This week’s returning guest, Professor Richard Epstein, teaches law at NYU School of Law, where he founded and heads the Classical Liberal Institute, run through the university.
Richard is also a senior fellow at the Hoover Institution and a senior lecturer at the University of Chicago. With his extensive background and knowledge in both economics and law, he's the ideal guest to discuss with me the newly enacted California FAST Recovery Act, which seeks to socialize the entire California fast food industry by putting it under strict governmental control. Other states are looking with curiosity, and perhaps envy, at what California has done so that they can follow the lead. It is really ugly.
In light of the nationwide implications and unprecedented broad reach of this legislation, Richard and I will discuss the act and the impact of labor laws on our economic life in America.
Links
California’s Fast-Food Fumble | Hoover Institution California’s Fast-Food Fumble
New California Law Forces Fast Food Restaurants to Think Fast | The Regulatory Review
Richard Epstein joins my show to discuss the California pig case
Say Goodbye to Bacon?. Professor Richard Epstein on… | by Bob Zadek | Medium
West Virginia v. United States – Halt The EPA’s Takeover Of Energy Markets | Hoover Institution Halt The EPA’s Takeover Of Energy Markets
Transcript
Bob Zadek: Richard, welcome back.
Richard Epstein: Well, it's always good to be with you, Bob.
What is the FAST Act?
Bob Zadek: Now, Richard, the FAST Act, California legislation, was recently signed into law by the Governor. It's an acronym for the Fast Food Accountability and Standards Recovery Act. I must say it's an art form how they can find these acronyms for this insidious legislation. The FAST Act seeks to capture the entire fast-food industry and bring it under tight governmental control. First of all, what does it do?
Richard Epstein: Well, I think the first thing to say about the statute is indeed a fast one. What it purports to do is much more modest than it turns out if you start to read the details in terms of what it does do. Well, the first thing it does is to make a series of findings about the systematic forms of abuse that you see inside the fast-food industry. This is de rigueur for any and all efforts to impose regulation on it because you have to have a villain in order to regulate. What's interesting about it is they don't give you any particulars as to why it is that the particular act that they're doing is actually curing any situation.
Fast food is a booming industry. There are large numbers of people who want to get into it. Huge numbers of consumers. Most of the workers and most of the consumers in this industry tend to be not upper-middle-class people but lower-middle-class people both on the job and on the food side. There's every sign that the market seems to be working reasonably well.
It turns out the FAST Act is essentially a combination of forces by progressives who generally believe in the socialization of the economy. But more importantly, the driving force behind this situation turns out to be unions. Their effort is to try to figure out a way in which they can gain a foothold in this particular industry.
“It turns out the FAST Act is essentially a combination of forces by progressives who generally believe in the socialization of the economy. But more importantly, the driving force behind this situation turns out to be unions.”
The Structure of the Fast Food Industry
To go back to the origins of this, the way the fast-food industry is organized is that you have central purveyors who set standards. These are franchisors. What you have is a large number of individuals who are franchisees. The way the division of power starts to work is the franchisors, well, they set the menu, they set the trade dress and they kind of give you everything that you need to know so that the consumer who is interested in making sure that when they go from one company outlet to another company outlet is going to get a standard fare. It's the arches of McDonald's, it's whatever other kind of logo that you want to see. You have to have that degree of control. Otherwise, it turns out the quality differentials become enormous. Each franchisee will try to play off the reputation created by others. So, in the end, there'll be a giant prisoner's dilemma game in which people will start to cheat on quality and vary in service so by the time you're done, it will be an inferior fault. That's why you need the franchise law.
But the franchisee knows that when it comes to running a particular outlet, he or she has no particular advantage over the person who's on the ground. So, the distribution of authority then goes that if you're starting to look at the employment relationships, the leases, and so forth, some of the borrowings in order to get the thing done, it's the franchisee who takes the lead on this stuff. This has huge consequences for the way in which labor markets are organized.
If each franchisee is a separate employer, then the only way that you can unionize is to find a way to go branch by branch, outlet by outlet in an effort to persuade those workers to do it. They're going to be, in general, very reluctant to do that. The reason they are so is they understand that if it's a popular franchise, they're going to be other branches that are going to be located fairly close. They decide to vote to unionize. That's going to raise their wages, which in turn will probably have to have exerted pressure on the prices that have to be charged to cover those things. So, there's a danger of losing market share. There's a danger of another franchisee from the franchisor coming into the market. There's a danger that they'll lose to a rival franchise that sells the same kind of product.
Well, the labor people are fully aware of all this. One of the provisions that I'm going to start with is not the most dramatic provision. The one which says, "Oh, we can raise the wages that we choose up to $22 an hour over the current $15 and change that it now is," but what they say is, "You're going to be exempt from all of these requirements to be unionized." Essentially, what happens is we are treating the statute as a big club which will force you to go into a unionization agreement which you won't want to leave because it turns out staying out, being subject to the FAST requirement, is a more onerous and hateful thing for you than is unionization.
