged enough to go it alone or whether unavoidable human vulnerabilities call for systematic state action, and who should pay for non-private costs of bailouts.

So around the core of the financial instability thesis, we can imagine criticism of ideologies that promote financial instability by hamstringing the public sector’s efforts to counter the cycle.  For example, some economic orthodoxies may deny that financial crises recur, insisting on inaction because, like the common cold, these cycles will work themselves out in time.[37]  Moreover, ideological orthodoxy in economic matters from anywhere on the spectrum can exacerbate crises by not being flexible when what is needed is pragmatism.  For example, the Community Reinvestment Act[38]— pushed by Democrats and progressives—encouraged commercial banks to originate subprime mortgage loans.[39]  Because of their foreseeable exposure to interest rate risk from refinancing, when underwritten, many of these loans would almost certainly have been classified as speculative or Ponzi assets.  The subprime market grew in tandem with deregulation of financial markets,[40] a view promoted from across the aisle but which, converging on federal efforts to promote homeownership, intensified the trends toward financial instability.

While ideologies that promote financial stability can come from either side of the aisle, the Right has largely captured the terrain of finance.  Since the 1980s, the United States has witnessed a flowering of anarcho-capitalist, libertarian, neoconservative, and reactionary social formations that, despite other differences, unite against financial regulation.[41]  We have yet to appreciate how these networking successes have rezoned our political imagination Right-ward, even that of liberals and supporters of financial regulation.  Because Minsky died as these formations were quickening, he did not get much of a chance to contest them using the financial instability thesis.  For example, many who would shudder at the label “Keynesian” have referred to a “Minsky moment” without owning the wider context for the financial instability thesis.  It is ironic because Minsky sought to give a fuller account of John Maynard Keynes’ radicalism, which he thought had been excised by the economics establishment of Keynes’ day when it accepted his work.  Minsky wanted to integrate the excluded elements.[42]

This latent dimension of Minsky’s work deserves extending because its technical credibility could counter some of the ideological posturing advanced in the name of capitalism.  In fact, there is more than one conception of capitalism, and his views might help elaborate alternative forms.  This point matters because, despite the debt overhang from the last crisis, neoliberal hostility toward financial regulation is back in arguments based on market primacy.[43]  This is the view that the uncoordinated, self-propelled actions of unregulated private actors will lead to better outcomes for them and for society than would state coordination.[44]

Markets are said to be better than the state for utilitarian and categorical reasons.  First, the market is alleged to produce more than the state would with the same resources.[45]  And the market is better than the state on moral grounds because it stands in for pure freedom.[46]  Adding the modifier “free” to “market” intensifies this devotional quality, sacralizing the market.

In theoretical accounts of the financial system based—explicitly or not—on market primacy, liabilities are no big deal.  In a market, it is assumed price mechanisms will adjust by themselves to reflect the risks and effects of these liabilities.  If a firm fails, creditors will devour it.  This is the take on liabilities in Merton Miller’s acceptance speech for the Nobel Prize, which he received for the capital irrelevancy thesis.  He said there was no such thing as an “overleveraged” firm because market price mechanisms would adjust its cost of debt and equity capital to reflect its risk.[47]  Lenders would evaluate risk, bargain for an appropriate rate of return, demand collateral as needed, and, if necessary, sue for breach.  There is no systemic risk here because all risk stays private.

True enough, if one stays inside of an abstraction that, necessarily, assumes away actual liabilities, real financial risks, and losses in the real world.  So, in the market primacy narrative, there was no “problem” with the 2007 crash.  It was a routine repricing of credit by forces of supply and demand, though the growth of the Fed is not ideal.

C.            Enter Reality Stage Right

However, market primacy faces some challenges.  First, financial crashes always spill over into the public sector.  In the now familiar script, an adventurous financial sector borrows itself into a crisis that threatens innocent bystanders, drawing in even advocates of market primacy.  The Federal Reserve Act of 1913 grew out of the 1907 Knickerbocker Trust Company crisis;[48] the New Deal’s financial architecture responded to speculative overinvestment, intensified by easy margin credit;[49] and the 1989 Financial Institutions Reform, Recovery, and Enforcement Act responded to the savings and loan crisis of the 1980s.[50]  The Act is merely the last iteration of this political economy cycle.  So models that turn a blind eye to obvious, foreseeable public impact should be taken with a grain of salt.

