Public Policy Archives – Southern California Law Review

Housing Gridlock

September 2024September 2024Brian M. Miller*

The housing crisis dominates much of political and economic life, and it is driven in large part by a lack of housing supply. Recognizing this, many commentators have called for the end of single-family zoning. And some jurisdictions have answered the call. But even if that groundswell grows, the housing shortage likely will persist. One underappreciated reason for that persistence is that a private network of restrictions stands ready to pick up where zoning leaves off. Specifically, restrictive covenants abound nationwide, and, just like zoning, they often cap how much housing can be built without regard to local or regional demand. The aggregate result of these covenants is what this Article calls “housing gridlock,” a side effect of dispersed private ownership rights that prevents property from reaching its full potential in service of both the public good and economic productivity. This Article explores the legal, financial, and, above all, psychological forces that brought about gridlock and further its hold today.

This Article then proposes a solution. Drawing primarily on the psychological phenomena and financial incentives that entrench housing gridlock in the first place, it crafts a two-stage procedural and remedial mechanism to break that gridlock. Critically, that mechanism aims to minimize psychic harm to existing property owners while freeing up additional housing supply. It begins with a lump-sum opt-in mechanism for willing covenant beneficiaries located near a proposed housing project, and an action only for damages within a predefined range for any remaining beneficiaries. This Article describes the finer details of this proposal and explores its potential advantages over other options in the preexisting legal toolkit from economic and (again, especially) psychological perspectives. Accordingly, it provides an asset to the multifront struggle for housing availability.

INTRODUCTION

The affordable housing crisis is well-documented: homelessness abounds;¹ those who live in homes spend a larger portion of their income on housing than in the past;² the rate of homeownership among young adults over the past several years is lower than it has been in much of recent memory.³ At a basic level, it is no mystery why this is the case. We have a severe housing shortage. Freddie Mac estimates a shortage of 3.8 million housing units nationwide.⁴ Though a simple model of supply and demand cannot tell the entire story, it can go far. More people competing for fewer homes means sellers or landlords can command higher prices.⁵ Thus, many people are without homes, and those who secure housing pay more to do so.

Unsurprisingly, then, the majority of the population agrees that the U.S. needs more housing.⁶ But that is where the consensus ends. What kind of housing? Where should it be located? How do we get more of it? These questions confound policymakers and prompt fiery reactions from people across the political and socioeconomic spectrums.⁷

One flashpoint in this contentious ordeal concerns zoning. Single-family zoning is perhaps “[a]s American as apple pie,”⁸ but it and other restrictions with similar practical effects suppress the housing supply. It inflates prices and drives suburban sprawl, disproportionately harming racial minorities and lower-wealth Americans.⁹ Indeed, racial animus likely motivated much of the initial push for single-family restrictions.¹⁰ Today, then, single-family restrictions hoard opportunity on behalf of existing homeowners.

Anyone who keeps their ear to the ground in the world of housing policy, urban governance, or even national politics has heard calls to abolish single-family zoning.¹¹ It’s not just chatter: multiple states and cities across the country, including Oregon,¹² California,¹³ Maine,¹⁴ and Minneapolis, Minnesota,¹⁵ have passed laws to break single-family zoning’s hold on housing development. These are welcome developments, but, of course, they alone are insufficient to solve the housing shortage.¹⁶

This Article targets another legal factor that blocks many cities and regions from meeting housing demand: single-family restrictive covenants. Restrictive covenants are private arrangements attached to property deeds limiting how property can be used, for the benefit of certain surrounding properties.¹⁷ The terms often apply for many decades to the burdened properties and automatically renew afterwards.¹⁸ Covenants thereby can “run with the land” and do not merely bind specific parties to an agreement.¹⁹ On the substance, restrictive covenants can limit property use in various ways.²⁰ One of the most prevalent covenant terms is one that restricts the burdened property to hosting one single-family home.²¹ Other common restrictions include minimum square footage, minimum setbacks from lot lines, and height limits.²² In other words, restrictive covenants, where they exist, often place the same lid on housing development through private rights as single-family zoning does through public regulation. And they often contribute de facto to the same racial segregation and wealth inequality that the now unenforceable racially restrictive covenants once pursued de jure.²³

These covenants are incredibly and increasingly common.²⁴ So, even if zoning restrictions were lifted across the entire nation, a sizeable portion of single-family properties would still be frozen indefinitely, regardless of the demand for housing in that region. And not only that, but there is also reason to suspect that even where such restrictive covenants do not yet exist, homeowners may seek to implement them when faced with the fear, post “upzoning,” that they will lose the “neighborhood character” they have grown accustomed to.²⁵ At the end of the day, policymakers could all get on board with unlocking more housing, but an extensive network of private legal apparatuses can still say no. If we care about finding real and lasting solutions to the housing crisis, we must explore freeing up property from longstanding private rights that often entrench inefficiencies and stand in opposition to the public good. At the same time, to avoid significant demoralization costs and psychic harm to property owners resulting from upended expectations in the short term (and to avoid certain political failure), we must find a path forward that seeks to honor owners’ reasonable expectations.

The legal academy has given this problem limited attention. At a high level of generality, many scholars have commented on some of the problems associated with restrictive covenants and other forms of deadhand control over real property.²⁶ Additionally, a few scholars have noted that restrictive covenants could swoop in where single-family zoning leaves off.²⁷ More specifically, Robert Ellickson recently provided a helpful synopsis of the problem of “stale” restrictive covenants of all forms and of some potential paths forward for those burdened by them to free themselves.²⁸

And, just this year, Gerald Korngold explored the likely prominence and harms of single-family covenants in the wake of zoning reform.²⁹ He evaluates whether invalidating such covenants might run afoul of the Takings Clause, and then urges courts to consider such covenants void as contrary to public policy under certain circumstances.³⁰

But the literature has only just begun to explore the nature and the depth of the problem as it relates to the housing crisis. This Article attempts to do so. It makes multiple new contributions to the discussion on the housing crisis and private law. First, it explains how the abundance of restrictive covenants contributes to housing “gridlock,” a scenario in which fragmented and dispersed ownership of private rights prevent productive and socially beneficial land use. Second, this Article employs an underutilized approach to both describe that problem and explore solutions. Building on the work of Stephanie M. Stern and Daphna Lewinsohn-Zamir, who have provided a general primer on the relationship between psychology and property law,³¹ this Article reviews contemporary psychological research on ownership, possession, and subjective attachment. It then applies that research to, first, suggest why restrictive covenants’ hold may be stronger and more damaging than some commentators have suggested and, second, to evaluate strengths and weaknesses of legal and policy tools to escape that hold. One of the primary insights this Article hopes to convey is that housing gridlock from restrictive covenants is a deeply psychological problem, and that any solution must account for the driving psychological phenomena.

This Article proceeds in two parts. Part I explains how restrictive covenants contribute to gridlock. It evaluates housing gridlock—how we got here—from legal, financial, and especially, psychological perspectives. Part II explores how to break out of that gridlock. It surveys potential paths forward from within the common law of property as well as certain regulatory or legislative approaches. Then, relying on common law, economic, and psychological principles, it constructs a new solution. That solution involves a statutory mechanism, with procedural and remedial components, that facilitates the bypassing of covenants when it would be efficient to do so. Finally, it aims to respect the preexisting interests of covenant beneficiaries along the way. In the process of explaining this proposed solution to housing gridlock, this Article explores the advantages—especially psychological—that the solution presents compared to other options.

I. THE TRAGEDY OF THE HOUSING ANTICOMMONS

This Section describes the housing gridlock that restrictive covenants have helped usher in. Section I.A identifies the concept of the tragedy of the “anticommons” and explains why it applies to the modern housing market generally and residential restrictive covenants specifically. Section I.B explores three interrelated social-scientific explanations of how we arrived at housing gridlock—a legal one, a financial one, and a psychological one—and it explains why the psychological explanation is particularly important. This Article thereby draws in part, but not exclusively, on law & behavioral economics to describe the problem, with a special emphasis on underappreciated psychological forces at play.

A. Gridlock as a Feature of the Modern Housing Market

Few concepts are more influential to the foundations of private property law than that of the “tragedy of the commons.”³² The basic idea is that when a resource (such as a freshwater lake that is useful for drinking and recreation) is unowned and subject to open access, each individual with access to it has a personal incentive to use it heavily and not limit themselves.³³ “Every other person might use it up first,” the thinking goes, “so if I don’t use it now I might never get any.” So, even though it would be in everyone’s interests to preserve the common resource for years and generations to come, the resource is instead spent or spoiled rapidly.³⁴

Theorists traditionally have proposed two main solutions to avoid the tragedy of the commons.³⁵ The first is centralized control by a public or governing body, giving authority and power to a single entity to perhaps allow public access to the resource, but limiting such access as necessary to preserve it.³⁶ The second is privatization, allowing private individuals or entities to own all or portions of the resource.³⁷ Under such an arrangement, the owners theoretically have an incentive to use the resource productively without spoiling it.³⁸

But there’s another tragedy that is far less famous. Michael Heller called it “the tragedy of the anticommons.”³⁹ While the tragedy of the commons describes an undesirable consequence of too much open access, the tragedy of the anticommons sits at the other end of spectrum as an undesirable consequence of, in a sense, too much private ownership.⁴⁰ Here’s the idea: Certain public goods rely on the use of property. And, indeed, some of those goods cannot manifest unless either enough property is pooled together, or a smaller unit of property is utilized or developed to a substantial degree.⁴¹ Think of public transportation corridors, large parks, or stadiums. But if property is divided among too many private owners, or if the rights concerning one unit of property are spread among too many owners, then for those greater public goods to manifest, more people must be willing to relinquish their right to exclude others from using their small slice of the pie.⁴²

A fictional example can make this more concrete. Imagine a swimming pool that is not owned by one person or entity, but instead is owned by hundreds of different people in individual chunks. Each person owns around one square meter and has complete and total rights over their small space. If even a handful of the individual owners decide to fence off their small portion of the pool from anyone else, they could prevent all other people from swimming laps. Because ownership of the pool is fragmented across many parties, the resource—the pool itself—cannot reach its full productive potential.

Although the swimming pool example is farfetched, anticommons and gridlock can calcify under the radar in ways that shape the real world. Michael Heller points to biomedical patents.⁴³ Years ago, a large pharmaceutical company developed what looked to be a promising treatment for Alzheimer’s Disease.⁴⁴ But the treatment never made it out of the lab because it wasn’t financially feasible for the company to pay off all the holders of patents of necessary component technologies.⁴⁵ The U.S. government developed the patent system to incentivize innovation in the world of biomedical technology. And it did. Driven by patents as rewards, we underwent a revolution in biomedical technology in the late 20th century.⁴⁶ But sooner or later it rings true that “there is nothing new under the sun”⁴⁷ and one must build with the materials that already exist. When too many people have the right to exclude others from using those building blocks, building a wall from the bricks can approach impossibility.

Hence the term “gridlock.”⁴⁸ We might have the building blocks to assemble resources that would massively improve public welfare, but whether we reach our goal depends on whether assembling those building blocks is feasible or whether they will instead stick in place, widely dispersed. I argue that we are witnessing a tragedy of the anticommons in housing too. Dispersed ownership rights stifle the production of the housing necessary to meet demand and ensure greater affordability and stability for all.

The most well-documented source of housing gridlock is regulatory: specifically, zoning and related regulations.⁴⁹ Most cities are governed by a zoning code, which limits land use in different geographic areas to specific uses—such as single-family housing only.⁵⁰ And in most cities, a property owner who seeks to use their property in violation of the zoning restrictions may request a “variance”: permission from the local government to, say, build a quadplex or small apartment building in an area otherwise restricted to single-family houses only.⁵¹ Often, a variance request triggers an elaborate comment and review process;⁵² even for the smallest proposed projects, house owners can voice their opposition and demand studies on traffic, environmental impact, water runoff or burden on public utilities.⁵³ Because this process is expensive and time-consuming for the property developer, often the result is either that housing is never built, or the end product contains fewer units at a higher selling price than originally planned.⁵⁴ That being so, gridlock and anticommons can follow from not only too many people owning pieces of what we’d typically think of as “property”—a piece of land, a patent or copyright, for example—but also from too many people or entities having the right and power to stop others’ use of their property, demonstrating the fragmentation of property rights.⁵⁵

However, loosening zoning restrictions will not necessarily suffice to escape gridlock. In many regions in and around metropolitan centers, restrictive covenants could pick up much of the slack. Imagine a developer buys a property and wants to build multifamily housing—a condo building, four townhouses, or even just a duplex. The property isn’t subject to any notable zoning restrictions. But it is within the bounds of a homeowners association (“HOA”). And within the HOA’s Covenants, Conditions, and Restrictions (“CC&Rs”) is a provision stating that all properties may only be used for the operation of one residence.

In this case, however, there is no variance process. The developer could petition the HOA board to allow multi-family housing, but (1) the board, made up of other homeowners in the subdivision, has no interest in losing the single-family, detached-home character of their neighborhood;⁵⁶ and (2) in any event, CC&Rs often can be amended only by a supermajority vote of all property owners within the association,⁵⁷ so if the developer wanted the legal right to build even a duplex, numerous owners in the vicinity would have to agree to the change. The chances of succeeding are slim.