There's going to be a huge fight over this, Bob, because as far as I can tell, question about the balance between union and nonunion shops is something which is set exclusively by the National Labor Relations Act which says that workers have the right to join a union and collectively bargain if they choose and they have the right to stay out. If this is a federal right, what's going to happen is they're going to come back and say the state cannot put its basically heavy thumb, make it an elbow, on the scales in order to direct you in the way of unionization so that the statute has to fall to the extent that it has this kind of component. This is going to have to be litigated. It will take place in two stages. One is there'll be some kind of challenge that will be made before the National Labor Relations Board to which the answer is this is a Biden operation. I don't think they've made a single ruling since they've taken over which has been anti-union and they've basically taken a lot of other things which have been relatively fixed for a long period of time and have expanded the authority of the board and have increased the rights of unions as against anybody else.
That means it's going to have to go to the courts. If you're going to go in California, the 9th Circuit is a kind of an iffy place. There's some liberal and some conservative judges. So, this issue is going to end up in the Supreme Court, and the prediction is it will follow a conservative-liberal line, and the conservatives will essentially vote to strike this thing down along with other kinds of cases they have. In connection with the unionization of public workers in a case called Janice and so forth, the Supreme Court said that the state is going to be subject to certain very powerful restrictions so that you're not dragging people to support a union if their free speech right wishes to do something else.
Bob Zadek: Just to summarize and to emphasize, if you will, this is nothing other than a tool to enable unions to gain membership in an area of the economy where up to now, they haven't tried that hard. They've tried a bit but it's unsuccessful for structural reasons. They can't get the job done. So, since they cannot achieve increase in union membership the way that the law now provides, they go to the California state government and the governor, Governor Newsom, they say, "Give us a club so that workers in the fast-food industry will have no choice but to join a union," because it's the classic "your money or your life", not really a good choice.
Richard Epstein: Yes.
The Unelected Council
Bob Zadek: The statute, I was surprised a bit that wasn't higher on your list to mention, because that to me was 19th-century European labor relations in 21st-century California. Just because it's so scary and it's so, if you will, un-American, tell us about the council that the statute sets up.
Richard Epstein: What happens is the labor movement not only has the strong pro-union stuff in terms of trying to get the organization going but what they do in this particular case is it's not just a minimum wage law that's passed and so forth. What they did is they set up a council which has 10 members, 8 of whom are appointed by the governor and one each by the head of the assembly and by the Senate. The interesting feature about these appointments is that the governor just makes them for everybody. If you start looking at the composition that you're talking about, it's really quite strange. There are two people who were put on this council by the Governor whose job is to be fast food advocates for workers. They're not workers themselves, they're just political. Then, it turns out there's supposed to be two representatives of employers and two representatives of franchisees that get you to four, but the governor appoints those and there's nothing which says that he's going to appoint people who actually care about what franchisees believe. He's going to point to somebody who's a rogue inside the business and not representative of everything else.
You then add these people and essentially, as best I can tell, at the very best, you've got a six or four majority in favor of whatever it is that the labor unions want. In some cases that vote could actually go to be and nothing if in fact the employer guys start the cave because they're appointed by the governor who can move them. Well, I mean, the first thing that you wanted to ask is, can you possibly do this kind of delegation to the governor? There is a recent move in a federal constitutional law saying that a non-delegation doctrine, which had been left for dead many years ago, is in fact something that you seriously have to take into place.
What this particular doctrine says is if it's something that looks to be legislation, that has to be decided by the legislature. The standard verbiage formulation is that the legislature has to set out the outlines of the statute, and then what happens is the governor or administrative agency can throw in the detail. Well, there's no outline that said, in this particular case, it's not as though what the statute says is that when it comes to these particular situations, there are 14 kinds of things that you have to find and list what they are. Then, what happens is the governor or the administrative agency can put together various guidelines as to how you submit information to a central body that addresses these kinds of questions. There's absolutely carte blanche. It also turns out it gets even odder. They have local councils as well. There is some thought, "Ah, the reason you need local council is because if you look at the wage profile that's going to be in Fresno compared to that in San Francisco, the same $22 minimum wage which will make the most modest effect in San Francisco where the market wage is already at $22 or very close to it." But it could be devastating in the central counties where the market wage is probably something around 13 or $14, and this will just drive everybody out of business.