Second, it was supply and demand—the self-adjusting hydraulics of market primacy—that contributed to the financial crisis.  After all, it was devotees of deregulation—George W. Bush in the White House and Alan Greenspan at the Fed—who let subprime debt mushroom thanks to easy money and, it would come to light later, systematic mortgage fraud.[51]  The risk to the financial system originated not in the state but—to further refute market primacy—from innovation in an overheated private sector whose private-label MBS came to displace the other MBS issued by government-sponsored agencies like Fannie Mae and Freddie Mac.[52]

The government’s error was to validate this innovation by investing in some of these private-label securities.[53]  Lenders in markets were wrong.  And the quantitative financial models were wrong too because they did not predict how markets act in a panic, so called “extreme liquidity events.”  It is only the latest example of mistaking unsustainable practices for benign financial innovation.[54]

Were the marketplace of ideas and reputation to work as its libertarian custodians claim, we could have shorted market primacy and captured the spread as brand names like Alan Greenspan, Friedrich Hayek, and Milton Friedman went down in a bear raid.  Instead, the spirit of deregulation has survived a financial crisis that it had a hand in creating.  It is not as odd as it sounds because, like limited liability for corporations, market primacy is a potent distillation of exclusions, erasures, and omissions of facts that might compromise its theoretical integrity.  It saves face by ignoring corporate insolvencies, credit scarcity, unemployment, foreclosures, losses in retirement funds, growth in the federal deficit, incipient inflation of energy and food, and sagging real estate values—in other words, other people’s problems.  Indeed, it is these efficiencies of externalization that have allowed corporate profits to rebound despite other weaknesses in the economy.[55]

An example of market primacy about the Act is the street’s hue and cry against the Act’s mandate that regulators bear down more on the swap markets.  Swaps are financial bets about future price movements that banks and other large firms place with each other, acting as “counterparties.”  The Act requires the Commodity Futures Trading Commission and the banking agencies to establish margin requirements and collateral policies to reduce the risk of default on these bets.[56]  Doing so, it is thought, will reduce the risk not only to the counterparties but to the financial system as a whole.[57]

However, the prospect of regulation has been met with objections by many firms, including nonfinancial ones that use swaps for hedging rather for speculative investment.[58]  In part it is because swaps are the poster child of imaginaries of the market.  Since Wendy Gramm, then head of the Commodities Futures Trading Commission, secured a major exemption from their regulation in 1993,[59] swaps have been sacralized as financial play in the libertarian forest primeval, away from the grasping hands of the state.  The resistance from firms seems to have worked given the broad exemptions that have been given to noncommercial end-users of swaps.[60]

Once put in focus, market primacy shows up as an attack on the very notion that there could be such a thing as a public interest and, insofar as it is recognized to exist, justifying it only insofar as a public function serves private interests.  This is what lies behind challenges to how the state provides services that have been the hallmark of the public sector.

Consider the new reach of market logic into higher education and state government.  A narrow cost logic is at work in legal education through the American Bar Association’s recent proposals on security of position, reforms that would reduce the agency costs of having faculty.[61]  A similar cost logic is at play in reform proposals about state government.  The proposals to allow states to declare bankruptcy would allow them to cleanse their balance sheets of liabilities for the pensions of public employees.[62]  Like the perennial anti-hero of the Nightmare on Elm Street, Freddie Kreuger is back, this time in the citadels of the public.

The attack is old news.  What is new and worth attention is how the discursive formations of reactionary thought are maturing.  By “discursive formation” I mean the way that institutions, individuals, and political narratives move in tandem to form a new consensus of reality, one that amplifies neoconservative values by erasing those of others.  At the institutional level, this is evidenced by the rise of foundations and advocacy groups whose influence reaches deep into private enterprise, the federal courts, and state government.[63]  These activist networks produce and market—and are in turn legitimated by—narratives, symbols, and social scripts that create a conceptual framework for understanding reality through a reactionary lens.  On economic matters, Minksy’s theory can help to contest these discursive formations of the Right.

II.  Internalizing Liabilities Through the Dodd-Frank Act

If we believe, as did Minsky, that capitalist market systems could be enhanced by mitigating leverage cycles, then we judge the Act by whether it does so.  Because it was passed during a window of financial ruin that temporarily muffled some libertarian activists, the Act does take some steps to limit financial instability caused by liability financing.  While market primacy shifts some of the costs of overleveraging onto strangers, the Act tries to do the opposite, allocating more of the total effect of liabilities onto those who generate the debt.  Below I discuss two examples of this internalization: risk management rules for leverage created by financial swaps and regulatory capital requirements that slow down, rather than intensify, boom-bust cycles.

A.            Limiting Swap-Induced Leverage

As explained here, many financial swaps include contingent leverage that springs into effect when the market moves against a bank.  These sudden market moves can turn a swap from an asset to a liability or from a small liability to a giant one.  An example illustrates the problem.  Assume that Party A and Party B enter into an interest-rate swap.  If the market moves against Party A, the swap becomes an out-of-the-money position, with Party A owing money to Party B as a net swap payable.[64]  To Party B, the swap is an asset because it is in-the-money and, hence, a net swap receivable.