Perhaps that would strike some people as just fine. We are talking about a single-family neighborhood, so maybe the property owner should simply find somewhere else to build the condos, townhouses, or duplexes. And anyway, the restrictive covenants should come as no surprise, right? The developer should have known what it was getting into. But for at least three reasons, restrictive covenants have contributed to and will continue to produce housing gridlock—not only as to an individual piece of property here and there, but also for residential properties and housing supply at local, regional, and national levels.

First, HOAs and single-family covenants are common and even rising in popularity. Single-family homes are the most prevalent form in the United States housing stock, representing around two-thirds of all units.⁵⁸ And around a quarter of all single-family homes in the United States are subject to HOA governance.⁵⁹ That share is poised to increase in the coming years—over 60% of new, single-family homes are subject to HOA governance, and the number is over 80% for new homes constructed in subdivisions.⁶⁰ Moreover, because a single-family restriction is one of the most common covenant terms for HOAs,⁶¹ it is reasonable to assume that the large majority of single-family homes under HOA governance are bound by a restrictive covenant to stay that way. The practical effect of HOAs’ increasing popularity for single-family home developments, and the prevalence of single-family use restrictive covenants, is that it is increasingly difficult to purchase a home that could one day be expanded into multiple units.⁶² And that is so even without taking into account the prevalence of other sorts of covenant terms that in practice allow only for single-family development—like minimum square footage requirements for each residence.⁶³ For this reason, I, like Lee Anne Fennell and James Winokur, am skeptical of arguments that decentralized governance by collections of private covenants could meaningfully provide for an open “market” of governance options for homebuyers.⁶⁴ Increasingly CC&Rs converge on this land-use uniformity and gobble up land as they do so.

Second, some people who own single-family homes either purchase them without recognizing that they are bound by a single-family covenant and the significance of that fact, or eventually come to want freedom from such a covenant when they stand to benefit from its removal.⁶⁵ Most people, we can assume, buy a home primarily because they like the home and its general location. And their awareness of HOA restrictions and amenities may not extend far past knowledge of the monthly or annual fee, as well as the access owners have to common areas, like a swimming pool.⁶⁶ Over time, research shows, homeowners often come to disfavor many restrictions governing their private land use.⁶⁷

Third, an obvious but important fact: land is a scarce resource.⁶⁸ As some land gets developed, the overall share of available land shrinks—especially land well-connected to amenities. Every property and subdivision developed for single-family use accelerates land consumption and constrains the resources available for future housing development.⁶⁹

Of course, these phenomena conspire to lock individual land parcels into perpetual hosts of one single-family home. But the aggregate effects could be substantial too. We have a housing shortage, but where new housing is being constructed, it’s disproportionately single-family and subject to a covenant keeping it that way.⁷⁰ Such development, being less dense and involving excessive land consumption, contributes to suburban sprawl.⁷¹ Radiating out from city centers, more and more large land agglomerations are “filled” with sparse housing; and because of covenants the gaps are not easily filled in later. That means that new housing necessarily stretches away from population centers rich in jobs, recreation, social services, and other amenities.⁷² This phenomenon disproportionately burdens lower-wealth residents for whom greater transportation costs and longer commuting times are especially difficult to manage.⁷³

And it likely will not improve on its own. Although covenant authors can specify that restrictions expire after a certain number of years, they usually do not do so.⁷⁴ Instead, restrictions often apply unless removed through an onerous process, in effect sticking to the corresponding land indefinitely. So, the more HOAs, the more single-family restrictions, and the more land is consumed by indefinite limitations on housing.

Thus, private rights can prohibit cities and surrounding regions from meeting housing demand.⁷⁵ A society filled with single-family land use may function well for a time. But that time is likely to be short if the regional population is to increase. Unused land is depleted, so would-be developers cannot simply buy another lot and build it up. The land that is already occupied is stuck in a web of private promises keeping it from being redeveloped to accommodate more people. Thus, gridlock is inescapable. Properties where the market would offer top dollars to purchase and convert into multiple housing units cannot budge. Too many people—most often HOA boards and members—have the unilateral right to say no.

B. Why Did We Get Gridlock?

The previous Section explained housing gridlock and how restrictive covenants contribute to it. But there is a more fundamental, or at least chronologically prior, question: Why do we have so many HOAs and restrictive covenants? No one factor or force can explain it all, but this Section discusses three separate, yet related explanations: one legal, another based on financial considerations and incentives, and a third psychological. It explains why the psychological element is particularly critical to grasp.

1. The Legal Backdrop

Non-possessory rights in land date back several centuries.⁷⁶ In fifteenth-century England, much land that up until then had stood open for passage was enclosed, and so free travel became more difficult.⁷⁷ In response, the “easement” was born as a legal right of passage through land under private control.⁷⁸ However, for centuries, those non-possessory interests rarely extended to provide rights, allowing people to limit how others used other properties.⁷⁹

Through the 1800s, the Industrial Revolution and corresponding urbanization brought people closer together and also presented a new array of land uses that could have unwelcome spillover effects on neighboring properties.⁸⁰ Non-possessory property interests that could be enforced to limit neighbors’ land uses proliferated.⁸¹ But even then, courts at first would apply such restrictions to the parties to the original agreement only.⁸² That changed in the mid-1800s, when American courts began to enforce these restrictive covenants not only against the parties to the initial agreement, but also to successive owners of the relevant properties.⁸³ The thought at the time was to expand property markets, turning contract-created development rights and limitations into transferable commodities.⁸⁴ Such a framework, proponents thought, would help efficiently allocate land uses to properties where they were most suited.⁸⁵

That history is our inheritance, and today the legal rules surrounding restrictive covenants make it quite simple to lock land uses into their present states for long periods of time. For a covenant to run with the land, one traditionally needs four things: (1) intent for a burden on the property to run to future owners; (2) horizontal privity (typically satisfied if the restrictions were placed when the properties were held in common and at an initial land conveyance or sale); (3) vertical privity (meaning a chain in conveyance of the property all the way back to the owners at the time the burden was created); and (4) touch and concern the burdened land (a notoriously fuzzy requirement, which for the purposes of this Article can be understood as a requirement that the burden somehow involves land use as opposed to a non-land-related restriction on owner behavior).⁸⁶

To simplify, this standard generally means that if at the initial sale of a piece of property, the right people aim to restrict how the property can be used into the future, they just have to say so, and future owners will be bound in precisely the same way. If someone owns two adjoining lots and wants to sell one, they can simply agree with the first purchaser that the transferred lot can only be used for one single-family home, unless the owner of the other property gives express permission to do otherwise. If that restriction is recorded with the deed to the sold property, then it can potentially stand for generations, even after all involved properties are sold again and again.

The most prominent source of single-family covenants today likely comes from HOA CC&Rs. Such restrictions are quite easy to create even though they can burden large collections of properties in one shot. The standard process is that a developer purchases a large piece of land, then subdivides it in accordance with local legal requirements.⁸⁷ In so doing, the developer, as the sole owner, has the right to set conditions on the properties’ future use, and can establish that the properties will all be members of a common-interest community (for example, they may be governed by an HOA and perhaps share in some common amenities).⁸⁸ The developer can then outfit each subdivided piece with a house and all requisite utility infrastructure. The properties at that point are worth far more taken together than the large portion of land the developer initially bought.⁸⁹ So the developer sells each home. If the developer specified in the community’s CC&Rs that each property is limited to single-family use, then each would-be purchaser must simply accept that restriction or look elsewhere.⁹⁰ And because the geographic areas where the developer acquires large chunks of land are often sparsely populated at the time and thus better suited to single-family homes, it is quite common for a developer to choose to include single-family covenants in a subdivision’s founding documents. In the short term (which is what matters to the developer), there is a market for it.⁹¹

Once the developer has sold off all the properties, it no longer retains control over how each property is used. That authority, with the pre-drafted restrictions, typically transfers to the HOA or the community members when the last property is sold, if not before.⁹² However, the restrictions tend to stick. There are many reasons for this, some of which will be explored in more detail below. But from a legal standpoint, the most important factor is that under the standard documentation for these common-interest communities, CC&Rs can only be amended through rather difficult means. It is typical for the restrictions to be amendable only by supermajority vote of the homeowners in the community.⁹³ It is not immediately obvious why in any given case the developer makes it so difficult to change restrictions. As discussed in Section I.B.2, infra, perhaps the developer suspects that buyers will pay more for the assurance that their neighborhood will not change in years to come. Or perhaps it is because such odious provisions are simply features of standard form CC&Rs today.⁹⁴ Either way, an entire new community is left with the restrictions, and it often takes nearly the entire community to be of the same mind to change the restrictions to even a single property.

In sum, the American legal system dove headfirst into commodification of fragmented land interests. In doing so, it made it quite simple for owners to restrict use of land for generations to come and to divide the power to restrict among many parties. And in the modern day, large developers use the same basic legal tools to cement indefinitely the single-family use of potentially hundreds of properties at a time—such that even when the developer is long gone, the law ensures that meaningful change is unlikely.

2. Financial Incentives

The financial considerations surrounding housing gridlock are essential but insufficient to understand the problem. Although they might partially explain why single-family restrictive covenants became so prevalent, they sometimes fail to explain why those covenants persist in certain locations. Basic financial considerations may suggest that restrictive covenants are eventually discarded when they expend their basic utility.⁹⁵ But that often does not play out in practice.

As the preceding Section suggests, financial incentives often encourage developers to mandate single-family use at the beginning of a new neighborhood’s life. For developers with massive capital and hopes of substantial profit, the goal is to construct, and then sell, a lot of homes.⁹⁶ One option would be to buy one or multiple smaller plots of land in an urban center where demand for multi-family housing near preexisting amenities is high. Some developers do take that path. But if other developers have already gobbled up city land for that purpose, or if local zoning provisions prevent a developer from building enough housing units to turn a large enough profit, then they might look elsewhere simply as a matter of necessity. In growing regions, that means looking to the open pastures of suburbs and beyond, where demand for housing is beginning to rise but land is still relatively cheap.⁹⁷ If they cannot build upward, they build outward.

That may partially explain why developers build so many single-family homes in expansive, sprawling subdivisions. But it does not necessarily account for why they restrict all the homes in the subdivision to single-family use. No one forces them to do so.

Although more research could be done as to why developers take that step, there are a couple of related possible explanations. First, and most importantly, there is reason to believe that, at least at the time the developer is first selling off the homes, single-family restrictions do not materially diminish the values of the properties they constrain. Most buyers of newly constructed single-family homes in sparsely populated areas are not interested primarily in an investment opportunity; they are looking for a place to live.⁹⁸ Thus, they perhaps do not care at the outset whether tomorrow or years from now they could be prevented from converting their home into a duplex, or from adding an accessory dwelling unit. Relatedly, buyers are not simply buying a home subject to a restriction; they are buying a home that is surrounded by other homes subject to a restriction. Someone looking for a home in a sprawling development in a sparsely populated region might prefer some assurance that their neighborhood character will remain stagnant.⁹⁹

But there comes a time when land cannot keep up with demand. As the population increases in a region that was once comparatively empty, the public interest demands more homes. As urban centers fail to accommodate the housing needs of prospective residents, more people seek to move into outer ring suburbs.¹⁰⁰ If the land is already substantially filled in these areas by single-family homes on large lots, housing prices will climb.¹⁰¹ Under such circumstances, developers could easily fill multiple housing units per lot.

Thus, once housing demand increases sufficiently, single-family covenants may come to deflate individual property values. As a general rule, per-unit construction costs decrease as the number of units in the structure increase.¹⁰² Further, the more housing units that can be constructed, the more total revenue is up for grabs.¹⁰³ For those reasons, a property that can host twenty, ten, or even two units is typically more valuable than a property that can only host one.¹⁰⁴ That is the basic economic incentive for developers to meet higher housing demand. And although no comprehensive study has been done to measure the effect on a property’s value of lifting a single-family covenant, there is analogous research regarding zoning.

Those numbers seem to point one way: “upzoning” increases property values where housing demand is high. This is especially true for single-family homes. One study found that in Minneapolis, the citywide upzoning initiative increased the value of single-family property by around 3%.¹⁰⁵ Another study found that in Chicago, properties near transit services saw a dramatic increase in value from upzoning—by 15–20%.¹⁰⁶ A study focused on Auckland, New Zealand also saw notable value increases.¹⁰⁷

Why, then, does the gridlock persist? If properties tend to jump up in value when restrictions limiting them to single-family use are lifted, why do single-family restrictive covenants still dominate so much of our single-family housing stock? There may be several reasons, including the high transactions costs someone who wants to bypass a covenant would incur by seeking waivers from all covenant beneficiaries. But from the perspective of all other parties involved, one of the potential causes is that those who would have to decline to enforce the covenant could in the short term suffer a drop in property value, or at least a drop in the subjective value they place on their property and on living in that neighborhood. In other words, although unlocking growth on a given parcel increases that parcel’s value, surrounding parcels might not similarly benefit, especially if they remain restricted. That is one possible reason why even though upzoning a particular property tends to increase its value, properties that are part of an HOA subject to single-family restrictions are sometimes valued higher than comparable properties not within an HOA.¹⁰⁸ Multiple studies have concluded that constructing new multi-family housing on a particular piece of property tends to depress the rent of nearby properties.¹⁰⁹ This result is no surprise, and is in fact a core goal of upzoning’s proponents.¹¹⁰ Thus, adding to the housing stock tends to reduce, or at least slow the increase of, the price of housing units that would compete against the new housing for occupants. This is perhaps a laudable result for the public at large, but one that is unwelcome to local homeowners centrally concerned with their own property’s value.

