Courts Take Charge: Implications of SCOTUS Dismantling Chevron Deference

The U.S. Supreme Court overturned two staples of the regulatory system. the so-called Chevron deference, which calls upon the courts to defer to the expertise of specialized federal agencies and the use of administrative law judge opinions (Jarkesy decision.) Junking the Chevron deference would affect the work of a large swath of the federal regulatory bureaucracy. (We wrote about this case and its implications for OilPrice readers several months ago.)

The court found that the considerable subject matter expertise of federal agencies would no longer receive special treatment or "deference" by the courts-a policy in effect for the previous forty years. The court went even further to state that the proper venue for the resolution of these disputes was the courts, not administrative agencies. This feels like an enormous power grab by the courts, taking power away from both Congress and the Executive branches of government. And there are four implications here.

As an aside, since many of the current Supreme Court's justices fancy themselves as historians, note that the U.S. has a long history of setting up and then deferring to regulatory agencies, usually created as a result of obvious defects in the market, such as tainted meat, discriminatory pricing, fraud, shooting workers, burning down competitors,  having inadequate funds to pay off depositors, stuff like that. Congress established the Interstate Commerce Commission in 1887, the Food and Drug Administration in 1906, the Federal Reserve System in 1913 and the Federal Trade Commission in 1914. Now for the implications.

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First, the history of business regulation in the US includes periods of extreme laxity and unbridled laissez-faire activity especially in connection with the railroads in the late nineteenth century. This led to a boom-bust mentality, periods of frenetic activity, and over-building followed by widespread economic failure. The financial panic of 1893, the most severe depression the country ever experienced (until eclipsed in the 1930s) was triggered largely by the bankruptcy of the Pennsylvania and Reading Railroad. A financial panic ensued, unemployment soared to almost 20%, and crop prices nationwide declined precipitously. No sector of the economy was spared. Many of the regulatory impulses we associate with the Progressive movement occurred as a direct response to the 1893 depression. One consequence was that the public lost faith in the power of big business in this Gilded Age to solve society's ills. A more robust governmental response was sought by the progressives to counterbalance the considerable clout of big business. A return to laissez-faire could lead to a reaction and tighter regulation later,

Another concern we have is the response of foreign governments to a sudden hobbling of pollution control regulations. It would not surprise us if other nations considered imposing a carbon tax, for example, on all imported U.S. goods. During the muckraking era, European markets were closed for a period to U.S. beef exports following revelations about unsanitary practices at slaughterhouses.

Third, the main consensus among legal experts seems to be that this will mean weaker regulators and more litigation. So for big polluters like oil companies and power plant owners, this seems like a granting of permission to continue the status quo. But there are at least two major industries that depend heavily on the federal bureaucracy, nuclear power and pharmaceuticals. If agency expertise is now replaced by court judgments, where does that leave the developers of SMRs or new disease-fighting drugs? We think new technologies, some of which are even supported financially by government agencies, will suffer the most from this considerable uncertainty.

Lastly, we think there is an interesting relationship between government regulation and the maturity of an industry. Regulation of railroads and meatpackers had a very different impact because these were both relatively mature industries and they haven't changed much since the Progressive era. The fledgling electric utility industry and its various technologies in power generation and distribution evolved with their regulators and continue to do so. What this suggests to us is a wildly uneven impact of this court decision across various sectors of the economy. 

Maybe the Supreme Court's newfound ability to channel the thoughts of Madison and Hamilton have missed the mark here, and might have more consequences than throttling regulation and creating more work for lawyers.

By Leonard Hyman and William Tilles for Oilprice.com

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