They were afraid of allowing these local variations. So, what happens is these local councils can only recommend things to the center. They can't decide themselves and that then gets you into this terrible kind of situation, what happens when the central body manages to get inconsistent recommendations from different councils who have different local agendas? My view is that this is a classic case as to why administrators fail. If they decide to do local variations, they're going to become so intimate that they're going to be completely essentially [unintelligible 00:13:10] that they're going to be completely unworkable. On the other hand, you have a single standard, it's going to fit so badly with so many cases that it's going to result in enormous kinds of situations. So, you got a dilemma. You can't do it locally and you can't do it nationally. The correct answer is you ought not to do it at all. But if you're a labor guy, all of these things are just small details. So, what you will do is you will get this stuff, put it at the center, come up with some kind of a recommendation, and then defend it fiercely, claiming that a delegated authority is entitled to a presumption of death.
Now, at the federal level, given this huge delegation, I think there's some belief that this one will not survive that kind of situation. Essentially, what's happened is the governor is told he can make the law by appointing people who can disappoint or remove from office anytime he wants, and that's a huge kind of delegation. We know by the way, there's nothing in the statute which prevents the governor from speaking to members of his particular council and expressing the views that he would like them to follow under these cases.
There's a case in which there was a much more modest delegation, and the Supreme Court barely upheld it 5:4. It was a kind of an odd case because virtually everybody believes that the challenge is coming back again in a different form, but a slightly different kind of case. This would be a perfect illustration to do this. Also, there's another development of the Supreme Court, in what is perhaps the single most important long-term case decided in the very controversial 2021 term. It's not the abortion cases which deals with abortion. It's a case called West Virginia v. United States. The so-called issue in that case is called the Major Questions Doctrine. What it means is that there's a really big question about the way in which an industry or a business ought to be structured and there is no deference given to an administrative agency, the legislature has to speak for itself in terms that have a reasonable degree of clarity to them.
In the West Virginia case, what happened is there was a provision which says that you can implement certain kinds of technical improvements that have demonstrable elements of success. What the Obama administration wanted to do and in a kind of strange way, the Biden administration wanted to do is to say, "The way in which we make sure that we use the best systems of emissions reduction is to require these plants not just to produce oil and gas, but to make sure that the mix of fuels includes a healthy dose of both wind and solar energy." What the Supreme Court quite sensibly said, in my view, is it's one thing to tell people how to put baffles or noise reducers on different kinds of equipment. It's another thing to try to redirect the energy from one source of energy to another source of energy. You can't do it by administrative regulation.
That's what they're trying to do in this case. They're trying to completely transform this particular industry into something that's utterly unrecognizable. The consequences of this stuff are going to be amazing. There's not a single shred of evidence that anybody at any time asks the question of what this would do to levels of employment, levels of firm profitability, levels of consumer prices. It's all taken on faith. Then, they're supposed to implement this and they can have a huge variation in what it is that they turn out to do. So, I think the statute is basically subject to this.
To give you a historical situation, there was a case called the Wolff Packing Company involving the state of Kansas in the early 1920s. What the case did was to set up a kind of an industrial council or board to oversee various kinds of firms in the meat packing business in order to be able to schedule wages for particular kinds of services and so forth. The United States Supreme Court actually struck that down, claiming that using these sorts of industrial courts is essentially just a total abuse of the entire administrative process. I think that cases like that which have been pretty much on the back burner in the last 100 years are likely to come back again when you're talking about this stuff. What you said is, A, is this a horror story? Yes. The question is, is this a horror story that will survive? Here, the parallel is what I said to you earlier about the union preference, the antiunion- rather the pro-union [unintelligible [00:17:34] is that it's going to be preempted by federal law. There's going to be a similar challenge in this particular case that is not going to work. It turns out that it's just not going to happen.
So, I think in effect that the statute is- first of all, I think it might well be beaten back by a referendum. If you get 1000 people to sign it and then you start to figure out who in the state is going to benefit from it, there are a lot more people that have had their lives made miserable than those who will be helped by it, I think it's likely to go down. But even if it survives there will be constitutional challenges and those constitutional challenges will seek a preliminary injunction. If what I said is correct, they're likely to get it. So, you'll see at least several more years of postponement before this dreadful statute is put into effect, if it's put into effect at all.
A Solution in Search of a Problem
Bob Zadek: A few observations. The chief sponsor, legislative sponsor of the FAST Act is Lorena Gonzalez. Those of you who are junkies on this stuff may remember that Lorena Gonzalez was the sponsor of the statute which California enacted which declared war on the gig economy. Remember, my friends, when California enacted legislation, it was basically focused on Lyft and Uber. On, others were captured as well where Lorena Gonzalez's statute sought to declare that the status of Uber and Lyft drivers and other industries as well was not independent contractors setting their own hours and working but rather that of employees that had to be treated as employees with profound cost implications, work rule implications, and the like. It was a declaration of war against the entire gig economy well flushed with the success of that bill even though it's been watered down and affected by California's Prop 22 which said, "Not so fast, folks. We don't like that statute." But Lorena Gonzalez is at it again and she was the chief sponsor of the FAST Act. That might tell you something about the source.