Yet, it is unclear whether such an effect holds true when looking at the value of surrounding homes that are not in the arena to compete for multi-family occupants, but that instead simply remain single-family properties. In theory, if enough potential buyers of a single-family home are dissuaded by the presence of multi-family housing nearby, then a home that remains a single-family property while its neighbors turn into multi-family homes might decrease in value. The evidence, however, struggles to show that such an effect plays out in practice. Again, borrowing from the zoning context, a survey of parts of the greater Raleigh, North Carolina area suggested that the upzoning of property had no significant effect, either positive or negative, on the value of neighboring properties.¹¹¹ Admittedly, it can be difficult to isolate the effect of upzoning and determine whether it alone tends to depress the value of neighboring properties. For one, demand for housing is often already quite high in those geographic areas (hence the upzoning decision). Also, upzoning and an increase in multi-family housing units may be accompanied by new amenities like restaurants or stores that can make the neighborhood more attractive to potential buyers.¹¹²

On the whole, then, single-family development with single-family restrictive covenants may make some financial sense at the time the covenants are first established. But as a general rule, whenever housing demand increases sufficiently, single-family covenants suppress the values of the properties subject to them. And although homeowners might assume that allowing other nearby properties to host multi-family development could suppress their own home’s value, the actual evidence may not definitively support that theory. What the evidence does support is that if all owners within an HOA could free up their own properties for multi-family use, then they would likely see their property values rise.¹¹³ But the restrictions persist. Not enough owners within an HOA get on board with the change. Given that this perpetual gridlock is not fully explained by the financial interests of the homeowners, another force must be at play. The next Section turns to it.

3. Underappreciated Psychological Forces

In general, owners of properties subject to a common single-family covenant stand to financially benefit by the lifting of that restriction. The fact that they do not take the plunge leads to a conclusion that is perhaps intuitive: owners who resist upzoning (and for the purposes of this Article, those who would try to enforce a single-family covenant if given the chance) do so not necessarily because they have calculated a quantifiable financial loss they might suffer, but at least in part because at a psychological level they have an aversion to the change in neighborhood character that the entry or proliferation of multi-family housing might bring about. This perceived change in quality of life can be a driving force even if it does not manifest in quantifiable financial harm. Because human psychology is potentially such a critical impetus behind the prevalence and enforcement of restrictive covenants, any solution to the resulting gridlock would benefit from a review of the relevant psychological principles. This Section serves that purpose.

Property ownership is not only a legal trait; it has deep personal implications to the owner and potential subsequent owners.¹¹⁴ That being so, concerns that motivate the retaining, using, and transferring of property are not only financial; they are psychological as well. This Section reviews contemporary psychological research that can help explain why property owners may hold onto possessions and entitlements notwithstanding contrary financial incentives.

People develop psychological attachments to their possessions. From a philosophical standpoint, thinkers from Hegel¹¹⁵ to Margaret Radin¹¹⁶ have argued that owning property is a prerequisite for human freedom, because at a psychological level people begin to associate what they own with who they are. Objects become part of the subject; material things contribute to immaterial “identity.” In other words, people need property to develop a fuller concept of self-personhood.

Psychological research supports this theory to a degree, particularly through two related key concepts: the “Endowment Effect” and the “Mere Ownership Effect.”¹¹⁷ Although the two concepts are not perfectly identical, they refer to a similar phenomenon—essentially, that people tend to place greater value on a thing they own or possess than on the exact same thing if they do not own or possess it.¹¹⁸ This Article refers to the two concepts interchangeably. The classic methodology to measure these phenomena is to construct an experiment of randomly selected people assigned to either be a “buyer” or a “seller” of some item, such as a coffee mug.¹¹⁹ The studies find that the “sellers” possessing the item assign the item a higher value than the buyers not possessing the item do.¹²⁰

The Mere Ownership Effect thus reveals that if we own or possess something, by that fact alone we will come to think of it as more valuable. The phenomenon applies to all sorts of “possessions,” even nonphysical ones, like intangible entitlements.¹²¹ And it applies even when a person has not had time to use or become more accustomed to the possession—merely being informed of possession or ownership is enough to trigger the effect.¹²²

Extrapolating to the broader world of property law, the Mere Ownership Effect means that owners of property will tend to value their property above general market value. Thus, they will resist selling an item even if offered the highest value reasonable buyers might pay. The Mere Ownership Effect means, therefore, that the status quo is sticky. Property will tend to stay in the same hands even when buyers are willing to pay the value of the property’s economic utility.

A related psychological principle is that “losses loom larger than gains.”¹²³ Someone who stands to lose a possession is likely to think that they will lose more than another person would think they gain by acquiring that same possession.¹²⁴ And the fear of losing X amount of value is felt more acutely than being denied an opportunity to gain X amount of value.¹²⁵ Some researchers have suggested that this principle of “loss avoidance” is what gives rise to the Endowment Effect.¹²⁶ Whether or not that is true, research shows that people are bad predictors of the importance of preference satisfaction.¹²⁷ In other words, people tend to think that having their preferences frustrated will be worse than it actually is. Once someone gets attached to anything—an object, a right, or even an idea—then they tend to overestimate how much they need it, and how bad it will be to lose it.¹²⁸

So, people tend to overinflate the value of anything they begin to conceive of as within their grasp. But perceptions of possession are not the only force that binds people to their things.

The more an owner associates a possession with meaningful memories and social relationships, the greater value the owner is likely to place on the possession.¹²⁹ This principle is intuitive—people subjectively value the sentimental. We value our close relationships with other people, and so we value the items that represent or remind us of those connections. Margaret Radin thus has argued that property law should place greater value on possessions like heirlooms, keepsakes, personal body parts, such as donatable organs, and the family home.¹³⁰ She calls these “personhood” property, possessions that are uniquely tied to the owner’s conception of self-identity (for example, a person who identifies as a “parent” is likely to place greater-than-market value on a picture that their child drew for them).¹³¹ Psychological research backs this up (although, interestingly, perhaps not as strongly for the family home as for some other possessions).¹³² All in all, our possessions take on greater meaning, and thus greater subjective value, when we come to associate them with things that give life deeper meaning, like family and friendship.

Just as people tend to place greater subjective value on possessions that are associated with meaningful social connections, people generate the most subjective value of all from the social connections themselves.¹³³ How many movies resolve by reminding the characters and the viewers that family, friends, and so forth are most important? The trope exists because it resonates at a psychological level.

Take these psychological phenomena and combine them. Humans place a value premium on things they already own or possess. We fear losing something more than we would desire to gain that same thing if we did not already have it. We overestimate how much we will suffer from losing something. And of all the things we can own, we guard most fiercely that which we associate with social and relational ties. If all these phenomena are borne out in the psychological research, another conclusion flows naturally: if we hold a tool that enables us to stop or slow change to our neighborhood, we will value that tool dearly—more so than we would value the opportunity to get that tool in the first place.

At this point the connection to restrictive covenants is coming into focus, and we can begin to answer the big question: Why do people hold onto restrictive covenants, especially those mandating single-family use only, when relinquishing such a right could make the most financial sense and when HOA restrictions are often unpopular among those subject to them?¹³⁴

In part it is because we are wired to see what we have (for example, our neighborhood as it currently stands) as much more valuable than what we would pay to get it in the first place.¹³⁵ Our neighborhood is ours, so ipso facto it is more valuable.¹³⁶ Thus, the people who must consent to the reworking or circumventing of a restrictive covenant are the same people who are psychologically predisposed not to do so, even if offered the equivalent of top market value to relinquish the right. Homeowners who buy a home in an HOA with single-family use restrictions might or might not see the HOA restrictions as a selling point. But once the home, the neighborhood, and the restrictions become theirs, psychological forces cement the status quo.

I. UNLOCKING HOUSING POTENTIAL

What can be done to break the housing gridlock? Legal mechanisms and economic interests lay the groundwork for gridlock by blanketing vast swaths of land in single-family restrictive covenants. And later, when both financial incentives and the public interest dictate that a change might be needed, the entrenched collection of private property rights collaborates with features of human psychology to stifle that change. This Part explores various options for breaking the gridlock covenants wrought. It evaluates each option through economic and psychological lenses and ultimately arrives at a new solution: in areas without single-family zoning but limited by a single-family covenant (or other covenant with a similar effect like one prescribing minimum square footage per unit and setbacks from property lines),¹³⁷ a property owner seeking to build multi-family housing can take advantage of a new procedural and remedial mechanism provided by statute. The mechanism in its first stage would encourage covenant beneficiaries to waive their enforcement rights, and in its second stage would limit remaining beneficiaries to one specific remedy that would allow efficient bypassing of covenants while still giving effect to preexisting legal rights. After this Part scans and evaluates a catalog of other options to avoid single-family covenants, it will explain this proposal in more detail and explain its advantages over other options, especially, but not only, from a psychological perspective.

A. Preexisting Tools for Breaking Gridlock

This Section explores some of the tools already available to private parties, courts, and policymakers for potentially bypassing the gridlock caused by restrictive covenants. It will evaluate the strengths and weaknesses of each from legal, economic, and psychological perspectives. Ultimately, it concludes that the standard toolkit likely will not be enough to accomplish the goal.

1. Private Bargaining’s Limitations

The simplest (not necessarily the easiest) way to avoid a restrictive covenant is to obtain a waiver—to convince the relevant party or parties not to enforce the covenant. Someone who seeks to develop multiple homes on a property could offer money to the property owners who have the power to enforce a single-family covenant.¹³⁸ No doubt this approach could work sometimes. But one of the central points of the preceding Part is that it often will not. Housing gridlock means that too many people have the right to say no. This is especially true in HOAs that include dozens or hundreds of homes. If a restrictive covenant will stand unless the large majority of homeowners vote to get rid of it,¹³⁹ then all it takes is one or a small handful of holdouts who cannot be paid off to let it go. Psychological phenomena tell us that holdouts are likely.¹⁴⁰ So, many homeowners will require well above “market value” to relinquish a covenant, if they could name a price at all.¹⁴¹ Only in cases in which the builder’s expected profit is enormous will the builder successfully buy development rights from all the parties that can stop them.¹⁴² If that were common, housing gridlock might not be a significant problem. But because psychological phenomena suggest that people will likely value and guard their covenant rights, the buyout method is unlikely to yield meaningful results on its own.

2. Broadscale Invalidation

Turning attention to the other end of the spectrum from free market to government control, the state or local government could simply declare single-family covenants invalid or unenforceable. Such an approach isn’t merely hypothetical. California has done it—at least for certain special circumstances. In 2021, when the state passed a law removing single-family zoning statewide, it also targeted certain covenants. It declared that any restrictive covenants limiting “the number, size, or location of the residences that may be built on the property, or that restrict the number of persons or families who may reside on the property,” are unenforceable against an owner or developer of “affordable” housing.¹⁴³ The language of the provision makes clear that it does not destroy all single-family covenants statewide, but instead only applies to those covenants that would restrict the construction or operation of housing that is subject to certain significant rent restrictions.¹⁴⁴ But in the sphere where the provision applies, its word is final. Any existing single-family covenants are powerless, no matter how longstanding they are or how many other properties purportedly benefit from them.

This total-abrogation approach has some benefits. It can cover many existing covenants all at once, providing numerous developers and landowners advance notice and assurance as to the (lack of) legal force those restrictions carry moving forward. It also, of course, completely bypasses the holdout problem. It does not matter whether all, or even any, property owners benefiting from the covenant can be persuaded to relinquish their hold. And relatedly, it perhaps does not directly cost the government or the builder anything.¹⁴⁵ The philosophy is simple: if the problem is that too many people have a private property right enabling them to say no to development, then remove the right entirely.

But total government appropriation is a blunt instrument. As such, it might bring the hammer down on the housing gridlock caused by single-family covenants while also rattling other interests that we would prefer to leave undisturbed. As described above, the primary harm from the loss of a covenant often is not so much financial as it is psychological.¹⁴⁶ And psychological research shows that being the subject of government coercion can be especially damaging.¹⁴⁷ Take a study regarding the use of eminent domain, which is similar in some ways to government invalidation of a covenant (in that it takes a property right or interest away from a private party). A study posed to its subjects multiple scenarios in which an owner parted with a parcel of land. In two scenarios, the owner agreed to sell it, and in the other, the land was confiscated by eminent domain in exchange for compensation.¹⁴⁸ But in all the scenarios subjects were informed that the owner of the parcel valued it at the same specified market value.¹⁴⁹ Nevertheless, subjects reported that the owner was worse off in the eminent domain scenario.¹⁵⁰

Stern and Lewinsohn-Zamir call this the “coercion premium.”¹⁵¹ It represents the fact that people suffer some sort of harm from being forced to part with property that is separate from and in addition to the value of the property itself. From that premise, Stern and Lewinsohn-Zamir suggest that any use of eminent domain to which the Takings Clause applies should require “just compensation” above the property’s market value.¹⁵² The idea is that if what the owner lost is beyond market value, then just compensation is also more than market value.

