THE REGULATORY STATE

“The size and complexity of the U.S. tax code also grew dramatically in recent decades. As of 2011, it takes 70,000 pages of instructions to explain the federal tax code (McCaherty, 2014). The code has about four million words and 67,000 sections, subsections and cross-references. It’s all crystal clear if you read the instructions.” Those are excerpts from a speech delivered recently by Prof. Steven J. Davis of the U. of Chicago and Hoover Institute. What does the professor suggest? “1. Keep the regulatory system clear, simple, and easy to administer, and then live with it. 2. Keep the tax system as simple as possible. 3. Make economic policies predictable.” I think the professor has identified the problem but not solved it.

The Common Law system, as established and developed in England, used to be taught in our law schools as one of the two primary forms of legal system, the other being the Civil Code system, which evolved from Roman civil law and Christian canon law and, centuries later, got traction in France, Spain, and elsewhere outside the British Empire. The two systems took different paths of development:

  • The Common Law system tried to stick to root documents (the Magna Carta, the U.S. Constitution) and to perceived societal norms and ethics, as interpreted and applied over time by the judiciary, and it did not pursue solutions to anything other than the particular case or controversy at hand. The English and the Americans felt that no one could anticipate every possible conflict or dispute that might arise in the course of human events.
  • The Civil Code system was rules, rules, and more rules, an attempt to anticipate and plan for everything. For all practical purposes, central planning and the Civil Code system are synonymous. Unlike the Common Law system, which was developed by the judiciary, the Civil Code system was developed by the legislature (or by the monarch, emperor, or Pope or other head of state or religion). For a fuller presentation on this topic, see: https://www.law.berkeley.edu/library/robbins/CommonLawCivilLawTraditions.html

The Civil Code system is based upon the conceit that smart, high-minded people can anticipate all possible problems and disputes and can write specific rules and regulations that will appropriately address and resolve them. The American Founding Fathers, like the English and their other colonies, did not share that conceit.

The Common Law system is compatible with free markets and minimal regulation of individual and corporate behavior. The Civil Code system is more compatible with a highly-regulated, centrally-planned economy and civil society. Rome presented the original Civil Code system. As was well-understood by the Romans (and by Gibbon), most “barbarians” regarded a surrender to Rome as a forfeiture of a large share of their individual liberties, a deal accepted by those who felt the material benefits of the Roman umbrella seemed more attractive than a free life in a less-developed territory outside the boundaries of the empire.  That type of trade-off is still operative, two millennia later.

It is no coincidence that the last nations that still emphasize individual and market freedoms are those that adopted a Common Law legal system, while the countries that impose more economic or social limitations can be fairly described as Civil Code countries – whether nominally capitalistic (e.g., China, Russia) or unremittingly controlling and repressive (e.g., North Korea, Iran), and whether labeled democratic, leftist, socialist, communist, or fascist. All authoritarian regimes, regardless of style or label, are essentially centrally-planned, Civil Code regimes. Authoritarians issue rules, they do not wait for judicial verdicts. Cynics have explained the phenomenon by pointing out that it is simpler to corrupt a politician than to corrupt a judge, and that regulations, which spell out the winners and losers in specific situations rather than following root principles, are often purchased by special interests. In all events, the central-planning, Civil Code model invites corruption.

As Hayek showed, the regulatory reach of central planning can only expand, never contract, as its proponents believe that the solution to every problem that is not solved by existing rules is to adopt more rules. The more advanced the establishment of the planning model, the more difficult and unlikely the un-winding.

America’s transition to a regulatory state has not been a matter of party politics, though it is generally identified with the Democratic Party. The Tax Reform Act of 1986, which briefly moved us back in the direction of the de-regulated, Common-Law model, was a bi-partisan law under which we switched to a nearly-flat tax and eliminated many special-interest deductions, credits, and other expressions of crony capitalism and social engineering. But it was a Republican President, George H. W. Bush, who initiated the dismantling of the TRA, and though the coup de grace was delivered by the Clinton administration, Republicans have shown themselves to be almost as addicted to over-regulation as Democrats. With the exception of the TRA, the country has been engaged since 1933 in an uninterrupted transformation into a Civil Code nation, and the process cannot be blamed solely upon the Obama regime. Long before 2009, the Internal Revenue Code and the Code of Federal Regulations were unworkable, virtually unintelligible exercises in central planning.

For all practical purposes, America is no longer a Common Law nation. It is simplistic and unrealistic for Americans to complain about excessive, complex, unclear, or unwise regulations. Short of a willful reversion to the Common Law system, we are never going to put the central- planning genie back into the bottle. You cannot just say, Let’s have better regulations. You cannot end the regulatory state by advocating smarter regulations (as does Cass Sunstein, President Obama’s former “Regulatory Czar”),  or by advocating clearer, simpler, and easier-to-administer regulations (as does Prof. Davis) . Not going to happen. Once you start playing on Prof. Sunstein’s home field, you have already lost the game.

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