Direct Democracy and State Fiscal Crises: The Problem of Too Much Law

The recent scholarly and policy debate concerning state fiscal crises has appropriately focused on the question of the money states have committed to their employees, bondholders, and citizens, and the implications of economic recession for those promises to pay. In that sense, the debate is not strictly about state fiscal crises, but state debt crises, and proposals to resolve them focus on ways in which the states can restructure their debts without triggering further fiscal decline. This focus on debt is understandable. The collective debts of the several states are staggering, and frequently rely on unrealistic projections of tax and pension fund growth that, during an economic recession, may render the states unable to meet those obligations. But what if the problem facing the American states is not simply a problem of too much debt, but the more insidious problem of too much law? That is, state debt crises might be symptomatic of a deeper crisis whereby the state fiscal policy-making process is gummed up by statutory and constitutional restrictions on the use of public resources, such that combating budgetary shortfalls - whether caused by economic recession, political gridlock, or some combination of the two - becomes increasingly unlikely.In the states that allow them, constitutional amendments by direct democracy - whether by popular initiative or by legislature-approved referendum - can place unyielding restrictions on the state budgets which, in times of crisis, may render the state unable to meet its fiscal demands. Add this problematic dynamic to the frequently dysfunctional fiscal policy processes so often associated with these same states’ legislatures and the result can be fiscal deadlock, and potentially, fiscal crisis. In a federal system as exists in the United States, these state fiscal crises can quickly create moral hazard, as states take risks that they hope the federal government will absorb. If the federal government agrees, federal taxpayers would thus absorb the losses of state fiscal crises in a way that, if history is a guide, will distort political conversations regarding fiscal policy for a generation. These twin problems - the inherent instability of fiscal policy by constitutional amendment and the risk of moral hazard in a federalist system - are important and understudied dynamics of state fiscal crises.This symposium essay offers a preliminary, counter-intuitive solution to these problems: use direct democracy to combat direct democracy, and thereby provide protection to federal taxpayers exposed to losses by state fiscal crises. Taking a cue from the Financial Review Board system seen in the municipal bankruptcy context, the essay proposes a state constitutional amendment by referendum or initiative that dislodges the fiscal policy-making process from the legislature and referendum-burdened state constitution. In place of these traditional fiscal policy-making regimes, the referendum would accept the authority of a federally created commission, what this essay calls the Fiscal Restoration Commission (FRC). The FRC would then recreate the state’s budgetary laws from the ground up. The release of federal funds to save a state’s fiscal affairs would be contingent on the adoption, again by referendum, of the Commission’s proposals. The result is thus a clearing of restrictive law, rather than the clearing of restrictive debt, the mechanism that characterizes most state restructuring proposals

The Policy Barriers to Marijuana Banking

Although cannabis-related businesses have thrived in the localities that have legalized marijuana as a consumer product, the industry has suffered from crippling uncertainty, in the form of limited access to the banking system. The cannabis industry thus has been forced to operate in a cash-intensive “gray market,” which is a problem. An entire industry conducting all of its business in cash cannot be fairly taxed or regulated and, historically, has been associated with lawlessness—everything from security concerns, transportation and currency problems, money laundering, and cash hoarding. This brief reviews and analyzes the issues that surround marijuana banking and offers several policy options for addressing the tension between federal enforcement and state sovereignty as it related to marijuana banking.https://repository.upenn.edu/pennwhartonppi/1054/thumbnail.jp

Politics, Independence, and Retirees: Long-term Low Interest Rates at the US Federal Reserve

A narrative of central bank independence took root in the mid-20th century and flourished from the 1980s until the global financial crisis. In that narrative, a central bank is designed to protect the people from their own worst instincts. The populace will demand easy money and low interest rates, and a politically sensitive representative class will give it to them. Central banks are given political independence, such as it is, to resolve this time consistency problem by protecting the long-term value of the currency even against the short term demands of politics. As with so much else, two of the defining events of the 21st century—the global financial crisis of 2008 and the 2016 election—have changed this standard narrative. Today, the U.S. Federal Reserve and other central banks are more likely to face political pressures to raise interest rates rather than lower them. This chapter explores how this new political economy of central banking, in the face of long-term low interest rates, changes the posture of central banks against the rest of the polity. It discusses some history of political pressures against central banks in other climates and makes predictions about how the “new normal” of lower interest rates will challenge the Fed’s ability to stay above the political fray, despite its best intentions

A Proposed Fat-Tail Risk Metric: Disclosures, Derivatives, and the Measurement of Financial Risk

Accurately and precisely modeling financial risk is somewhat of a Holy Grail for financial theorists, regulators, and market participants. But like the Holy Grail, the location of a comprehensive model of risk remains unknown; some have even suggested that such a model is a figment of financial theorists’ imaginations. Nowhere has that disaster been more fully evident than in the recent failure of risk models to adequately prepare the marketplace for the collapse of the market for mortgage-backed securities and credit derivatives, and the financial crisis that followed. Because of the mistaken assumptions associated with some risk models, otherwise vigilant market participants were blinded to the risks that brought the global financial system to the brink of collapse. I propose a lawyer’s solution: use a form of mandatory disclosure for off-balance-sheet guarantees and over-the-counter (OTC)derivatives to provide the data necessary to describe the risk of a firm’seconomic footprint in the unlikely event of catastrophic collapse. With this data, regulators and firms could compute what I preliminarily call a Fat-Tail Risk Metric (FTRM), or a metric for determining the impact of the most financially devastating high-impact, low-probability events.Such a disclosure requirement could have three principal benefits. First, requiring mandatory disclosure of contingent liabilities — namely, derivatives and off-balance-sheet guarantees — will resolve the ongoing difficulties in record keeping that have plagued the industry. Second, a scale that measures the size of a firm’s impact upon catastrophic collapse provides a relative measure with which regulators can compare firms of equal market capitalization and/or balance sheet assets that have differing remote-risk profiles.Third, and most importantly, the FTRM will provide a steady stream of data that has, until now, been impossible to gather and could prove essential in understanding risk measurement at the firm level over the coming decades. With that information, defining ―too big to fail may simply become a question of basic econometrics

The Principled Leadership of Middle Management: Stephen F. Williams’s Liberal Critique of Marks

Most law students spend their first year—or sometimes much longer—struggling to discern legal rules from judicial opinions. That is true even for relatively straightforward opinions. When they encounter splintered opinions—especially cases where no opinion commands a majority—the exercise becomes more difficult even for the most seasoned lawyer. The U.S. Supreme Court, in an effort to add coherence to these not-infrequent instances of judicial disarray, created a rule to guide this process. The so-called Marks rule instructs courts, including the Supreme Court itself, to honor horizontal and vertical stare decisis even in the face of splintered decisions by discerning what proposition, if appropriately narrowed, would have commanded a majority. It is a hypothetical exercise and a controversial one. Legal scholar Richard Re has recently recommended that we cast it aside entirely, a position I embrace below