As this example shows, a swap can fluctuate between being an asset or a liability based on market movements and contingencies that are built into the swap.  (Such was the case at AIG when swap commitments made by its financial products unit became liabilities rather than assets.)  These market contingencies are the heart of the bargain that is entered into every time someone enters into a swap position.  Moreover, because many swap counterparties waive margin for an entity with a good credit rating, swaps can produce uncollateralized debt that can suddenly increase a firm’s effective leverage.

The moral of the story is that the unintended—though foreseeable—liabilities that can arise through swap contracts also need provisioning and risk management.  The Act reduces the growth of speculative and Ponzi liabilities that might arise from swaps activities—especially by financial firms—by requiring that standardized swaps be settled through a clearinghouse that would impose margin requirements to eliminate the risk that a liability would lack adequate collateral.[65]

Once swaps clear on a central counter party, each member will have to post initial margin, post variation margin based on market changes, and make a contribution to the guarantee/clearing fund as it begins to accumulate a liability with respect to a swap position.  Centralized clearing of swaps and margining generally may also reduce the funding liquidity of some firms.  Not all swaps will have to be cleared centrally.  To create a kind of parity, the Act also imposes margin and collateral rules on swaps that remain on the books of the original counterparties.[66]  The margin rules for uncleared swaps may also reduce the funding liquidity of swap counterparties who post margin.

From the perspective of the financial instability hypothesis, do the new clearing and margin rules for swaps increase or decrease financial fragility?  To apply Minsky’s debt classification to the new swap rules, first convert the margin or collateral into an income stream that backs the interest payments and amortization of principal on the debt.[67]  The analysis is different for cleared and uncleared swaps.

The margin requirements keep the individual clearing members from accumulating uncollateralized liabilities to the clearing house.  This limits the risk that swaps will add speculative and Ponzi exposure to the liability structure of a clearing member.  The swaps clearing house will be subject to strict risk management rules that limit its overall risk.[68]  Assuming, then, that it behaves like clearing houses for other asset classes, the swaps clearing house will not generate speculative or Ponzi risk.

The implications of margin on an uncleared swap, that is, one that stays on the books of the counterparties, follow below using the example from above.  As suggested, Party A is short on the swap and would have to post margin to cover his liability to Party B.  By collateralizing this debt, Party A’s liability structure moves toward hedged borrowing from speculative and Ponzi positions.  Posting margin may reduce Party A’s borrowing cost because Party B should accept a lower interest rate on collateralized debt.  If Party A posts cash collateral, however, its balance sheet also becomes less liquid and it is left with less unpledged collateral.  Less potential collateral limits Party A’s ability to invest in the other firms (including in the liabilities) and its own ability to borrow on a collateralized basis.

The leverage and liquidity implications are the converse to Party B, who receives margin from Party A.  By reducing counterparty credit risk to Party A, the margin shifts Party B’s asset structure toward hedged from a potentially more speculative or Ponzi position.  If Party B can re-hypothecate the margin collateral, he has two more options.  First, he can collateralize his own debts, making his own liability structure more hedged.  Second, he could do the opposite by using the collateral to borrow more and use the proceeds to acquire a new asset, whose value would reflect the leveraged demand made possible by borrowing.

Given that margin can directly affect a firm’s access to liquid resources and its ability to leverage itself, the new margin rules—both for cleared and uncleared swaps—give regulators another tool that can be used counter-cyclically against the confidence (crisis) cycle.  A tight collateral policy during good times would slow down growth, but a loose collateral policy on the downside of a credit bubble would take pressure off firms.[69]

The effects are more variable in the case above of an uncleared swap, because margin redistributes risk, liquidity, and leverage between the payor and payee.  Because neither the market nor regulation require all liabilities to be margined, the ultimate effect of imposing margin on leverage created by uncleared swaps will depend on the opportunity costs to the payor of posting margin and the reinvestment opportunities to the payee.

Two other provisions of the Act that further limit the risk of sudden leverage from financial swaps by limiting the amount of swaps activity that certain financial institutions engage in are the Volcker Rule[70] and the swaps pushout rule.[71]  Both require divestiture by many banks of certain derivatives activity.  The Volcker Rule limits the amount of swaps activity that a bank can conduct.  Separately, the swaps pushout rule limits the ability of banks to enter into swap agreements for their own account, although some important exceptions remain, including entering into swaps positions to accommodate customer interest.  Together, these provisions may cleanse much springing and contingent leverage out of the bank.

