Too Big to Judge

Courts dealt a major blow to too-big-to-fail regulations last week. As Andrew Ross Sorkin reports,

MetLife won its case against the government last week, and its position has been vindicated, at least until the decision is appealed.

A judge determined that the government’s process for designating MetLife a systemically important institution was not just “fatally flawed,” but seemingly purposely so. “Every possible effect of MetLife’s imminent insolvency was summarily deemed grave enough to damage the economy,” Judge Rosemary M. Collyer wrote in her opinion.

Not surprisingly, Jacob J. Lew, the Treasury secretary, took great umbrage. “In overturning the conclusions of experienced financial regulators, the court imposed new requirements that Congress never enacted, and contradicted key policy lessons from the financial crisis,” he said.

There’s nothing new in judges reviewing government regulations: it’s a core judicial function. But what may be new is the complexity of 21st century financial rules. As Sorkin adds,

How can any judge with anything short of a doctorate in statistics and economic modeling be tasked with effectively overseeing the decisions of a group like the Financial Stability Oversight Council, which includes the leaders of the Treasury, the Federal Reserve, the Securities and Exchange Commission, the Federal Deposit Insurance Corporation, and the list goes on.

Judge Collyer smartly chose not to comment on whether MetLife was actually too big to fail, and she left open the possibility that the company could someday merit that designation. In her opinion, she said more narrowly that the process of determining that status in the case of MetLife was problematic…

in certain instances, like the case involving MetLife and the oversight council, should there be a special court, perhaps with an area of expertise?… Joshua D. Wright, a former commissioner of the Federal Trade Commission, co-wrote a 2011 study that determined in antitrust cases, a judge’s expertise had a significant impact on the validity of the ruling. “Decisions of judges trained in basic economics are significantly less likely to be appealed than are decisions by their untrained counterparts,” the study says. “Our analysis supports the hypothesis that some antitrust cases are too complicated for generalist judges.”

More basic competence seems like an unimpeachable recommendation. And it might avoid judges taking a pass on questions that we would all be better off having settled.

But as someone with training in both orthodox and heterodox economics, my immediate reaction to Sorkin’s suggestion is: what type of economics training? There’s at least eight schools of economics, according to the recent book Economics: A User’s Guide. And Steven Teles has gone through the archives, and found that economics boot camps for judges held since the 1970s have tended towards the libertarian. So, the notion of training isn’t value neutral.

As it happens, scholars have attempted to untangle the issue of the effect of specialization and ideology on judicial decision-making. There are many methodological challenges in the inquiry, not least – ideological compared to what? Robert Howard attempted to tackle this question by looking at a case where two types of judges had jurisdiction to determine the same questions. He writes:

The Internal Revenue Service (IRS) is unique among federal agencies in that it is subject to the jurisdiction of both the U.S. District Courts and the U.S. Tax Court, a specialized court of limited jurisdiction and limited independence…

[Howard’s Prediction:] As tax policy, and support or opposition to the Internal Revenue Service, is highly ideological, one would expect judges to exhibit ideological bias in their rulings. Tax court judges are subject to the same nomination and confirmation process as are the judges of the district court, so one should see similar ideologies in rulings for both courts. However, because tax policy is complex, judges of general jurisdiction courts need to rely more on litigants, lawyers, the IRS, and other courts for the meaning and proper construction of the Internal Revenue Code; this reliance on outside interpretation will restrict the use of ideology in the rulings by the district court judges. Tax court judges’ expertise, and the concomitant lack of reliance on others, means that the tax court judges have greater freedom to use their ideology in their rulings…

[Howard’s statistical result:] The tax court, contrary to expectations, seems to be both more expert and more ideological in its decision making than the district court. As expected, the more liberal the judge, the greater the likelihood of support for the Internal Revenue Service, while the more conservative the judge, the greater the likelihood of support for the taxpayer. Tax court judges are more ideological in deciding cases than are district court judges. Finally, the hypothesis that liberal judges would react more negatively, and conservatives more positively, to tax-protestor or tax-fraud issues was confirmed for both courts.

These results suggest that ideology may matter more than expertise in deference to executive branch decision-making. Indeed, if judges know more (or just enough to be dangerous), they may be more willing to substitute their own judgment on complex financial matters for those of elected officials.