This principle carries at least two implications for restrictive covenants. The first concerns the takings issue itself. Courts across the country appear split as to whether a restrictive covenant gives the benefitted properties the sort of interest such that they are entitled to compensation when the government extinguishes that interest through a taking—but many jurisdictions likely would say that it does.¹⁵³ So, any such proposal might run into significant constitutional challenges depending on where it is enacted.¹⁵⁴ In the jurisdictions that might find the extinguishing of a restrictive covenant to be a taking, the government could incur an expense—perhaps a substantial one—to destroy the covenants.¹⁵⁵ And whatever “just compensation” ultimately might be, the coercion premium makes it more likely that landowners would challenge the action in court, thus presenting another cost to the government from litigation.¹⁵⁶

The second implication is that coercively terminating restrictive covenants will in itself inflict some level of psychic harm.¹⁵⁷ The precise amount of harm is perhaps impossible to quantify. But if the question of best policy turns on utilitarian considerations to any degree, the psychic harm must be part of the calculus nonetheless.¹⁵⁸ How much weight and credence it deserves is of course another question. Perhaps local or state policymakers would conclude that the benefit of more housing from terminating numerous single-family covenants is worth the cost of the psychic harm to single-family homeowners.

However, as that cost-benefit analysis shakes out, policymakers contemplating it should keep in mind two pillars of political participation: voice and exit.¹⁵⁹ These two forces drive much local (and, to an extent, state) policymaking. Voice refers to residents’ ability to give their input, either through detailed communication of some kind or, most significantly, through voting.¹⁶⁰ If enough people are fed up with policymakers’ decisions, they can vote them out. If that happens, then the officials that fill the vacancies might be more amenable to the homeowners’ interests (and therefore might try to undo the undoing of the covenants, leading to an end result that is worse than before—a reestablishment of the conditions that led to gridlock and new government leaders who might be more anti-housing on the whole).

The related force, “exit,” refers to residents’ ability to vote with their feet by moving away from jurisdictions with policies they disfavor and into jurisdictions with policies they favor.¹⁶¹ Exit casts a shadow over local and state government decision-making because when residents exercise it, the jurisdiction loses economic activity and housing demand, and so the tax base and revenue diminishes.¹⁶²

Voice and exit are of particular concern when the displeased demographic is homeowners. For one, homeowners tend to be especially active in local politics,¹⁶³ so any new policy or law that disfavors them is sure to garner strong opposition. Also, because homeowners (especially of single-family homes) tend to be wealthier than the average citizen,¹⁶⁴ their exit can be distinctly harmful to localities’ short-term fiscal goals.

But it is possible that in the long run these bogeymen of voice and exit would not prove catastrophic to the jurisdiction seeking to “take” the covenants. As for voice, if lifting single-family covenants creates room for enough new people to move into the jurisdiction early enough, then perhaps some of the strength of an anti-new-housing voting bloc can be diluted by new participants in public life. And as for exit, perhaps the exit of wealthy homeowners who prefer freezing neighborhoods as single-family only would not be that harmful to the jurisdiction if the removing of covenants unlocked trapped property value and increased the number of taxable housing units in the base.¹⁶⁵

Overall, then, if a local or state government chose to address housing gridlock simply by destroying single-family covenants, it would have to be ready for some negative economic and political backlash. And although it may turn out that destroying the covenants is worth the backlash on the whole, the coercion premium brought about by such actions should give decisionmakers pause and reason to evaluate less heavy-handed legislative options. Robert Ellickson recently surveyed some such options, such as statutory provisions limiting the lifespan of covenants to two or three decades.¹⁶⁶ He disfavors such restrictions because, if set on too short a timeline, they may terminate covenants before the covenants have expended their value to those directly benefited.¹⁶⁷ I would also be wary of them because of the flipside of the coin: If set on too long of a timeline, they might allow harmful covenants to maintain their hold for too long. In other words, such provisions may sometimes prove beneficial but fail to narrowly tailor to problem sources.

3. Traditional Common-Law Tools

Although covenants are supported by strong legal backing, the common law provides some principles to escape them in special cases. The two most obviously relevant here are the changed-circumstances doctrine and voiding as contrary to public policy.¹⁶⁸ The changed-circumstances doctrine in some ways comports with the psychological underpinnings of possession and attachment. But both that doctrine and the principle of voiding as contrary to public policy are unlikely sufficiently accessible from a legal standpoint to make much difference in the aggregate.

Under the common law, the changed-circumstances doctrine holds that a party owning a property burdened by a restrictive covenant can escape its enforcement if local conditions have changed so that the covenant no longer serves its purpose and no longer benefits the once-benefited property.¹⁶⁹ For example, consider if one property (hosting one house) was in covenant with another (also hosting one house) to never have loud parties, but years later the benefited property is purchased and converted into an industrial site. A court could determine that the purpose of the covenant, presumably to ensure peace and quiet for whoever lived in the home on the benefited parcel, can no longer be carried out because that property no longer hosts a home. The party can go on.

Relying on the changed-circumstances doctrine has some intuitive appeal for voiding single-family covenants. Imagine that six homes on one street were under a covenant for single-family use only. But twenty years after the establishment of the covenant nearly all of the other homes on the street and the surrounding area have been converted to duplexes, quadplexes, or small apartment buildings. If the purpose of the covenant was to do what could be done to preserve the single-family character of the entire surrounding area, and (so the owners thought) to preserve property values, perhaps the covenant can no longer serve its purpose. Psychologically, the feeling of loss the owners might experience by seeing the covenant dissolve would probably be diluted, because the neighborhood had already been changing for years. And if it was once financially beneficial to lock in single-family use, perhaps increased housing demand in the area (signaled by all the new construction) makes it so that the properties would be worth more if not so limited.

But the problem with the changed circumstances doctrine is that courts employ it only in rare cases.¹⁷⁰ As a general matter, courts hesitate to find changed circumstances unless there is no reasonably conceivable benefit to the covenant.¹⁷¹ In the context of single-family covenants, that would be incredibly hard to show. At least theoretically, ensuring that a neighboring property or properties remains single-family could benefit the surrounding properties’ values, because it suppresses local housing supply. The purpose of the covenant may not be economically efficient, but as long as the court finds a purpose, it likely will stand.¹⁷²

And the fact that such covenants often appear as part of the regulations of an HOA with dozens or more properties make the changed-circumstances doctrine an even weaker tool. If an HOA with a single-family covenant covers a sufficiently large swath of land, then it necessarily will insulate the properties within it from much neighborhood change. Instead, the entire subdivision or several blocks of the neighborhood remains a single-family enclave, and the areas beyond the HOA’s bounds are the spaces that might change. Of course, proliferation of multi-family housing outside of the bounds of the HOA is more than likely a primary reason why HOA members would want the single-family covenant to persist. The covenant’s purpose is to preserve the area as distinct from its surroundings.

So, although declining to enforce single-family covenants because of changed circumstances makes sense from a psychological standpoint and is probably less likely than other approaches to elicit backlash from psychic harm to homeowners, in practice under current common-law rules it is unlikely to be a powerful tool to break housing gridlock on any meaningful scale.

Declaring such a covenant invalid as contrary to public policy is potentially more powerful, but ultimately suffers from a similar weakness. Under the Restatement approach, a covenant is invalid if it is contrary to public policy.¹⁷³ It is rare that a court concludes a covenant is contrary to public policy.¹⁷⁴ But when it does happen, often it is because a state (or sometimes even the federal government) has made clear through enacted statutes or other written law that what the covenant aims to accomplish is specifically disfavored, or that it stands directly opposed to a goal codified in state law.¹⁷⁵ In the context of restrictive covenants, the public policy exception closely adheres to the unique principle that a court’s enforcement of certain restrictive covenants constitutes “state action.”¹⁷⁶ Thus, when a court is faced with a request to enforce or invalidate such a covenant, it must keep in mind whether doing so would contravene the explicit goals expressed in the state or federal constitution, or any other law such as one passed by a legislative body.

If a court concluded that enforcing a single-family covenant was contrary to public policy, then that would be a powerful tool to break apart some of the housing gridlock. The result of such a decision would completely bypass the covenant and thus free up the land for more productive residential use. But it is unclear what it would take to prove that enforcing a single-family covenant is against public policy, and even that inquiry could vary substantially by state. There are some easy cases. Take California, for example. There, again, the state passed a law declaring that any single-family covenant is unenforceable against a developer or operator of “affordable housing.”¹⁷⁷ Quite plainly, then, there is a public policy against single-family covenants blocking the development of affordable housing. But that is an easy case because the statute already does all the work—the statute by its own enactment guts all such covenants, so the “public policy” exception on the judicial side of the equation is unnecessary.

And there are easy cases on the other end of the spectrum, when enforcing such a covenant would clearly not violate public policy. If the government actor has already zoned large portions of similar land for single-family use only, then it would be hard to credibly assert that the government has any discernible public policy against private agreements that would do the same.

But there are cases between these two extremes that are trickier. Take for instance any of the jurisdictions that have effectively eliminated single-family zoning on the public side of things, but unlike California have said nothing about private covenants.¹⁷⁸ On the one hand, one could argue that a jurisdiction that took the affirmative step of freeing all land from the constraints of government-induced single-family restrictions would likewise oppose private arrangements that constrained property in a similar way. On the other hand, one could also argue that if the government wanted to touch private covenants, it could have said so more explicitly. And in any event, a government could reasonably want to loosen government constraints but remain agnostic on what private entities and private rights accomplish in the same subject area.

In an article released this year, Gerald Korngold specifically argues that the public policy doctrine is a viable method for voiding many single-family covenants.¹⁷⁹ He rightly notes that occasionally courts in some jurisdictions have viewed the doctrine more broadly, applying it even without explicit enacted guidance from the legislature on the issue.¹⁸⁰ I would welcome extending that approach to the issue of single-family covenants. But because it appears that such an approach would mark a stark departure from how courts in many states have approached the public policy doctrine, I think it profitable to seek another solution.

In sum, I believe that the void-as-contrary-to-public-policy approach likely is not a reliable mechanism for breaking gridlock moving forward under the current state of the law. At the very least, in many jurisdictions it would potentially require the jurisdiction to already have eliminated single-family zoning, and so far, that has happened only in a handful of cities and states. And even in those jurisdictions, it is likely that some other specific expression of a policy against restrictive covenants operating to constrain housing supply would be required.

B. A Hybrid Solution

This Section first briefly identifies a potential multi-step solution to escaping housing gridlock while limiting negative externalities and psychic harm to property owners. It then explains each component of the solution in more detail and explores why it presents some advantages to other approaches from legal, economic, and especially psychological standpoints.

1. The Two-Stage Solution to Escape Gridlock

This Section gives an overview of a procedural and remedial solution to housing gridlock that single-family covenants (and covenants with a similar effect) helped bring about. The first stage of the solution involves a new legal mechanism created by statute. It would be available to any property owner subject to such a covenant in an area without single-family zoning. If the property owner (I will call this entity the “builder” for clarity) wants to construct multi-family housing on its property, it can force a decision of each beneficiary property on whether to decline to enforce the covenant. The builder would submit to the HOA members a rough plan for the development, such as whether it intends to create a duplex, add an accessory dwelling unit, or build an apartment or condo building, as well as the estimated size of the structure. Along with the rough plan, it would submit a lump-sum monetary offer—the amount the builder is offering to the property owners collectively to not oppose the development. The beneficiary property owners (most often this will include all other members of the HOA) then can individually decide whether to “opt in” to the offer. Those who do so will be entitled to a pro rata share of the total sum.

The second stage of the solution acts as a backdrop. Whether or not a majority of interested property owners opt in to receive a pro rata share of the monetary offer, the construction can go forward. But for those who did not opt in, a legal action for damages will still be available once the structure is completed to a habitable state. They cannot sue to block the development or require it to be torn down if it is already built; but they will be entitled to damages of some amount. There would be no need to determine liability—the builder’s violation of the covenant would be open and undisputed. The action, if it does not result in settlement, will proceed to a trial or hearing on the issue of harm alone. At that proceeding, the property owner would be entitled to a jury determination of damages within statutorily defined ranges, which could rest not only on evidence of the market value of enforcing the covenant in that instance, but also on any sort of harm (financial, psychological, or otherwise) the suing property owner suffered from the new construction.

The following Sections explore each component of the proposed solution in more detail and discuss the comparative advantages over other approaches from legal, economic, and especially psychological perspectives. They address the damages backdrop first since that component is more central to the overall scheme, and then address the initiating offer second.