B.            Countercyclical Capital Requirements

The Act also nods to Minsky by calling for capital requirements that go against rather than with the prevailing direction of the business cycle.[72]

Federal law requires a bank’s capital structure to meet certain prudential standards for its balance sheet.[73]  Potential investors may apply more stringent standards, but federal law establishes the minimum.  These standards promote solvency by measuring the bank’s assets conservatively and ensuring that the bank has enough equity capital free from the contractual constraints that creditors impose on debt financing.  The standards do this by subjecting the bank’s balance sheet to various solvency and liquidity tests, each of which must be satisfied for the bank to remain in the best standing with its federal regulator.

For example, the tests promote conservative valuation when determining the bank’s net worth (reflected in its equity capital) by aggressively discounting assets to reflect what they might fetch in a distressed market.[74]  These asset discounts reduce the bank’s net worth on a dollar-for-dollar basis, a loss that is born first and wholly by the bank’s equity.  So a bank’s net worth calculated for its regulatory capital requirements will often be lower than its net worth based on generally accepted accounting principles.  This is how the conservative valuation is accomplished.  The federal government wants to have this conservative measure because the federal promise to insure certain bank deposits leaves the government on the hook as a back-up source of downside risk capital if the bank fails.

To complement this conservatism, other tests apply to the right-hand side of the bank’s balance sheet.  These rules are conservative because they limit how much the bank can leverage itself with borrowed money, including federally-insured deposits.  The limit is expressed as a multiple of the equity that determines the maximum amount of debt that the bank can take on.[75]  Capping debt leverage increases the bank’s financing costs because the interest costs of debt are deductible, while equity investors demand a higher rate of return for investing as owners.  Hence, a bank—like any firm—tends to pay more for equity capital than for debt capital.  Although there is no limit to how much owners can make from a successful company, lenders can, at best, expect to receive only their contractual entitlement.  As a result, lenders have more contractual rights to protect their expectancy in the firm than do its owners.  Enough equity reassures regulators that the bank has an adequate resource cushion free from the contractual rights that, if breached, give the creditor rights to interfere in how the bank is run.  One effect of ensuring a minimum amount of owner’s capital is to limit the overall size of the bank’s liability base with respect to which the bank owes contractual duties that limit its freedom of action.

At present, these regulatory capital requirements have the unintended effect of amplifying the credit cycle.[76]  When interest rates are low and the bank can easily make loans, its assets increase, marking up the bank’s net worth and making it easier for the bank to borrow more, replenishing its ability to repeat the asset growth-equity-growth-borrowing growth cycle.  More credit means more dollars chasing the same assets, which means that prices go up in the aggregate.  The discounts used to haircut assets do not take into account the risk that assets are rising because a credit bubble may be underway, based on unsustainable escalation of market values.  As a result, the intended conservatism of regulatory capital is somewhat offset by inflated asset, equity, and debt values.  So the capital tests do nothing to slow down this inflation and, instead, by continuing to signal that the bank is solvent and liquid, give a green light as the bubble inflates.

The opposite kind of amplification happens as the bubble deflates.  This time, the market value of outstanding loan assets begins to drop, shrinking the bank’s balance sheet as the market applies a haircut of its own.  Regulatory capital makes matters worse by adding another asset haircut, one that may be less justified because the market is already discounting.  Every time an asset loses a dollar of value, the bank’s net worth (its equity capital) drops by a dollar.  As the equity base shrinks this way, the bank loses its ability to keep borrowing because of the leverage limits keyed to the bank’s equity.  To avoid losing regulatory status by becoming over-leveraged, the bank will begin contracting.  If this means cutting its leverage, then the bank may have to dispose of assets to pay a liability.

Unfortunately, the asset may fetch less than par in a hasty sale, so the bank may face a nasty cycle of deleveraging leading to fire sale prices, leading to more deleveraging.[77]  Moreover, during this cycle credit is harder to get because the bank is pickier about investing in loan assets, the more attractive ones being those not subject to a regulatory asset haircut because they boost the bank’s net worth most directly.  Less credit means fewer dollars chasing the same assets, which drives prices down.  So, on the downside of the cycle, regulatory capital rules discourage lending just when the market could use a boost from more credit.

One way to mitigate the tendency of regulatory capital to amplify the direction of the boom-bust cycle in asset prices would be by taking account of whether asset prices were rising or falling and, consequently, whether the market was overestimating or over-discounting an asset’s ultimate value.  On the upswing of the cycle as banks expand their balance sheets with new loans—adding inflationary momentum by financing more demand—banks should be subject to higher rates of required equity on the right-hand side of the balance sheet.  Because equity capital is more expensive and generally harder to get, increasing the equity bite delays the bank’s ability to keep growing with borrowed funds.  This pause in financing on the upside is likely to slow down asset growth.