Number two, this is the most classic case of finding something that's not broken and then fix it. As Richard said in his observation, in his comments a few moments ago, the fast-food industry both in California and nationwide, it absolutely works. It delivers a product that people like at a cost they're willing to pay. It provides entry-level jobs more so than most other industries in the country, and we are desperately in need of entry-level jobs. The franchisees are able to pay a lot more than the minimum wage. In fact, the wages in the fast-food industries [unintelligible [00:20:42] something no more complicated than supply and demand of labor, the wages in the fast-food industry have been above the minimum wage, mostly around the country simply as a fact that there aren't enough workers. That's the way it's supposed to work.
So, we have an industry that delivers a quality product. There's no complaint about that. Customers want it. The food is readily available. The restaurants are clean. The workers get entry-level jobs. Everything is working exactly the way it's supposed to for all of the components. Yet, here we have an entire rejiggling of a system, a complex system that works beautifully. Find something that's not broken and fix it. The legislation has only one purpose as Richard said. It's a gift to the unions who could not find a way to force workers to join a union by having them vote so the unions had to go to the thinly disguised compulsion of a statute where it's your money or your life.
So, Richard, do I overstate the case about the industry? I don't want to sound like I'm some passionate follower of the fast-food industry, although they are my primary vendor when it comes to food, but that's a different subject.
Richard Epstein: Well, I think the answer is I'm sure you could find pockets of places where things don't work particularly well. You're running a very complicated industry with huge numbers of independent points of authority. Some of these franchises are extremely adroit. So, when you talk about a franchisee, you're not talking about a guy who simply runs one outlet, they thought to run 15 to 20 outlets and able to borrow on existing franchisees to expand elsewhere. Then, you may get somebody who's a really terrible franchisee who can't survive. But that's essentially part of the success. The key element in the franchise business is if you fail, you go out of business. If you go out of business, you're not going to basically have a very strong role to play.
The thing about markets is that you start with, say, a market in which 50% of the people were terrific and 50% of the people were terrible, all of whom were untested, and you go through several iterations, by the time you get to the second, the third one, the ratio is shifted. The successful guys have a much larger share of the market. They're up to 70%, 80% or 90%. The unsuccessful guys are holding on by their fingertips, and that pressure turns out to be relentless. So, I think the right way to put this is that markets, you don't want to be Pollyannaish about them, but what you want to stress is that they have immense self-corrective capacities in terms of the fact that they reward the right things, not the wrong thing. Whereas the moment you start talking about the governor's type of stuff and the special committees, all of a sudden, you're no longer designed to figure out how it is that you manage to please your customers and your supplier. What you now are trying to figure out is how you play games of flirtation with the various regulators to get what you want. It turns out that what's going to make it much more difficult is people who have bad performances are going to be propped up by the statute in some particular kind of way and good people are going to be driven out of the market so that what happens is whenever you have a regulatory system, the nature of the entrepreneur in it goes.
To give you an illustration, take rent control, it's a classic divide. Now, landlords in New York and landlords in Chicago, I've lived in both cities, Chicago is not a rent-controlled city. What happens? You've got large numbers of people and twice a year, basically in March and October, leases start to turn over and somebody who's in a big apartment and the kids have gone away, they give up that lease and they rent a smaller apartment in the same neighborhood. Landlords are essentially very attentive to what their tenants need. The tenants are pretty clear that they have to supply references and records in order to make sure they get it. You go to New York City, and it turns out, well, the tenants are there for life unless you could pry them out with a hammer and tongue, and you get a very different kind of landlord. These are landlords who know how to use the legislative process. These are landlords who are prepared to make life miserable for tenants by cutting off services in one form or another in an effort to get them out. So, you get the cult of a landlord in a place like New York which you would never get in Chicago.
What happens is the moment you introduce a system of regulation, the people who move into that industry are those people who are comfortable employing all of the levers that are needed to survive in a regulated economy. So, the quality of the merchant starts to go down. That's the thing that you really have to worry about. The pressures are always upward in a market economy for better services. They're always downward in a regulatory economy where Lord knows what it is going to start to move these things.
So, Robert, basically you are Pollyannish but Pollyannish with a legitimate purpose. There's no question if you were trying to take the long-term trend of the ways in which these industries have worked, the franchise industry has been one of the great successes in the history of American innovation. And it's not just in fast food. It's also in other kinds of services that one starts to deal with as well. So, the more you understand about how this thing operates, the less willing you are to interfere with it.