2. Why Damages?

By now the stickiness of restrictive covenants is evident. They are hard to get rid of without express agreement by most benefited property owners.¹⁸¹ Broad coercive action by governing authorities might achieve the primary goal of breaking gridlock, but in the process it might generate various negative externalities rooted in the psychic harm that research suggests it would cause.¹⁸² And the common-law mechanisms limiting the perseverance of such rights are narrow and apply rarely.¹⁸³ But courts and the common law can contribute another tool: remedies. It is one issue what private rights parties possess; it is another issue which way a court will operationalize the right.¹⁸⁴ At the simplest level, sometimes a court can issue an injunction protecting a right, while other times it can order damages as payment for violating the right.¹⁸⁵

A promising tool for breaking the hold restrictive covenants have on housing supply would be—to use the classifications made famous by Calabresi and Melamed’s foundational work—converting the right provided by such a covenant from a property rule to a liability rule.¹⁸⁶ In other words: enforcing covenants only in such a way that the beneficiary of the covenant can receive payment for its violation, but cannot by force of law keep the burdened property in compliance. In a recent article, Robert Ellickson briefly suggested a damages approach and commended one state, Massachusetts, which has provided for it by statute in some special instances.¹⁸⁷ This Section explores a damages approach for single-family covenant violations from legal, economic, and psychological viewpoints. It then discusses the finer details of how such an approach could be implemented from a practical standpoint.

i. The Legal Landscape

From a legal perspective, damages are the preferred remedy across much of the common law.¹⁸⁸ Even for property rights (which one would rightly assume are often protected by a “property rule”), courts often require the plaintiff seeking to enforce its right to show why equitable relief like an injunction is appropriate. For intellectual property, electronic property, chattel, and sometimes even real property, a plaintiff must show that damages cannot adequately compensate them and that they will suffer irreparable harm without an injunction.¹⁸⁹ And even after all of that, a court might decline to issue an injunction if it finds it inequitable to do so based on the interests both of parties to the lawsuit and of third parties.¹⁹⁰ Thus, at a high level of generality, it comports with common-law remedial principles to presume that damages are a proper remedy when a restrictive covenant is violated.

In practice, however, most jurisdictions will enforce restrictive covenants by injunction.¹⁹¹ A covenant is a property interest and so, the thinking goes, an injunction to protect against its violation is presumptively appropriate.¹⁹² Injunctions are often available simply on a showing that a covenant was violated, without any necessary demonstration of harm by the complaining party.¹⁹³ And indeed, an injunction in some circumstances might even require a property owner to tear down a structure that was erected contrary to the covenant.¹⁹⁴ For restrictive covenants specifically, many courts favor injunctions to enforce them precisely because it is challenging to quantify the harm from violating them.¹⁹⁵ From a historical perspective, this practice follows from a unique turn of events in Anglo-American law that lowered the bar for what a restrictive covenant beneficiary would have to show to obtain equitable relief. Traditionally, covenants could be enforced against successors in interest only when the original covenanting parties were in horizontal privity; but eventually courts placed restrictive covenants under the umbrella of a new form of nonpossessory interest known as an equitable servitude, which more freely allowed for enforcement by injunction.¹⁹⁶

Yet in most jurisdictions courts still ultimately retain remedial discretion, and thus need not enforce a covenant through an injunction if doing so would be inequitable.¹⁹⁷ In Blakeley v. Gorin, a property owner planned to construct a large hotel and apartment building that would connect to the neighboring property at the rear via a large, elevated bridge.¹⁹⁸ But a covenant required property owners to leave a sixteen-feet-wide space behind their buildings at the rear of the property.¹⁹⁹ The restrictive covenant was over a century old and originally served to preserve a cart path.²⁰⁰ Even though the court noted that cart paths are now mostly obsolete, it explained that the covenant still served the valuable purpose of preserving light and air for surrounding properties.²⁰¹ Thus, the court held that the covenant should be enforced.²⁰² However, the court chose damages instead of an injunction to do so.²⁰³ In its view, the harm to surrounding properties from reduced light and air was minimal compared to the benefit to the developer and the public from the more productive use of the land.²⁰⁴

Likewise, sometimes courts specifically conclude that damages are an adequate legal remedy for the violation of a restrictive covenant. In Crossmann Communities, Inc. v. Dean, a builder violated a setback covenant by beginning to construct a house too close to the property boundary line.²⁰⁵ A neighboring property owner within the planned community sued to enjoin the construction.²⁰⁶ The Court of Appeals of Indiana held that although the covenant was enforceable, damages were an adequate remedy because “[a] restrictive covenant constitutes a compensable interest in land.”²⁰⁷

When it comes to single-family covenants, though, courts almost never elect damages instead of injunction.²⁰⁸ Why? It is not necessarily because they walk through the standard equitable considerations and determine an injunction is necessary. Instead, courts typically note that for violations of such covenants, plaintiffs are not limited to damages they can prove.²⁰⁹ Essentially, the court simply states that an injunction is allowed in the face of a violation and goes on its way.²¹⁰

That approach would be misguided in many cases dealing with proposed or completed multi-family housing development. If restrictive covenants were treated like most other private legal rights, then a plaintiff would have to affirmatively show that an injunction is necessary to safeguard their interests and that such relief is equitable considering all parties affected by it.²¹¹ In many cases, a property owner benefiting from a single-family restrictive covenant may have a very difficult time making such a showing. As described above in Section I, presumably from a homeowner’s perspective, the main reason to cherish a single-family covenant is that it preserves property values, both by suppressing nearby housing supply and by preserving “neighborhood character.” But, again, the evidence is tenuous that removing such a covenant significantly harms surrounding property values.²¹²

Regardless, if there is some measurable harm to property value by terminating the covenant, then damages could conceivably compensate for it because it would be financial loss.²¹³ And if there is no measurable harm to property value, that likely means the harm is not so much financial as psychic. Assuming psychic harm provides the foundation for a cognizable legal interest, it is true that damages might not always perfectly compensate for it. From a psychological standpoint, people prefer in-kind redress over monetary redress, even when the loss they suffered is of a fungible asset.²¹⁴ Extrapolating to the context of psychic harm, it is reasonable to assume that if there is real psychic harm from terminating a covenant, damages might not completely compensate for it. That may be one of the reasons the Restatement (Third) of Property and many courts remark without much explanation that because harm from the violation of a restrictive covenant is hard to quantify, injunctive relief is appropriate.²¹⁵

Still, under standard remedial principles, a court may go on to evaluate whether injunctive relief—even if a better compensator than damages—is appropriate based on a “balance of equities”; that is, whether an injunction makes sense given the harm such relief might cause to both the defendant and the broader public.²¹⁶ Often it does not make sense in light of those considerations. The benefit to the plaintiff homeowner would be avoiding some indeterminate amount of psychic harm. But the harm to the defendant and the public from an injunction (that is, strictly enforcing the covenant) might be more pronounced. The owner of the land limited by the covenant would suffer the financial consequences of only being able to operate a single-family home when multi-family use might be dramatically more profitable. And the public would suffer the consequences of one more instance of constrained housing supply.

The legal landscape thus points two ways here. On the one hand, courts are generally free to opt for damages instead of an injunction when presented with a violation of a covenant. On the other hand, courts in practice rarely do so, especially for single-family covenants. I next move on to the interrelated economic and psychological perspectives on the issue to explore why courts’ overprotectiveness of such covenants with injunctive relief is likely misguided.

ii. Economic Considerations

From an economic perspective, damages are often the best remedy if available. That is because they allow for “efficient breach.”²¹⁷ This concept is most prominent in contract theory, but it applies more broadly. To put it simply, damages place a number value on a legal right or duty. If a party wants to violate such a right or duty, damages set how much they must pay to do so.²¹⁸ And most commonly, damages aim to compensate the injured party for what it lost. So, if a violating party chooses to violate a right, and then pays damages to do so, theoretically that party has determined that its action is worth more to it than the money it had to pay. The end result is that the injured party is no worse off than before, and the violating party is better off—approaching a Pareto-efficient result.²¹⁹

If instead a violating party does not have the opportunity to violate a right and pay damages—indeed, if it cannot permanently violate a right at all because it is prohibited by an injunction—then the law entrenches inefficiency.²²⁰ The violating party cannot pay to get something they value more than the money, even when allowing them to do so theoretically would not ultimately make anyone else worse off.

To make it plain for the context of this Article: in theory a single-family covenant has a specific quantifiable value to a beneficiary of it (such that the owner assumes it enhances their property value).²²¹ And a prospective builder expects a certain financial gain from being able to construct a duplex, quadplex, or other multi-family housing development.²²² If the value the builder expects to gain from the project is greater than the value of the single-family restriction to the neighbors, then an efficient framework would allow the developer to violate the covenant and pay the neighbors what the restriction on that particular property was worth to them. The developer still profits, and the neighbors are no worse off (and that is not to mention the added benefit to the public at large from the increased housing supply).²²³

As explained in Part I above, although such a result could theoretically be achieved through private bargaining, the logistical difficulties of doing so means that a “liability rule” might be necessary to reach an optimal result.²²⁴ Under Calabresi and Melamed’s famous and foundational remedial framework, the standard perspective is that a right should be protected by a property rule when transactions costs are low, and a liability rule when transactions costs are high.²²⁵ The reason for this is that when transactions costs are low, such as when only two parties in close proximity are involved, then it is logistically simple for them to negotiate a buyout.²²⁶ But when transactions costs are high, such as when a builder must obtain permission from many parties, then a liability rule bypasses drawn-out negotiations and holdouts and jumps straight to compensation.²²⁷

For single-family covenants, a liability rule is often more appropriate. This is so especially when the population of property owners with the right to say “no” to multi-family development is large and thus the risk is great of holdouts who will accept no reasonable price for a change.²²⁸ Combined with the psychological phenomena leading neighbors to assume that such restrictions are worth more than they in fact are,²²⁹ this means that a lawsuit with damages as the end result is often a necessary tool to reach an efficient arrangement that private bargaining cannot achieve.²³⁰

What about an obvious and important economic objection—that any such limitation on the strength of single-family covenants might in the short run constrain housing supply? The idea is that there must be some profits-focused reason why subdivision developers include the single-family covenant in new CC&Rs.²³¹ And so if such a provision is weaker, the developers might have a harder time selling off homes initially. By extension, they perhaps would have less incentive to develop land in the first place.

Two responses: first, although it is true that homes within HOAs tend to be more valuable than those not in HOAs,²³² the evidence does not indicate that reciprocal single-family covenants are necessarily the primary reason for that. It is more likely that the better services within an HOA compared to those of the surrounding locality is a major selling point, with the complete, broad network of restrictions playing a role alongside.²³³ Indeed, a single-family restriction on a given piece of property likely suppresses that property’s value.²³⁴ So even if it were a selling point that other surrounding houses are covenant-bound to remain single family, any value bump from that fact could be offset by the fact that the same restriction applies to the purchased property too. Put another way, any “demoralization costs” of limiting the enforcement of restrictive covenants may in part be offset by the “morale benefits” of loosening constraints on individuals’ free use of their properties.²³⁵

Second, the objection fails to distinguish between local market conditions at the time of initial sale of the home and the time of subsequent transfers of the property to new owners. Most likely, by the time an owner of a house restricted to single-family use determines that they want to develop additional housing, years have gone by since the covenant was initially placed.²³⁶ When the initial developer of the subdivision first sold off the homes, it was able to capitalize on any value added immediately from the single-family restrictions (if there was any value added). So, the fact that legal remedies might make some room for market pressure towards multi-family housing down the road is unlikely to significantly affect the initial profitability for the developer from building out and selling off the subdivision of homes restricted to single-family use. The availability of damages down the road unlocks new housing and probably will not stifle initial subdivision development.

iii. Psychological Phenomena at Play

One might argue, though, that the precise problem is that you cannot put a numerical value on a single-family restriction from the point of view of the neighbors.²³⁷ This very Article even suggests that psychological attachment, more than quantifiable financial interest, explains the perseverance of such covenants.²³⁸ But even if it is difficult to put a number on what it means to lose the benefit of a restrictive covenant, psychological phenomena suggest that enforcing a covenant, but ordering damages, is perhaps the best way to pursue the public interest in a way that does minimal harm to landowner expectations.

First, I will address some psychological research that might seem to point away from a monetary remedial scheme. Research shows that people prefer in-kind redress over monetary relief.²³⁹ When they lose something, they are likely to be more satisfied if it is replaced with something similar—even if the thing lost is fungible.²⁴⁰ Relatedly, Stern and Lewinsohn-Zamir argue in favor of property rules and injunctive relief because in their view this principle means that courts systematically undercompensate injured parties.²⁴¹ If that is so, then perhaps one might assume that a property rule enforced by an injunction makes the most sense; if money in exchange for the loss of a right does not seem to make the injured party feel whole, then monetary relief is inadequate and an alternative remedy like an injunction is necessary.