The opposite happens on the downswing.  As the value of outstanding loan assets begins to drop, the regulatory discounts on the asset values should be relaxed, avoiding a direct dollar-for-dollar reduction in net worth for every loss in a loan asset.  Preserving the bank’s net worth this way keeps it from having to quickly deleverage by shedding impaired assets into an already illiquid market.  This cannot stop the cycle, but it slows it down and tries to produce a softer landing.

This is what is meant by countercyclical requirements.  Reducing the unintended and highly undesirable amplification of the boom-bust cycle caused by regulatory capital rules goes to the heart of Minsky’s advice for reducing the growth of fragility and slowing down the contraction of debt-financed consumer demand.  Banking regulators have recommended that regulatory capital eliminate this procyclicality by building in additional counter-cyclical capital requirements.[78]  Many implementation issues remain but it is an important step in the right direction.


New financing arrangements will always require original analysis to determine how they affect the financial system as a whole.  That analysis should draw on liquidity and leverage axioms derived from Minsky’s framework about financial instability.  Doing so would help to forecast an individual firm’s financial future, especially if it must refinance.  This kind of analysis also sheds light on how firm borrowing impacts the stability of the financial system as a whole.  Now more than ever, perspectives like this matter because the ultimate impact of the Dodd-Frank Act still hangs in the balance.  If implemented in good faith, the Act could enhance our capitalist system by mitigating financial cycles.  Whether or not it will live up to this promise remains to be seen.

* Associate Dean for Academic Affairs and Associate Professor of Law, College of Law, Florida International University, Miami, [email protected].  My thanks go to Alan Palmiter and Kent Greenfield for including me in the Symposium, “The Sustainable Corporation.”  As always, I am overleveraged to Charles Pouncy for his valuable comments on this Article.  I would also like to thank and praise the Wake Forest Law Review staff for their extraordinarily fine contributions to this piece.

[1]. Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, 124 Stat. 1376 (2010) (codified in scattered sections of the U.S. Code).

[2]. John Cassidy, The Minsky Moment, New Yorker, Feb. 4, 2008, at 19.

[3]. See James S. Earley, Joseph Schumpeter: A Frustrated “Creditist,” in New Perspectives in Monetary Macroeconomics: Explorations in the Tradition of Hyman P. Minsky 337, 338 (Gary Dymski & Robert Pollin eds., 1994).

[4]. Cassidy, supra note 2.

[5]. Hyman P. Minsky, Financial Instability Revisited: The Economics of Disaster, in Can “It” Happen Again?  Essays on Instability and Finance 117, 118 (1982).

[6]. See id. at 122–24.

[7]. See Hyman P. Minsky, Capitalist Financial Processes and the Instability of Capitalism, in Can “It” Happen Again?, supra note 5, at 71, 86.

[8]. See generally Gary Dymski & Robert Pollin, Introduction, in New Perspectives in Monetary Macroeconomics, supra note 3, at 1–18.

[9]. See Hyman P. Minsky, Stabilizing an Unstable Economy 165–67 (1986).

[10]. Id. at 213–20; see José Gabilondo, Leveraged Liquidity: Bear Raids and Junk Loans in the New Credit Market, 34 J. Corp. L. 447, 475–76 (2009).

[11]. See Minsky, supra note 9, at 206; Gabilondo, supra note 10, at 471–74.

[12]. See Minsky, supra note 9, at 206–07.

[13]. Id. at 207.

[14]. Id. at 207–08.

[15]. Id. at 174.

[16]. Justin Lahart, In the Time of Tumult, Obscure Economist Gains Currency, Wall St. J., Aug. 18, 2007, at A1.

[17]. The whole quote is even more troubling because it knowingly discounts the liquidity crashes that are in the making: “When the music stops, in terms of liquidity, things will be complicated.  But as long as the music is playing, you’ve got to get up and dance.” Michiyo Nakamoto & David Wighton, Bullish Citigroup is ‘Still Dancing’ to the Beat of the Buy-Out Boom, Fin. Times, July 10, 2007, at 1.

[18]. U.S. Corporate Issuance, Sec. Indus. & Fin. Mkts. Ass’n,‑US‑Key-Stats-SIFMA.xls (last visited Aug. 30, 2011).  Borrowing by households and government units also contributed to these conditions, but this Article focuses only on borrowing by private business units.

[19]. See, e.g., Minsky, supra note 9, at 220–21.

[20]. Historical Changes of the Target Federal Funds and Discount Rates, Fed. Res. Bank of N.Y. (last visited Aug. 30, 2011),

[21]. Sudeep Reddy & Anusha Shrivastava, Fed’s Lending Ebbs as Crisis Subdues, Wall St. J., July 20, 2009, at A2.