I might add that to go at the federal level again, in the Obama administration, there was an effort which was beaten back to try to make sure that the franchisees essentially were working pawns of the franchisors so that anytime they committed some kind of mistake, the franchisor, the McDonald's or the Wendy's or whatever it is, could be tagged with an unfair labor practice. They tried to put something like that in this bill, and the defendants, the manufacturers or the restaurateurs, managed to get that provision out. They're working on this again in Biden administration to try to do it, and it's a total disaster. Because what happens is the franchisee only works well when they have profit and loss responses. The moment you start to say that every time he commits a mistake, the national chain is going to be responsible, then at that point the national chain is going to have to exert greater control over what the franchisee does, which gets rid of all the right economic incentives on the downstream part of the market.
What happens is you take a company like McDonald's and so forth, this is what they do. They keep essentially franchise-owned outlets, 4% or 5% say of the market, and they do this for testing new innovations and so forth. Every time they do the studies in terms of long-term success, what they realize is that the franchise model dominates the wholly owned model, which is just used for very specific purposes, like trying to figure out what new kinds of products ought to be put into the market this, that, or the other week, but none of these companies want to expand beyond that particular situation. We do see essentially the progressive mood that every form of business is essentially ill concentration. If you want to look further, the labor board has become absolutely hopeless under the current administration. The FTC and the justice department think that anytime you acquire a company, you engage in anticompetitive activities, and they have been a menace on the market. The SEC has done one dumb thing after another.
So, what you're looking at today is the general economy in which progressive states on the one hand and the federal government on the other, are pushing us to what will be a kind of systematic recession. Because there's no way that these businesses can survive if they're constantly pumped in one form or another by a set of people who always think they know how to run somebody else's business better than the people who own these businesses do. The point about socialism is the one that you always made. "If it's my money, I'm going to watch it. If it's your money, to quote Margaret Thatcher, I'm willing to spend your last time on my particular purposes. And if you go about bankrupt, I'll find another target and bankrupt them as well."
So, the long-term trend that we have in this thing is very ominous. You have a governor who's absolutely oblivious to all of this stuff. They put out press releases saying, "Well, the people who benefit from these statutes are really just wonderful people. We love them all." They never asked who was going to be hurt by these statutes. If they started to do that, they could then explain why it's not all that difficult. They'd get a million signatures in California against this kind of statute.
Is the FAST Act Constitutional?
Bob Zadek: You are a very strong expert in the area of labor relations, business labor relations. So, when you speak about labor relations, the audience is hearing something from somebody who has spent their life studying that body of law. You mentioned if the California legislation finds its way to an appellate court or to the Supreme Court, the Supreme Court could easily find the legislation to be unconstitutional or violative of federal law, at least under the Labor Relations Act itself, in that it doesn't give workers the right to vote on unionization, it coerces them. It struck me as rather perverse that legislation, the National Labor Relations Act, which was designed to give unions a leg up at the bargaining table, it was very pro-union in its enactment, and that was the reason is now the very statute that may be the final nail in the coffin of this legislation.
The second point I want to just mention and have you speak to it, Richard, is the legislation also makes a distinction in its coverage. It defines the types of establishments both by size and number of units. There is speculation now, maybe more than speculation, that the fact that it treats different restaurants differently may trigger a constitutional issue about equal protection.
Richard Epstein: Yeah, well, let me just take the first point first, which is the question about the purpose of the National Labor Relations Act. It's hard for people to imagine today just how central to American politics, labor relationships were in the first third of the 20th century, going even past the war. 1935, the Wagner Act was passed, and it had only one set of unfair labor practices, and that was unfair labor practices committed by employers against employees, and there was also no public union coverage in that particular statute. Then, the courts get to this, and some of them start to interpret this thing in ways that are very expansive to the statute. The second world war is over. 1946 is a huge transformation in American politics in which the FDR New Deal Democrats essentially get absolutely wiped off the face of the globe in both the Senate and the House, and a series of statutes that passed designed to limit the power of unions, including the Taft-Hartley Act, whose key provisions in many ways, which is trying to create a parallel set of unfair labor practices applicable to unions as against their workers or against employers.
In that statute, what they said is not the right only to organize, but the right not to organize. That's why the preemption argument if you force people to organize by threatening them with something in the way in which the statute does, if they don't organize, it's going to be difficult.
I think what happens is the current version of the National Labor Relations Act is designed by Republican influence not to repeal the whole statute which I have championed for the last 40 years or more. In fact, the student note I wrote in 1967 was an antiunion piece. I'd just come back from England in 1966 where I studied law at Oxford. You can see, as eventually became the case, that labor unions were going to bring England down to an impossibly low position until Margaret Thatcher took office in 1979. That's how bad it got. So, I think that the whole problem turns out to be there.