Relatedly, the Mere Ownership Effect may partially explain the existence of property rules in general. If a liability rule assumes that basic infringements on property rights can be rectified through pay, property rules assume that sometimes they cannot.²⁴² A property rule promises that the legal system will protect a property interest even if infringement of that interest does not manifest as quantifiable financial harm (hence the classic standard for injunctive relief, which requires the plaintiff to show that they will suffer irreparable harm without an injunction and that legal remedies like damages do not adequately safeguard their interests).²⁴³ Property rules assume real harm even absent affirmative proof of it.²⁴⁴

To put it in terms of the Mere Ownership Effect: if something becomes “mine,” then for that reason alone it is more valuable to me.²⁴⁵ Therefore, an act that I see as an afront to the thing being “mine” hurts me, even if it causes no measurable damage to the object and even if it does not prevent me from using my property. If my right to exclusive possession is not respected, then I have lost something.²⁴⁶ At the end of the day, then, monetary compensation would fall short because the core of the harm is difficult or impossible to quantify.²⁴⁷ And so, if we care about that non-quantifiable harm, the best way to guard against it would be a property rule expressed through injunctive relief.²⁴⁸

That argument is compelling, but it suffers from a few shortcomings when applied to the issue at hand. First, it would mean mostly surrendering to gridlock. If we assume that because owners of restrictive covenants would rather have the covenants than money, we therefore must accommodate that preference; then life will go on as it has. In the numerous and increasing swaths of land across our country where single-family homes under covenant dominate, but housing demand is high, we will simply persist indefinitely in the housing shortage. Psychological realities may be quite important, but do not alone carry all the normative weight. Property owners might report that they prefer something over something else, but whether the law should cater to the preference is another matter entirely. Stern and Lewinsohn-Zamir, despite their favoring of in-kind remedies and property rules, note that just because people might prefer one kind of remedy does not mean the law necessarily should accommodate their desire.²⁴⁹

Indeed, while we can generate crucial insights by understanding psychological phenomena undergirding people’s relationship to their possessions, we likely cannot satisfy short-term preferences of all property owners and correct the legal and market mechanisms that have brought about housing gridlock at the same time. Again, recall the Mere Ownership Effect.²⁵⁰ Because people value their possessions above market rate by the simple fact that they possess them, a feature of human psychology makes efficient transfer of goods less likely.²⁵¹ The Mere Ownership Effect thus entrenches a status-quo bias into people’s relationship to property. And property rules simply bolster that status quo, regardless of whether it is economically efficient or socially beneficial to do so.²⁵²

Next, even from a psychological standpoint, we must take the preference for in-kind redress itself with several grains of salt. This Article explained above how the fear of neighborhood change has such deep psychological roots.²⁵³ But there is another element at play here. It is the fact that people are bad estimators of their future flourishing.²⁵⁴ Take for example, one of the most serious forms of compulsory lifestyle change: relocation. If people develop a fear and aversion to changes in their familiar surroundings like their neighborhood, then even more so they assume they will suffer deep psychic harm from being forced to move somewhere else entirely. But the psychological reality is that that is generally not the case. In fact, there is almost no evidence at all that people who must relocate to another home suffer any lasting psychological harm from that event.²⁵⁵ There are some narrow exceptions, such as people living in poverty for whom relocation often means eviction and homelessness.²⁵⁶ But for most people, even though the prospect of change may hurt, they readjust quickly.

That is not to say the initial discomfort does not matter. But when the choice is between an injunction that freezes a housing shortage under force of law and damages that both attempt redress and free up new housing, we have some important questions to ask: If any discomfort from the addition of new housing may wane into the immeasurable given enough time, then why operate under legal rules that, in effect, indefinitely prevent such change? And if psychological research shows that a person would not pay over market value to get a restriction in the first place, then why should we effectively “pay” them far above market value (expressed through unending specific performance)²⁵⁷ when they stand to lose that restriction?

Furthermore, not only do people adjust to new circumstances despite their initial discomfort, they also can be nudged to see their own possessions and entitlements through a different lens. Specifically, the degree of psychic harm a person experiences by losing a legal entitlement can be influenced by how that entitlement was previously framed and presented to them. One study measured this effect among a group of first-year law students.²⁵⁸ Students were divided into two groups and all were given a laptop. The students in one group were told they owned the laptop, which, they were informed, included the right to use, exclude others, and transfer.²⁵⁹ The other group was told that they owned all those same sticks in their bundle of property rights but not specifically that they owned the laptop itself.²⁶⁰ Both groups were then informed that the school was placing certain restrictions on the laptops’ use. Between the two groups, the students who were told they owned the laptop were more likely to report that they “lost” something because of the restrictions compared to the students who were merely told they had a collection of specific rights regarding the laptop.²⁶¹ Researchers later concluded that forewarning property owners of potential restrictions on their free use of property leads those owners to feel less like their rights had been violated when restrictions were later presented.²⁶²

So, if owners of a possession or entitlement are informed about the qualified nature of their right, they are less likely to feel a sense of loss when restrictions manifest later. For single-family covenants, this means that people’s expectations about what entitlements a restrictive covenant gives them potentially can be adjusted. If, in practice, they begin to see that violation of such a covenant entitles them to some form of financial compensation, then over time they may adjust to see their interest in the covenant as a financial one—and not an amorphous, yet deeply cherished, interest that entitles them to block neighborhood change.

On the other side of the coin, that same principle demonstrates why the damages approach has some psychological advantages to other methods of breaking housing gridlock, especially those involving sweeping mandates or broad invalidation of such single-family covenants. A damages regime enables people to relearn the nature of their interests. A wide-reaching statute that terminates or voids all single-family covenants in one shot gives people no time to adjust their expectations about their own entitlements before those entitlements are taken away. But if the covenants stay in place and are simply enforced differently when violations arise, then people perhaps have room to adjust their expectations without feeling like they have been entirely deprived of their rights. Admittedly, property owners might still experience some degree of surprise, such as when the legislative body first enacts an approach like the one this Article urges. Furthermore, the first property owners in a given geographic area to find themselves neighbors to a covenant violation under the new remedies approach would not have had sufficient time or previous examples based on which to adjust their expectations. But for subsequent neighbors, the blindsiding effect could be reduced.

But if damages are the answer, how will they be calculated? It is an important question because, as Stern and Lewinsohn-Zamir point out, the “coercion premium” means that property owners are unlikely to receive compensation that makes them whole, at least in the takings context.²⁶³ First, property owners, so the thinking goes, refuse to sell in a voluntary market transaction because they value their property above market value.²⁶⁴ Second, and relatedly, when the government resorts to a taking, the property owner suffers an additional psychic harm through the coercive practice.²⁶⁵ So, if just compensation is determined by a court’s estimation of fair market value, that compensation will systematically undercut what the property owner feels they lost.²⁶⁶ If all of that is true in the takings context, presumably it could hold true in the damages context too. In both cases, the property owner is given money in the face of their refusal to relinquish a property right.²⁶⁷

Still, the fact that someone subjectively would feel immense loss from having a property right transformed to a liability right does not by itself mean that their preference should determine proper compensation. If it did, then we could hardly hope to escape the holdout problem. A property owner who deeply cherishes the restrictive covenant could be entitled to such a substantial damages award for the loss of the covenant that developers would seldom find it profitable to build and risk the lawsuit. If all that mattered were property owner expectations, that might be fine. But if the public interest factors into the balance of the equities, we need another approach.

iv. Four Features of the Damages Action

To address this problem, I propose a compensation method with four key features.²⁶⁸ The first is that the property owner ought to be allowed to have a jury decide compensation if they so choose. Some jurisdictions already allow for this, even if they are not required to as a matter of constitutional law.²⁶⁹ A jury trial could in theory soften the effect of the coercion premium. Each member of the jury is someone who could own property or reside in a home that is part of a neighborhood with covenants.²⁷⁰ Because each of them could find themselves in the same situation, they could sympathize with the property owner’s subjective plight. Conversely, the jury could be a useful tool to moderate the intensity of the property owner’s preferences. Although the jury could have sympathy for the property owner, the fact that the jury is drawn from a “cross-section” of the community²⁷¹ means that it is less likely to be swayed by a property owner with an unusual attachment to the single-family covenant.²⁷²

The second and related feature of my compensation regime is that the property owner ought to be allowed to present evidence explaining why and to what degree they value their right to prevent the building of the structure at issue above market. In takings cases, most often the measure of just compensation is the market value of what was taken (that is, for the purposes of the issue at hand, the right to enforce the covenant in that particular instance), or the difference in fair market value between the plaintiff’s entire property before and after the taking.²⁷³ But of course in tort actions and elsewhere across the common law, other factors (such as pain and suffering and other psychic harms) can enter the equation to determine what would make an injured party whole.²⁷⁴

The third feature of my compensation regime is that the damages should be based on the harm from the construction of the precise structure or development the covenant-violating landowner builds, not from an extinguishing of the right to enforce the covenant against any other property bound by it.²⁷⁵ In other words, someone who wants to construct a medium or large apartment building may have to pay more in damages than a homeowner who wants to add an accessory dwelling unit behind their house, or convert their house into a duplex. If the central harm from the non-enforcement of a single-family covenant is more rooted in the change that could result from the specific covenant violation, as opposed to the weakening the covenant in the abstract, then it makes sense for the damages due to reflect that.²⁷⁶

The fourth and final feature of the compensation regime is statutory ranges or caps on damages, if not inconsistent with state law where the regime would be implemented. Specifically, the legislative body should prescribe either a range or a maximum damages award per property owner that considers the nature of the new structure, the nature of the surrounding structures, and the distance from the new structure to the property of the aggrieved owner. In other words, the legislative body could, for example, provide a range of permissible damages awards for duplexes built in single-family neighborhoods, which would be slightly lower in value than the range of permissible awards for quadplexes in the same neighborhood, which would be lower than that for ten- to twenty-unit apartment buildings in the same neighborhood, and so on.²⁷⁷ Prescribing a range instead of specific values enables courts or juries to consider various other factors that might make the new structure more or less harmful to the aggrieved property owner in a given case. And prescribing a range instead of allowing any damage award whatsoever accomplishes at least two things: (1) it gives builders some amount of predictability and thus confidence about whether it will likely be financially feasible for them to move forward and build the non-conforming structure;²⁷⁸ and (2) it guards against the risk that some juries might offer astronomical awards even for minor departures from single-family use restrictions—disproportionately burdening builders of smaller structures who likely have less capital on hand. Many states have addressed whether statutory caps on noneconomic compensatory damages are constitutional as a matter of their state’s law.²⁷⁹ In most states such limitations would likely be constitutional,²⁸⁰ but in the minority of states where they would not be, this compensation regime would have to operate without express limits on the compensatory damages that a plaintiff property owner could obtain.²⁸¹

It would be difficult here to declare the specific dollar value ranges appropriate for all possible cases. A legislative body could benefit from thorough input on that matter from builders and property owners. But, importantly, whatever ranges the legislative body chooses must not allow for such significant damages awards that builders would rarely bother moving forward with relatively noninvasive multi-family projects for which there is market demand. To make it just a bit more concrete: in regions where demand for more housing is high but not astronomical, damages awards in the range of several hundred dollars for the nearest neighboring properties may be appropriate for converting one home to a small handful. The value could scale up for larger construction projects and scale down for neighbors located farther from the project. Perhaps three-digit damages would strike many people as surprisingly low (not to mention the two-digit damages potentially in play for more distant neighbors). But the key here is that the damages award would, again, be provided in response to one covenant violation, not for termination of the covenant all together. The same or a similar amount in damages could be in play the next time around if another neighbor plans to develop housing in violation of the covenant too. And from the builder’s perspective, it is possible that they will have to pay every other property owner within the HOA in some form, either through damages or as part of the initial lump-sum payment. Thus, if individual neighbors are entitled to too high of a value in compensation, rarely would builders go through any of this process at all (except in cases of extremely high potential profit from the project).

These four features of the process of calculating damages should go far towards ensuring that property owners’ psychic harm is taken seriously, but not given so much weight that gridlock can persist as it has. And, as the next Section explains in more detail, from a psychological standpoint, it gives property owners a voice in the process—a crucial component to minimizing psychic harm throughout the procedural stages themselves.²⁸²

One thorny issue still remains: the proper timing for such a damages action. Many HOA CC&Rs specify time limits on how long construction projects may take; these are often one-year limitations.²⁸³ And HOAs may levy reasonable fines for failure to comply with such a deadline.²⁸⁴ That being so, an action for damages could ripen whenever covenant terms have been violated.²⁸⁵ For an express single-family covenant, that means the plaintiff can sue once a multi-family structure is built out to a habitable standard (that is, when the defendant no longer uses the property as a single-family residence as the covenant requires).²⁸⁶ For other restrictions that have the effect of only allowing for one single-family unit, such as minimum-square-footage requirements, an action could ripen as soon as the new construction has caused a violation. The HOA’s time limits on construction can serve as separate restrictions for which fines could accrue to the HOA daily after the deadline passes. This acts as an incentive for builders not to unduly delay and thus force aggrieved neighbors to delay their compensation. Yet, it is possible that HOAs could limit construction times so stringently that few multi-family projects could go forward.²⁸⁷ To dodge this counterpunch, localities or states may need additional legislative provisions directly targeted at allowing reasonable construction times.

3. Why an Opt-In Mechanism?

There is, however, one more psychological observation that bears on the question of the proper mechanism for escaping a single-family covenant, for which a damages approach alone might not meaningfully account. It is the fact that even property owners who lose an entitlement tend to feel that they have not lost as much if they (1) were given voice in the process,²⁸⁸ and (2) were not singled out for negative treatment.²⁸⁹ To account for the coercion harm and singling-out harm, I suggest a new legal mechanism that would chronologically precede the damages schema described above.