[22]. Bd. of Governors of the Fed. Reserve Sys., Consolidated Statement of Condition of All Federal Reserve Banks, in Federal Reserve Statistical Release H.4.1 (Mar. 29, 2007), available at

[23]. Bd. of Governors of the Fed. Reserve Sys., Consolidated Statement of Condition of All Federal Reserve Banks, in Federal Reserve Statistical Release H.4.1 (Mar. 26, 2009), available at

[24]. Bd. of Governors of the Fed. Reserve Sys., Consolidated Statement of Condition of All Federal Reserve Banks, in Federal Reserve Statistical Release H.4.1 (Mar. 25, 2010), available at

[25]. Bd. of Governors of the Fed. Reserve Sys., supra note 22 (percentage derived by dividing current “U.S. Treasury” securities by “Total assets”).

[26]. Bd. of Governors of the Fed. Reserve Sys., supra note 24 (percentage derived by dividing current “U.S. Treasury” securities by “Total assets”).

[27]. See generally Mkts. Grp. of the Fed. Reserve Bank of N.Y.ork, Markets Group of the Federal Reserve Bank of New York, Domestic Open Market Operations During 2010, at 11–16 (Mar. 2011), available at (describing the Fed’s complete portfolio at the close of 2010).

[28]. Jerry Markham, Regulating Credit Default Swaps in the Wake of the Subprime Crisis 19 (2009) (unpublished working paper for Int’l Monetary Fund Seminar on Current Dev. in Monetary and Fin. Law) (on file with author).

[29]. 12 U.S.C. § 290 (2006).  See generally Jeffrey Rogers Hummel, Federal Reserve Accounting and Its Solvency, History News Network (Mar. 10, 2011), (discussing Fed changes to its accounting for remittances to Treasury).

[30]. Bd. of Governors of the Fed. Reserve Sys., supra note 22 (percentage derived by dividing current “deposits” of “Depository institutions” by “Total liabilities”).

[31]. Bd. of Governors of the Fed. Reserve Sys., supra note 24 (percentage derived by dividing current “deposits” of “Depository institutions” by “Total liabilities”).

[32]. See, e.g., Peter Stella, The Federal Reserve System Balance Sheet: What Happened and Why It Matters (Int’l Monetary Fund Working Paper WP/09/120, 2009),available at (arguing that assets acquired due to financial rescue interventions are “policy” assets as distinguished from the ordinary monetary ones acquired during routine central bank operations).

[33]. On the Resolution Trust Corporation, see generally Lee Davison, The Resolution Trust Corporation and Congress, 1989–1993 (pts. 1 & 2), 18 FDIC Banking Rev., no. 2, 2006 at 38, no. 3, 2006 at 1.

[34]. See Minsky, supra note 9, at 206–08.

[35]. Press Release, Levy Economics Institute, Leading Economists and Policymakers to Discuss Ongoing Impact of the Global Financial Crisis at the Levy Economics Institute’s 20th Annual Hyman P. Minsky Conference (Apr. 11, 2011), available at

[36]. See generally Hyman P. Minsky, The Financial Instability Hypothesis (Levy Economics Inst. Working Paper No. 74, 1992), available at

[37]. See, e.g., Gabilondo, supra note 10, at 247–54 (giving examples of objection to financial cycle theory).

[38]. Community Reinvestment Act of 1977, 12 U.S.C. §§ 2901–2908 (2006).

[39]. See Markham, supra note 28, at 4–7 (noting that large banking organizations seeking approval for mergers from the Federal Reserve pledged to allocate credit to borrowers who may not have otherwise met credit underwriting standards).

[40]. Philip Ashton, Troubled Assets: Financial Emergencies and Racialized Risk 7 (May 2009) (unpublished working paper for Great Cities Inst.), available at

[41]. These political alliances against regulation flow out of the generic mobilization of the new Right that began in 1968 with Richard Nixon and reached its apotheosis through the “emerging Republican majority” theorized by Kevin Phillips.  José Gabilondo, When God Hates: How Liberal Guilt Lets The New Right Get Away With Murder, 44 Wake Forest L. Rev. 617, 618–21 (2009).

[42]. See generally Éric Tymiogne, Minsky and Economic Policy: “Keynesianiasm” All Over Again? (Levy Economics Institute Working Paper No. 547, 2008), available at (contrasting Minsky’s Keynesianism with mainstream Keynesianism).

[43]. See, e.g., Todd Zywicki, Dodd-Frank and the Return of the Loan Shark, Wall St. J., Jan. 4, 2011, at A17 (“Congress can pass all the laws it wants, but it can’t repeal the law of supply and demand and the law of unintended consequences.”).