Now, the second problem that you're asking is a slightly different one, and you called it an equal protection problem, but there's going to be another way in which you could think about it as well. What you noted is essentially this is only trying to attack big franchisors, people with 100 units or more franchisees. But what's so odd about the statute is that if you have 100 units outside of California and 1 unit inside California, the California unit is going to be subject to that particular statute because they count things out of state. So, there's going to be this whole crazy fault pattern of advantages and disadvantages that you're going to have to sort out. Well, that's good enough. So, what happened is the protection clause says these are arbitrary distinctions between different kinds of franchisees, they're not equal protection, what you have to remember is if you go back to the American constitutional framework on the equal protection clause, if you're talking about race, the level of scrutiny is very strict. If you're talking about sex, they raise more than one eyebrow. There's, at the very least, intermediate scrutiny. We talk about economic affairs, the level of scrutiny is so low that in many cases it's just a joke to say that you could ever find a violation of the Equal Protection Clause insofar as it relates to differences between different kinds of economic organizations.
But there's another element in this case and it's not clear how it will play out, which is called the Dormant Commerce Clause. If you start looking back to the way in which the Constitution was organized, it's pretty clear that we were not capitalist in the sense we never used a word which wasn't in existence back in 1789. But there was a very strong set of beliefs that you were trying to make sure that the United States, even though it had strong states, would have an open national economy for the movement of goods and services across state boundary lines. This thing basically was dormant until 1824 when a case called Gibbons and Ogden gets proposed. At this point, you see the outlines of doctrine called the Dormant Commerce Clause. What that doctrine starts to say is if Congress doesn't do any legislation but there's a state statute which imposed an impediment to the free movement of goods and services across state lines, then the very fact that the Commerce Clause takes over the area means that those statutes can be struck down.
So, the issue is going to be is this kind of crazy quilt situation going to so disorganize the relationship back and forth against state lines that this Dormant Commerce Clause doctrine is going to deal with and it's not a clean fit one way or another. The doctrine is in somewhat of a disarray today and there are many conservative judges who think that it's not really textual in the strong sense of the word. So, the originalists like Thomas and Scalia who are on the court are reluctant to extend it but there are cases right now before the Supreme Court involving, of course, California with the-
Back to Pigs
Bob Zadek: You are going to talk about Richard, you're going to talk about the pig case. You actually joined us on my show to discuss the California pig case and it's amazing how on this one hour, we've gone to- [crosstalk]
Richard Epstein: Back to pigs.
Bob Zadek: Back to pigs, exactly right.
Richard Epstein: Well, because what happens is the State of California says you can't sell within the State of California, pigs that are slaughtered and prepared elsewhere outside the state that don't meet California standards for justice and fair play. This is the so-called extraterritorial effect. I think the Dormant Commerce Clause arguments are stronger there than here. It is interesting to note that if you look at the liberal press, 100% of them are in favor of strong extraterritorial impact. So, the question is, is there a labor issue lurking in the background? What do you think the answer is? You better believe it. How do I say that? Well, what this statute says is, "We will not admit because of our moral judgments, perfectly safe meat, pork that has been slaughtered elsewhere because it offends our sense of moral." Now, what you do is California is going to say, "We will not allow anybody to sell goods and services if they're made by in a right-to-work state or if they're made essentially by a nonunion firm." Can they do that?
I think the Dormant Commerce Clause says you absolutely cannot do anything like that. Indeed, one of the issues left over in the pork case is exactly that one. The unions and the state had this brief trying to explain why everything was hunky dory. And when it came to the hypothetical about the Right-to-Work Act, they just punted. They don't want to face that their strategy is exactly correct. "Don't bother me with hard cases. Let me win the case having to do with the pigs first." I think they will lose but, boy, that is a very tricky judgment. "After I win that case, we can figure out whether or not I could work the extension."
So, the real thing is whether or not the courts of California and the legislature of California can buy its huge position in these markets essentially dominate the ways in which things are done in other states. There's a huge battle about whether or not they have that particular power. There's a very long and learned debate over court about the extent to which different companies may or may not be able to adapt their assembly lines so that they can supply both California and the non-California market without a very high price increase. The case may well be remanded to see whether or not the price increase that was posited by the industry, something close to 10%, is that a true number or is it a false number? One of the things about it is when you do as much law as I do, you're very cautious about making predictions about the actual dollar impact of these statutes. It takes a lot of very close empirical work. But you can see what the pattern on all of this kind of thing is.
Of course, there's also going to be imitation. You find a series of other states that are liberal. What you've done by passing the California statute and by developing regulations on how it works and by withstanding a constitutional challenge, say, you're lucky on all of those things, there's somebody in New Jersey who says, "Well, we'll just basically borrow the whole California kitten caboodle and put it into law here. It's going to be much slower for us to introduce this statute because all the difficulties and all the constitutional issues have been ironed out in our favor before we got into this particular situation." So again, it's exactly the same kind of situation. The issue in all of these particular cases is whether or not when you start doing these kinds of things, what you can do is you can kind of lever up and constantly expand the scope of the situation.