Psychologists have conducted specific research on the psychological effects of takings, and of procedural legal processes more generally. They have found that people often care as much about being treated with dignity and respect during legal processes as they care about the end result.²⁹⁰ Likewise, people are averse to legal processes that single them out for unfavorable treatment, even if it is in the name of the public interest.²⁹¹ That means that people are likely to suffer psychic harm if they are coerced into a situation in which they are disadvantaged for the sake of some public good but others against whom they compare themselves are not.²⁹²

Property owners who expect to be able to limit fellow HOA members to single-family use, but then can only collect market price for the right instead, might feel that their particular interests were steamrolled on behalf of some public good. That does not mean the damages approach is inappropriate, but it does beg the question of whether that particular form of psychic harm could be minimized along the way.

My proposal is one that gives landowners voice, but not veto. The legal mechanism is created by statute and triggered when an owner of a property within an HOA seeks to build in violation of a single-family covenant, and that area is not subject to single-family zoning. The builder can initiate a decision by each member of the HOA. It offers a single lump-sum value in exchange for the right to violate the covenant. Each member decides whether to opt in to receive a portion of the sum. The sum is divided among all HOA members who opt in, and in exchange, those members and the HOA itself relinquish the right to challenge the building. For those that do not opt in, the damages approach will apply.²⁹³ If they object to the construction, they can roll the dice and collect damages in court.

This legal mechanism draws inspiration from land assembly districts (“LADs”), though it has some key differences. LADs seek to break another form of property gridlock.²⁹⁴ Sometimes a large development that would span several individual land parcels would generate more economic value or public benefit than the sum of all the individual parcels under their current use.²⁹⁵ But because each individual parcel owner can refuse to sell, a single holdout can sink a socially beneficial development. LADs tackle this problem.²⁹⁶ When a state or locality authorizes an LAD, it gives the neighborhood the power negotiate a sale of all the land within it—either by majority or supermajority vote, or by the appointment of a board to negotiate the sale.²⁹⁷ The dissenting property owners can opt out, but then they would still lose their land to the project by eminent domain (and in exchange, receive just compensation from the government).²⁹⁸ All other properties effectively receive a pro rata share of the overall sale price.²⁹⁹

My proposal is similar to the LAD mechanism in two important ways. One, it allows for a lower-transactions-costs method of negotiating a selling price than bargaining with each individual entitlement holder. Two, it provides an incentive against holdouts,³⁰⁰ and ultimately can move forward whether there are individual holdouts or not. My proposal differs from the LAD mechanism because whereas with a LAD the owners have the ultimate say by majority vote over whether the land collection is sold at all,³⁰¹ in my proposal for restrictive covenants the development may move forward either way.³⁰² But the property owners can choose whether they prefer compensation through the slice of the developer’s up-front offer or whether they would rather leave their compensation to litigation and jury determination within the predefined damages range.

A psychological benefit of this approach is that it gives the property owners a sense of ownership over whatever result they reach. Those who opt in to the developer’s offer choose to do so and thus escape any acute harm from direct coercion. But even those who do not opt in could to an extent feel that their interests mattered. True, they were not able to stop the development simply by speaking up. But when they ultimately are only entitled to damages in court, that result is one they had some choice in bringing about; they are in the same boat as all other HOA members in that respect.

Of course, this procedural mechanism will interplay with the damages backdrop. If the builder has reason to believe that juries would give more favorable awards to neighboring property owners and strongly compensate for any unquantifiable psychic harm (that is, select higher values within the predefined damages ranges), then the builder might want to avoid such damages actions. They therefore would have an incentive to offer more in the initial lump sum to try to persuade owners to opt in and thus relinquish their rights to a later suit. Conversely, if the builder offers too much in the lump sum, but the neighborhood contains many holdouts, then the builder might end up substantially paying in the lump sum and still face the prospect of numerous damages suits, after which it would pay out again and again. And from the neighboring property owners’ perspectives, the lower the value a jury is likely to award within the damages range, the more likely the neighbors will be encouraged to accept a lump sum monetary offer by the builder up front. But the crucial point is that the two-stage solution, while guaranteeing that a builder can develop multi-family housing if it is determined to do so, also provides neighboring landowners both a degree of ownership over how their interests are credited and a mechanism for targeted compensation. This approach avoids holdouts and loosens housing gridlock in a way that takes property interests and people’s psychological attachments to them seriously.³⁰³

CONCLUSION

The housing crisis is complex. It is partly a legal and financial problem and, as this Article especially emphasizes, partly a psychological one. Even if homeowners have the economic incentive to build or allow for multi-family housing, and even if localities and states lift the “zoning straitjacket,”³⁰⁴ housing supply still could lag. Private restrictive covenants enshrining single-family housing curb housing production in many localities, potentially distressing millions of Americans and disproportionately harming those living in poverty. Psychological phenomena concerning how people develop attachments and perceive change conspire with powerful legal tools to hold these restrictions in place. The solution to this gridlock thus must account for those conspiring factors. This Article charts a possible course: an initial lump-sum offer from a builder with an opt-in mechanism for each HOA member, followed by a carefully prescribed damages action available to all remaining members. If we care deeply about both property owner expectations and providing an adequate supply of housing, this approach shows a way forward.

97 S. Cal. L. Rev. 1233

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Brian M. Miller*

* Assistant Professor of Law, Duquesne University Kline School of Law. I would like to thank Molly Brady, Charles Barzun, John Infranca, Peter Danchin, Michele Gilman, Will Moon, Anne-Marie Carstens, Aadhithi Padmanabhan, Alexi Pfeffer-Gillette, Chris Bryant, Matthew Sipe and Chelsea Banister for insightful comments. Thanks also to all the participants in the Maryland Law/Baltimore Law Junior Faculty Workshop for helpful feedback on an earlier draft. And thanks to the participants in the Richmond Junior Faculty Forum for helpful comments as well. I am grateful to Marc LeVan for valuable research assistance and to Tanya Thomas for research assistance at the earliest stages. Finally, thanks to the exceptional editors of the Southern California Law Review. Errors are mine.

Red, White, and Blue—And Also Green: How Energy Policy Can Protect Both National Security and the Environment

March 2024March 2024David M. Schizer*

Too often, energy policy protects the environment while neglecting national security, or vice versa. Since each goal is critical, this Article shows how to advance both at the same time.

For national security, the key is to avoid depending on the wrong suppliers. If they are vulnerable to attack (like some Middle Eastern producers), they need to be defended. Or, if they are themselves geopolitical threats (like Russia and Iran), their energy exports fund harmful conduct. This Article breaks new ground in showing why suppliers tend to be insecure or menacing: authoritarian regimes—which are more likely to pose these risks—have a comparative advantage in producing oil and gas, since they are less responsive to opposition from environmentalists, local residents, and other groups.

To avoid depending on the wrong suppliers, the U.S. and its allies should pursue two strategies. First, they should cut demand for fossil fuel. Along with making it easier to stop buying from the wrong suppliers, slashing demand also reduces greenhouse gas emissions and pollution. Yet although these are significant national security and environmental advantages, there is an offsetting national security risk: like fossil fuel, the main alternative—clean energy—also can foster dependence on insecure or potentially hostile suppliers (like Congo and China). In response, the U.S. and its allies should ramp up domestic production of clean energy technology, while also encouraging households and businesses to use it.

Second, since the transition to clean energy will take time, the U.S. and its allies also need to tap new sources of fossil fuel in countries that are secure and friendly. Yet since new fossil fuel development raises familiar environmental concerns, this Article proposes three ways to do it while still reducing emissions and pollution. First, these new sources should be as “clean” as possible (for example, natural gas instead of coal). Second, in adding new capacity, the goal should be to replace other fossil fuel sources, not to add to them (for example, so more production in the U.S. means less production in Russia). Third, new sources should be flexible, so they can ramp up and scale back as needed. Fortunately, these shifts are relatively easy for U.S. shale producers—indeed, more so than for others—and can be encouraged with the right regulatory approach.

While government intervention is needed to pursue these goals, policymakers should strive to harness the private sector’s capacity to innovate, cut costs, and enhance quality. A moratorium on new fossil fuel development is counterproductive, entrenching a status quo that depends too much on coal, as well as on insecure and hostile energy suppliers. Instead, the best approach is to “price” the relevant national security and environmental costs with Pigouvian taxes, motivating businesses and consumers to mitigate these costs and letting them choose how to do it. Yet if Pigouvian taxes are not politically feasible, this Article recommends a heuristic called “the marginal efficiency cost of energy”: policymakers should account for all the social costs of each source—private costs, national security costs, and environmental costs—and strive to replace high-cost sources with low-cost sources. This framework should guide all aspects of energy policy—from permits and regulations to rate-setting, mandates, moratoriums, subsidies, and government leases—so policymakers stay focused on both environmental and national security goals.

In December 2021, the Biden Administration blocked the construction of a natural gas pipeline from the Eastern Mediterranean to Europe. “Why would we build a fossil fuel pipeline,” the Administration’s senior energy advisor asked, “when our entire policy is to support new technology . . . and new investments in going green and in going clean?”¹

The answer to this rhetorical question should have been clear. In a word, it was “Russia.” Just three months later, Russia would invade Ukraine, and troops were already amassing on the border. To fund this military build-up, the Russian government depended heavily on energy exports, which accounted for a whopping 45% of its revenue.² Since Russia’s main market was Europe, one way to weaken Russia was to wean Europe off its energy. A new pipeline from the Eastern Mediterranean would help (although it would take years to complete). Even so, the Biden Administration nixed this pipeline,³ prioritizing the environment over national security.

As this example illustrates, energy policy has a profound impact on both national security and the environment, but too often the focus is on one or the other. Indeed, several prominent scholars have chosen to omit national security from their analysis altogether.⁴ For example, an influential 1996 book on energy security pointedly ignores the cost of defending Middle Eastern oil, arguing that energy is not the only reason for the U.S. to intervene in the region.⁵ But oil surely is one of the reasons. Ignoring it renders their analysis incomplete. Instead, energy policy needs to account for—and, indeed, to protect—both national security and the environment. This Article shows how to do it.

To enhance national security, the key is to avoid depending on the wrong suppliers. If they are vulnerable to attack (like some Middle Eastern suppliers), they need to be defended. Or, if they are themselves geopolitical threats (like Russia and Iran), their exports fund harmful conduct.

Unfortunately, it is no accident that fossil fuel suppliers often are insecure or hostile. This Article breaks new ground in explaining why. In democracies, fossil fuel production regularly faces staunch opposition from local residents, economic competitors, and environmental groups. But interest groups have less influence in authoritarian regimes, so production gravitates to these countries. This “authoritarian comparative advantage,” as the dynamic is called here, renders the U.S. and other democracies more dependent on authoritarian suppliers, which are more likely to be insecure or hostile.

To mitigate these national security risks, the U.S. and its allies should rely less on these suppliers. In general, there are two ways to do this. The first is to reduce demand for their product, while the second is to find other suppliers. This Article analyzes both alternatives, evaluating their implications for national security and the environment.

The first strategy—cutting demand for fossil fuel—lessens the stakes. There is less economic disruption when the U.S. and its allies stop buying from insecure or hostile suppliers. Finding other suppliers also is easier, since there is more slack in the system. Along with these national security advantages, reducing demand also yields familiar environmental benefits, reducing greenhouse gas emissions and pollution.

Yet although it is important to reduce demand for fossil fuel—for instance, by depending more on clean energy—this strategy poses national security risks of its own. Unfortunately, as with oil and gas, many clean energy suppliers are insecure or potentially hostile. For example, China is a leading supplier of EV batteries, solar panels, and minerals needed for clean energy. Arguably, replacing Russian hydrocarbons with Chinese clean energy is like jumping out of the frying pan into the fire.

In response, the U.S. and its allies should ramp up domestic production of clean energy technology, while also encouraging households and businesses to use it. To incentivize this effort, Congress offered a range of subsidies in the Inflation Reduction Act of 2022, although it remains to be seen how effective these subsidies will be; as I have emphasized elsewhere, targeted subsidies require Congress to pick which technologies to fund, but Congress often lacks the expertise and incentives to make the right choices.⁶ Even with these subsidies, moreover, clean energy still faces daunting regulatory barriers. For example, the permitting process for wind projects, mines, and solar farms is expensive, slow, and risky, but Congress failed to pass a 2022 bill on permitting reform.⁷ For this reason (and others as well), the “friend-shoring” of supply chains—and, more generally, the transition to clean energy—is likely to take many years.

Meanwhile, the U.S. and its allies should also pursue a second strategy. To ease their dependence on insecure and hostile fossil fuel suppliers, they should find other suppliers. Yet this effort, which involves adding new wells, pipelines, and infrastructure, raises familiar environmental concerns.

To square this circle, this Article proposes three ways to develop new sources of fossil fuel while still reducing emissions and pollution. First, these new sources should be as “clean” as possible; for example, natural gas generally is preferable to coal. Second, in adding new capacity, the goal should be to replace other fossil fuel sources, not to add to them. For instance, the point of increasing U.S. exports should be to reduce Russian exports. Third, new sources should be flexible, so they can ramp up and scale back, as needed. Fortunately, these shifts are relatively easy for U.S. shale producers—indeed, more so than for others—and can be encouraged with the right regulatory approach. For example, in awarding permits for a new pipeline or Liquefied Natural Gas (“LNG”) facility, the government should reserve (and pay for) the right to shut it down after a specified period. This would be much better than the Biden Administration’s decision in January 2024 to “pause” decisions on new export permits.⁸

To protect both the environment and national security, then, the U.S. and its allies need to reduce demand for fossil fuel, while also tapping new supply. But who is supposed to pursue these twin goals? After all, producing energy is not a government responsibility—at least not in the U.S. Rather, this is the job of private firms, and rightly so. They have the expertise and incentives to innovate, cut costs, and enhance quality. So even though authoritarian systems are better at overcoming interest group opposition, free societies have their own edge—economic dynamism—which they should harness.