[44]. Ironically, given its role in promoting neoliberal values, it was a paper on government securities by the International Monetary Fund that made me see the inevitable role of the state in influencing market structure.  See Peter Dattels, The Microstructure of Government Securities Markets (Int’l Monetary Fund Working Paper WP/95/117, 1995).  The paper analyzes the choices that governments have when setting up markets for their own public debt markets, e.g., auction pricing, specialist versus market-makers.  That there are choices to be made by public officials negates any “naturalness” of market structure.  A second example came while at the U.S. Securities and Exchange Commission on an inspection of the specialist system at the New York Stock Exchange.  This arrangement gives a monopoly on all the order flow for a security to one trader (the specialist) in exchange for his duty to make a fair and orderly market.  The specialist does this by crossing the buy or sell orders of customers or, as needed, by using his own capital to effect a trade.  An aesthetic of price is at work that favors incremental changes—in either direction—to swings.  Issuers of the specialist’s securities could complain when—in their profoundly interested opinion—the specialist had not “made markets” appropriately by creating a bumpy price path.  An investigation and market reconstruction would follow.  Here again were policy decisions at work rather than the canonical idea of forces of supply and demand meeting at a clearing price—so wide-eyed claims that markets are “free” suggest, to me, that the speaker is either profoundly naïve or disingenuous.

[45]. See, e.g., F.A. Hayek, The Use of Knowledge in Society, 35 Am. Econ. Rev. 519 (1945) (emphasizing the importance of disbursed, localized knowledge in the economy).

[46]. See, e.g., Robert Norzick, Anarchy, State, and Utopia (1974).

[47]. Merton H. Miller, Leverage, Nobel Prize Lecture (Dec. 7, 1990), in 1990 Econ. Sci. 291, 298–300, available at
/economics/laureates/1990/miller-lecture.pdf (arguing that unregulated market forces can regulate the pricing of liabilities through interest rates).

[48]. See Steven A. Bank, Origins of a Flat Tax, 73 Denv. U. L. Rev. 329, 379–80 (1996).

[49]. See A.C. Pritchard & Robert B. Thompson, Securities Law and the New Deal Justices, 95 Va. L. Rev. 841, 847–57 (2009).

[50]. Tim Curry & Lynn Shibut, The Cost of Savings and the Loan Crisis: Truth and Consequences, 13 FDIC Banking Rev. no. 2, 2000 at 26.

[51]. See, e.g., S. Permanent Subcomm. on Investigations, 112th Cong., Wall Street and the Financial Crisis: Anatomy of a Financial Collapse 95–103 (2011).

[52]. An industry journal of the time noted the development with glee:

Now, issuers of private-label residential MBS are holding the aces that were once held by the government-sponsored enterprises (GSEs), Fannie Mae and Freddie Mac.  Once a junior—but powerful—player in the market, private-label residential mortgage backed securities (RMBS) are now the leading force driving product innovation and the net overall volume of mortgage origination.

Robert Stowe England, The Rise of Private Label, Mortgage Banking, Oct. 2006, at 70, 70.

[53]. Theresa R. DiVenti, Fannie Mae and Freddie Mac: Past, Present, and Future, 11 Cityscape 231, 237 (2009) (“The private-label securities contributed significantly to the GSEs’ losses in 2008; in many cases, the value of the securities fell as much as 90 percent from the time of purchase.”).

[54]. Legal scholarship, in particular, has a duty to evaluate these practices carefully, although it has not done so enough.  See Charles R. P. Pouncy, Contemporary Financial Innovation: Orthodoxy and Alternatives, 51 SMU L. Rev. 505, 508 (1998) (“Legal scholarship has not produced critical examinations of financial innovation as an economic process. . . .  The products generated [by financial innovation] are readily accepted and adjudged good.”).

[55]. See Luca Di Leo & Jeff Bater, New Jobless Claims Cloud Economic Outlook, Wall St. J., May 27, 2011, at A3 (reporting increasing corporate profits).

[56]. Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, §§ 701–754, 124 Stat. 1376, 1641–1754 (2010) (to be codified in scattered sections of 7, 11, 12, and 15 U.S.C.).

[57]. See generally Michael Greenburger, Overwhelming a Financial Regulatory Black Hole with Legislative Sunlight: Dodd-Frank’s Attack on Systemic Economic Destabilization Caused by an Unregulated Multi-Trillion Dollar Derivatives, 6 J. Bus. & Tech. L. 127 (2011).

[58]. Victoria McGrane, Risk Rule Riles Main Street: U.S. Wants Car Makers, Brewers to Back Derivatives Bets with Cash; Cost at Issue, Wall St. J., Apr. 13, 2011, at A1 (summarizing objections by nonfinancial users of swaps to CFTC’s margin and collateral proposals).

[59]. See Carolyn H. Jackson, Have You Hedged Today?  The Inevitable Advent of Consumer Derivatives, 67 Fordham L. Rev. 3205, 3221–22 (1999).