There are rough studies today which indicate that the American public, generally speaking, is about 70/30 in favor of the union, which is a huge working majority. I think it is one of the worst judgments that you could possibly imagine. Of course, many of the people who are doing this are not employers. If you ran the actual same survey on the question of how employers feel about that, the survey would come out about 99 to 1. There's not a single employer who would voluntarily yield to the sorts of restrictions that are imposed by the National Labor Act if they did not face some government sanction. All of them know that this stuff is poisoned and generally speaking of workers and the firm are faced with a firm which has less flexibility in the long run, what will happen is they will lose out themselves. They will get short-term monopoly profits but that will so basically cripple the way the firm works that its market share will start to shrink and then these workers will find that they're on a short lease, high wages for a short period of time. You remember what the number of workers was when we looked at this stuff, Bob, back in 1979? How many workers there were in General Motors? Remember the number?
Bob Zadek: A little less than a million or around a million.
Richard Epstein: About half a million people by that time. When they went bankrupt, they had 42,000 people working for them. The only way that this can happen is that you end up lopping off unit after unit. You lose to foreign competition in one form or another.
Bob Zadek: Or machines.
Richard Epstein: Well, machine, whatever it is, people will find ways to do this. And automation of course is a constant threat, and you will see more automation taking place in the fast-food industry. I have the following. This is a form of age discrimination. Guys like me, I have never been able to figure out how to use all this stuff. My 12-year-old grandson, my 8-year-old grandson, they've been working with these machines since birth. I started out life with an Underwood typewriter back in 1955 in which the keys would get stuck when you type a word too fast. And so, they're much better at doing all of these things. But in the end, what happens is they will force you into systems that are better off than a market than the regulatory system but worse than a market kind of system.
I think most of the American public, essentially their support for unions is abstract in the sense that they believe powerful employers should not be able to drive into the dust terrible employees. If you actually ask them, "Well, do you want a union in your particular factory?", oftentimes, the answer is really quite the opposite. What the unions have done is to try to make the rules in every way, shape, and form possible to favor them in union elections. They're allowed to take cards and not to return them. They have a quickie election so that the vote has to be made very quickly after the thing is done. It's amazing how much change, i.e., damage can be done by the National Labor Relations Board.
The first thing that will happen if the Republicans take over in 2024 is that when it comes to the new members of this thing, it will be three, two Republicans, and all the stuff that the Democrats put into place will be undone. And when the Democrats come back in, the cycle is going to run in another way, which is another reason to say you don't want any industry to beholden to the regulatory situation, because the shifts in sentiments in one direction or another make another element of uncertainty.
You're doing a business plan and you're trying to figure out how to expand the factory or network. You want to run a ten-year plan. You can do that with your investors and all the rest of it, but you can do it with your regulators, and they may turn over two or three times between the state, the federal, and the local one. It's just a terrible mistake. As we start to lurch into a depression- or not a depression, I think it's more likely to be a recession, all of us are going to start to see this happening.
The big change intellectually because we're coming to the end of the hour is when I started teaching and taking this in law school in 1968 or so, you couldn't find anybody who had the hard-line views that I had on labor relations. Now, it turns out the intellectual forces are much more heavily divided. There are large numbers of people who think that the problem about the labor law is that they basically organize the most efficient form of cartels imaginable. Labor unions, which create rigidity, job [unintelligible 00:44:05] situations, all sorts of collateral consequences that harm individual people, shutting down school systems, buses, and all the rest of that stuff. And that they should regard it as a very dangerous set of institutions. That has been my view consistently since 1968. Looking at this statute, I don't see any reason why I should change my mind.
The Folly of the National Labor Relations Act
Bob Zadek: Richard, as I recall, when the National Labor Relations Act was enacted, almost your first sentence today was you recited the necessary findings which the legislature made in California, I believe, this is really from memory, the findings were that I'm paraphrasing "It's in the best interest of the country to have strong unions," something like that. And I said, "Where is that written? How could that be a finding? How could that finding govern union management relations for almost a century?"
Richard Epstein: What happens is if you go back and you read the National Labor Relations Act, there was a long history of judicial situations in which they said any effort on the part of the government to require individual firms, either at the federal or the state level, to unionize was an interference with freedom of contract. There was a decision in 1908 called the Dare by Justice Harlan which took that position. There was a more elaborate and actually more effective version of the same thing by Mahlon Pitney in a case called Coppage and Kansas, which was decided in early 1915. Essentially, you couldn't force unions on anybody. By the time you got to the 1920s and so forth, the New Republic, then a serious, very powerful situation, people like Felix Frankfurter was so strongly pro-union that it was only a question of time as to when these earlier cases would topple.
They started the topple in 1926 with the passage of the Railway Labor Act. That was applied to railways only because there was no question that the federal government had jurisdiction over things under the narrow version of the Commerce Clause. Then, 1930 comes and you see a book written by Felix Frankfurter and Nathan Greene called The Labor Injunction, which was very strongly pro-union. Norris-La Guardia gets passed in 1932. Then, what you do is you get the National Labor Relations Act after a couple of failed attempts in 1937 which completely undoes the structure that had been put together in these earlier cases.
What happens is they made a series of findings. There was no "actual" freedom of contract between management and work. What's the meaning of the word 'actual'? What they said is they couldn't prove that these contracts were coercive. The employers were often in a competitive industry. Wages were rising at that particular time. So, It's a philosophical belief that the moment you have an employee, there's an inequality of bargaining power, which means that the worker has no choice. Well, somehow or other, you have to reconcile that with the consistent rise in wages that took place during the entire period in which workers were oppressed. There's a fine book by a man named Gordon about the rise and fall of the economic system. What happens is, without question, the single greatest improvement in human well-being took place between the period of, roughly speaking, 1870 and 1940 at a time when labor laws were extremely hostile to you.
It's not an accident, it turns out it's a reason. You start putting these things into place and you slowly start to shut down the way in which the system is going to operate. So, after the war, you have unions and they get a little bit more powerful, the big one, but it's almost an equilibrium, but things slow down a bit and it's never been able to reproduce the level of growth that we've had in that particular period. There are a whole variety of other reasons that explain some portion of it. But make no mistake, if you were talking about the basic constitutional framework, you're a classical liberal, I'm a classical liberal, the period of time in American history that was closest to that frame of mind was the pre-New Deal period extending roughly from the end of the Civil War to the Second World War. That's where all the progress started to take place. But if you start reading everybody, what they say is all you did was just the endless amount of exploitation and the rest of it.
I'll give you just another illustration. There's always the argument, the moment you have market economies, safety is going to be thrown to the winds in the search of profit. Well, turns out these firms have a reputation. You start flying planes that drop regularly out of the sight, even if you don't have to pay a single dollar in damages, the loss to reputation exceeds so much the cost of prevention that they go in exactly in the opposite direction. If you start looking at records with respect to air safety on the one hand and vehicle safety on the other, all of these things improve mightily during this particular period when it turns out that you get these genius progressive economists saying none of this could possibly ever happen. It's all a kind of a big mistake.
Understand the following. If employers are not liable to workers for accidents, and they have a new device, are they going to use it? Yes, they are. Why are they going to use it? Because then they get better working conditions, they can get higher productivity and pay lower wages because they don't have to pay a premium for accidents. Also, if they are liable for the injuries, as they sometimes were in this period, they're going to put it into place because the cost of putting in superior equipment is less than the cost of paying damages.
Well, put both hands of it together. Doesn't matter what the liability rules are like. If you're running a business in which you have a close consensual arrangement with workers, it's going to be in your interest to make sure that this thing starts to run better. The real thing that you worry about is whether or not your safety devices are going to have to be approved by some federal board before they can start to be put into place. Or whether or not you can change work rules which have an intimate relationship to safety without going through some kind of a union procedure.
So, what happened is the old model worked perfectly well, and the great intellectual puzzle is why is this thing going to be destroyed in the New Deal period if it was so successful? The one-sentence answer, if I could give it to you, the macro situation completely deteriorated. Smoot-Hawley with respect to tariffs, massive deflation under Hoover. By the time you got done, those changes were so big, people said, "Well, the way we fix that is to get rid of all the bad breaches of American capitalism." What we did is compounded the felony. The only way you could get rid of deflation is through reinflation. The moment you reinflate, there's some people who are going to be caught in the downs and the ups, and they're going to be in a very bad situation. This is what the Biden administration doesn't understand at all, is you don't want to ever let this train run off the rails. Because if it does, there's no easy way to get it back on the rails without creating all sorts of collateral damages in the end.
So, what we have to do today is to try to make sure that statutes like the one you are talking about, the California Fast Food Act, never see the light of day because the damage that it will wreak will last long beyond the period of its repeal if it is repealed. That's why I take such a strong stand on it. It is to me a source of great sadness that popular sentiment is running in favor of practices, I think, which in both the short and long run would be regarded as utterly destructive.
Bob Zadek: Every time anything in our country is reformed, what is being reformed is something else that the government did. The reform is always fixing another statute and it goes on forever. Richard, thank you so much for sharing your thoughts and thank you to my friends.
California Passes the Worst Piece of Legislation Since AB 5