[60]. Cheyenne Hopkins & Joe Adler, Regulators Give Banks Win on Key Derivatives Proposal, Am. Banker, Apr. 13, 2011, at 1 (noting that pressure from Congress resulted in ongoing exemptions from margin and collateral rules for corporate end-users).

[61]. Mark Hansen, Too Much Momentum?, A.B.A. J., May 2011, at 55.

[62]. See Lisa Lambert, State Bankruptcy Bill Imminent, Gingrich Says, Reuters, Jan. 21, 2011, available at

[63]. See generally Lester M. Salamon, The Resiliant Sector: The State of Nonprofit America, in The State of Nonprofit America 3 (2002).

[64]. This is what out-of-the-money credit swaps did to AIG.  See Mary Williams Walsh, Risky Trading Wasn’t Just on the Fringe at A.I.G., N.Y. Times, Jan. 31, 2010, at B1.

[65]. For those swaps that are cleared bilaterally rather than being moved to a central clearing house, an additional regulatory capital charge may apply on the theory that this nonstandard position imposes more systemic risk than a position that has been moved to a CCP.  See Margin and Capital Requirements for Covered Swap Entities, 76 Fed. Reg. 27564 (proposed May 11, 2011) (to be codified at 12 C.F.R. pts. 45, 237, 324, 624, 1221); Capital Requirements of Swap Dealers and Major Swap Participants, 76 Fed. Reg. 27802 (proposed May 12, 2011) (to be codified at 17 C.F.R. pts. 1, 23, 140); Margin Requirements for Uncleared Swaps for Swap Dealers and Major Swap Participants, 76 Fed. Reg 23732 (proposed Apr. 28, 2011) (to be codified at 17 C.F.R. pt 23).

[66]. Pub. L. No. 111-203, § 731, 124 Stat. 1376, 1703–12 (2010).

[67]. Though not explicit, Minsky’s classification appears to assume uncollateralized borrowing.  The following discussion applies the leveraged liquidity framework developed in my article on leveraged loans.  Gabilondo, supra note 10, at 474–76.

[68]. Pub. L. No. 111-203, § 725(D), 124 Stat. 1376, 1688–89 (2010).

[69]. This is what the Fed did by expanding the kinds of acceptable collateral that banks could use for discount window borrowing.  See Steve Goldstein, Fed Expands Auction, Accepts Wider Collateral, Marketwatch (May 2, 2008),‑expands‑auction‑accepts‑wider‑collateral-to-boost-liquidity-200852105100.

[70]. See Megan Davies & Svea Herbst-Bayliss, Volcker Impact Sends Shivers Through Banks, Reuters, Aug. 9, 2010, available at

[71]. Annette L. Nazareth, Dodd-Frank Act Finalizes Swap Pushout Rule, Harv. L.F. on Corp. Governance & Fin. Reg., (July 7, 2010, 9:13 AM),‑frank‑act‑finalizes‑swap‑pushout-rule.

[72]. Michael Kowalik, Countercyclical Capital Regulation, Fed. Res. Kan. City Econ. Rev., 2d Quarter 2011, at 63, 63–64, available at

[73]. For an example, see 12 C.F.R. § 3 (2011) for the regulatory capital rules that apply to national banks.

[74]. See Kowalik, supra note 72, at 66.

[75]. For example, banks are generally required to hold 4% of their financial capital, i.e., debt and equity capital, in relatively permanent forms of risk capital designed to bear residual loss known as Tier 1 capital, e.g., common stock and noncumulative preferred stock.  Id. at 80 n.6.  Disregarding for the moment other capital ratio rules that apply, that requirement would limit the bank’s potential debt to equity ratio to 25:1.  In practice, it is lower because of concurrent requirements that apply to less residual forms of financing like subordinated debt.

[76]. See generally James B. Thomas & Joseph Haubrich, Keeping Banks Strong: Countercyclical Capital Requirements, Forefront, Winter 2011, at 16, available at

[77]. See, e.g., Adrian Blundell-Wignall, The Subprime Crisis: Size, Deleveraging and Some Policy Options, 2008 Fin. Market Trends 29 (examining deleveraging of subprime mortgages).

[78]. See Kowalik, supra note 72, at 66–69; see also Basel Comm. on Banking Supervision of the Bank for Int’l Settlements, Countercyclical Capital Buffer Proposal (July 2010), available at


By: Thomas Joo*


* Professor, University of California, Davis, School of Law. I would like to thank my fellow symposium participants, Alan Palmiter, Wake Forest School of Law, and the Wake Forest Law Review for a fascinating and productive conference. I would also like to thank Holly Doremus for her invaluable suggestions and the UC Davis School of Law and Dean Kevin Johnson for support of this project.