Yet the private sector can do only what it is allowed to do. New wells and pipelines require permits, as do wind farms and mines for clean energy minerals, while extensive regulations also apply. The wrong government policies would thwart the approach recommended here. For example, a moratorium on new fossil fuel development—a step with influential supporters, including the International Energy Agency (“IEA”)⁹ —would be counterproductive, entrenching a status quo that depends too much on coal, as well as on insecure and hostile suppliers of oil and gas.

Yet the point is not for the government to leave these issues to the market, but to intervene the right way. The most efficient response is a Pigouvian tax. By adding environmental and national security harms to market prices, it creates financial incentives to mitigate them. At the same time, a Pigouvian tax lets consumers and businesses pick the solutions that are best for them, from electric vehicles and energy efficient appliances to shorter commutes, mass transit, better home insulation, and much more. The government does not have to pick specific responses to support—a key advantage because the government is not good at “picking winners.”¹⁰

Unfortunately, Pigouvian taxes have encountered stiff political resistance in the U.S.¹¹ If they are not available, policymakers should use other policy instruments to reduce the demand for fossil fuels and change the ones we use. To guide this effort, this Article proposes a heuristic called “the marginal efficiency cost of energy”: policymakers should account for all the social costs of each source—private costs, national security costs, and environmental costs—and then seek to replace high-cost sources with low-cost sources. This framework should guide all aspects of energy policy—from permits and regulations to rate-setting, mandates, moratoriums, subsidies, and government leases.

Admittedly, this agenda faces political challenges. Generating the requisite political support will require compromise, as well as an alliance between advocates for the environment and for national security.

Part I analyzes the national security costs of defending insecure fossil fuel suppliers, showing that these costs can be reduced by cutting demand for fossil fuel and adding secure new sources. Part II shows that this two-part strategy also addresses another national security cost of fossil fuel: strengthening hostile exporters. Since energy policy should also protect the environment, Part III briefly surveys two familiar environmental goals: limiting climate change and pollution. To identify synergies and tensions among the various national security and environmental goals, Part IV focuses on strategies to reduce demand for fossil fuel, while Part V considers strategies to tap secure new sources. Part VI generalizes these insights into a regulatory strategy, and Part VII is the conclusion.

I. DEFENSE EXTERNALITIES: A COST OF DEPENDING ON THE WRONG SUPPLIERS

When energy exporters are vulnerable to attack, they may need to be defended; indeed, the U.S. and its allies have protected Middle Eastern oil producers for decades. But this Part argues that instead of defending insecure suppliers, the U.S. and its allies should find ways to depend less on them. By tapping new sources of supply and reducing demand, the U.S. and its allies could cut their defense budgets.

Even so, some commentators and government agencies dismiss this potential benefit, deeming it too speculative to consider in energy policy. The last Section in this Part responds to their claims.

A. The National Security Implications of Energy

1. Defining National Security

Before considering this link between energy policy and national security, it is important first to clarify what the phrase “national security” means here. This Article uses the classical “realist” definition, which focuses on physical security and material well-being, rather than on the advancement of ideals.¹²

The goal here is to enhance the security of the U.S. and its allies, not to maximize global welfare. For example, conduct that is dangerous to U.S. citizens is considered harmful, even if it is beneficial to adversaries of the U.S.

To identify threats, this Article relies on the U.S. Intelligence Community’s annual threat assessments.¹³ The 2022 analysis highlighted four threats—China, Russia, Iran, and North Korea¹⁴—while earlier assessments also focused on terrorism.¹⁵

In mentioning “allies” of the U.S., this Article refers to countries that feature prominently as “allies and partners” in the Biden-Harris 2022 National Security strategy, including the U.K., Germany, France, and other NATO allies in Europe; Canada and Mexico in North America; and Japan, Australia, and South Korea in the Indo-Pacific.¹⁶

2. Links Between Energy and National Security

As the U.S. and its allies strive to counter security threats, energy is relevant in a number of ways. This Part focuses on the cost of defending suppliers, while the next considers the cost of empowering them.

But admittedly, these are not the only links between national security and energy. The military needs fuel to fight wars, just as it also needs weapons, rations, and other materials.¹⁷ The familiar response is to stockpile these supplies.

Energy policy also can cause environmental harms, which some classify as security threats.¹⁸ Yet as a matter of terminology, this Article classifies them instead as environmental harms, discussing them in Part III’s analysis of climate change and pollution.¹⁹

Energy also affects national security through the economy. Without cheap and reliable energy, it is harder to produce and deliver food, medicine, and other essentials; heat homes; enforce the law; maintain effective communications and transportation networks; and engage in a range of other indispensable activities. In short, energy is a fundamental ingredient of modern life.

To avoid severe economic and social disruptions, countries need to protect their electrical grids, pipelines, and power plants.²⁰ This is no different from the need to defend other vital infrastructure.

For similar reasons, countries also need reliable sources of fuel. Recognizing the importance of this precious resource, the literature used to focus on another security challenge: the economic drain from energy imports.

In the U.S., this was mainly an issue for oil, not for natural gas or coal. The U.S. became a net importer of petroleum in the 1950s, and these imports generally increased every year after 1954 until they peaked in 2005.²¹ Since the U.S. was the world’s largest oil importer for decades, the cost of these imports loomed large in the literature on energy and national security.²² In contrast, the U.S. did not depend on imports for natural gas during this period, although experts worried that this would change as U.S. reserves dwindled.²³ There was no such concern about coal, though. With the largest reserves in the world,²⁴ the U.S. has been a net exporter for decades.²⁵

Yet the economic drain from energy imports is no longer a concern in the U.S. In the past fifteen years, U.S. firms have unlocked vast oil and gas reserves in shale formations, using hydraulic fracturing.²⁶ This innovation has turned the U.S. into the world’s largest producer of oil and gas.²⁷ U.S. oil production surged 145% from 2008 to 2019, from 5,000 to 12,289 barrels per day.²⁸ Likewise, U.S. natural gas production increased 88% between 2005 and 2019.²⁹ After a dip during the coronavirus pandemic, U.S. gas production set a record in the summer of 2022,³⁰ reaching a level that once was unimaginable.³¹ This “shale boom” has turned the U.S. into a net exporter of oil and gas,³² so energy no longer contributes to the U.S. trade deficit. The economic drain of energy imports still burdens many U.S. allies, but not the U.S.

B. National Security Risks from Insecure Suppliers

Even so, the U.S. still faces another important energy security challenge, which is the focus of this Section: the risk of sudden contractions in the global supply of energy. This can happen if a supplier suddenly stops producing because of a revolution, war, or other geopolitical crisis. Notably, these supply shocks can still harm the U.S.—even though it is a net exporter—by triggering economically damaging spikes in energy prices.

1. Supply Shocks

These supply shocks can trigger both inflation and recessions in the U.S. and across the globe. For example, when Arab nations slashed oil production in 1973 and embargoed the U.S. to protest U.S. support of Israel, the spike in energy prices triggered nearly a decade of “stagflation.”

Soaring energy prices are especially painful for low-income households. Energy represents a larger percentage of their budgets, so price spikes are even more noticeable, causing difficult tradeoffs between oil, gas, and electricity, on the one hand, and necessities like food, medicine, rent, and education, on the other. Unlike wealthier households, families with low incomes do not have the liquidity to invest in more energy efficient cars, homes, and appliances or, in many cases, the flexibility to move closer to work or telecommute.

To head off these dire economic consequences, policymakers need “to ensure that the United States . . . is more resilient to inevitable global energy shocks,” Jason Bordoff and Meghan O’Sullivan have observed.³³

2. Cost of Defending Access to Energy

The traditional way to avoid energy shocks is to police access to fossil fuel, especially oil. For decades, the U.S. armed forces have “maintain[ed] the security of international oil flows for the global market,” a RAND Corporation analysis explained in 2009.³⁴

Like climate effects and pollution, this cost is not included in the price at the pump, so consumers do not consider these “defense externalities” in deciding how much fuel to use. Instead, “[t]he cost of those forces . . . generates a burden on the U.S. taxpayer.”³⁵

For many years, the U.S. has defended oil suppliers in the Middle East. For example, when the Soviet Union invaded Afghanistan in 1979, President Jimmy Carter warned that “[a]n attempt by any outside force to gain control of the Persian Gulf region will be regarded as an assault on the vital interests of the United States of America.”³⁶ Two years later, President Ronald Reagan pledged to defend oil producers from their neighbors as well.³⁷

Honoring this commitment, President George H.W. Bush protected Kuwait from an invasion by Iraq in 1990, invoking U.S. reliance on fossil fuels, among other things, to justify a military response. “[M]y administration, as has been the case with every President from President Roosevelt to President Reagan, is committed to the security and stability of the Persian Gulf,” he told the American people.³⁸ “Our country now imports nearly half the oil it consumes and could face a major threat to its economic independence.”³⁹

To secure the Middle East (and its oil) after the First Gulf War, the U.S. permanently stationed troops there for the first time. This U.S. military presence, especially in Saudi Arabia, was one of the reasons invoked by Osama Bin Laden to rally support for terrorist strikes against the U.S.⁴⁰

Bin Laden’s attacks on September 11, 2001 prompted the U.S. to invade Afghanistan. So, although this invasion was a response to terrorism, the terrorism itself was motivated (at least in part) by U.S. efforts to defend fossil fuels. “You can draw a thread through the whole thing with oil,” argued Admiral Dennis C. Blair, former director of National Intelligence.⁴¹

Similarly, although the U.S. invaded Iraq in 2003 for a number of reasons, energy was a key motivation for Vice President Dick Cheney. “Armed with an arsenal of these weapons of terror, and seated atop ten percent of the world’s oil reserves,” he observed six months before the invasion, Iraq’s leader Saddam Hussein could then be expected to “seek domination of the entire Middle East” and “take control of a great portion of the world’s energy supplies.”⁴²

Admittedly, the U.S. has intervened in the Middle East not only to protect its oil, but also to counter terrorism, support allies, contain rivals, and defend the principle of sovereignty. But although energy is not the only factor shaping U.S. defense policy, it is an important one, as a group of retired senior military planners affirmed in interviews for a 2018 study.⁴³ “We are not in the Persian Gulf because we are benevolent. We want oil to flow out of there,” one observed.⁴⁴ “Since the end of [the] Cold War, the only real threats we have are threats to the oil supply,” another said.⁴⁵ “[M]ore than half the Defense budget is for the security of Persian Gulf oil.”⁴⁶

These military efforts have long been reinforced by diplomacy. The U.S. has maintained close ties with oil-producing regimes, including ones that do not share U.S. values.⁴⁷ Propping up these authoritarian “petrostates” is all the more costly because they often are unstable.⁴⁸

3. As a Net Exporter, Can the U.S. Stop Worrying About Supply Shocks?

Can the U.S. stop supporting these regimes now that it has become a net exporter of petroleum?⁴⁹ Are Americans protected from oil shocks, as long as U.S. wells keep pumping? Unfortunately, the answer is “no.”

For one thing, key allies and trading partners still import oil, and their economic health affects the U.S. Energy shocks drain away money they otherwise would spend on U.S. goods and services, as well as on shared strategic interests.

Supply shocks also still affect the U.S. more directly: when consumers in Europe or Asia cannot buy from their usual supplier, they try to buy from U.S. producers, bidding up the price.⁵⁰ This is why U.S. gasoline prices spiked after Russia invaded Ukraine, even though the U.S. was importing very little oil from Russia.⁵¹ In a global market, a war or revolution thousands of miles away—involving suppliers who do not sell to U.S. consumers—can still cause U.S. prices to spike.

Does the U.S. have the same sort of exposure with natural gas? The answer is “yes, but not nearly as much.” The difference is that oil is easier to ship. Since a tanker can take Texas oil to either Athens or Alabama, buyers in both places can bid for it, yielding a (relatively) uniform global price.

In contrast, the price of natural gas is set locally because it is harder to transport. The cheapest way is a pipeline, but then the destination is fixed. If the pipeline goes to Alabama, Athenians cannot easily buy this gas. They would have to turn it into liquid, ship it on a tanker, and then turn it back into gas. This costly process requires a sophisticated infrastructure. At the moment, the U.S does not have enough liquefaction facilities to satisfy European demand. This constraint on exports leaves more gas for domestic consumption. As a result, prices in the U.S. are much lower than in Europe and Asia.

Even so, U.S. natural gas prices are still affected by global supply shocks, at least to an extent. When prices spike in other markets, U.S. suppliers can export at least some gas, a choice that reduces domestic supply. This helps explain why U.S. natural gas prices spiked for several months after Russia invaded Ukraine (while European prices went much higher).⁵² Looking ahead, global demand will have even more impact on U.S. prices as the U.S. builds more LNG facilities.⁵³

To sum up, energy supply shocks are still a challenge, even though the U.S. has become a net exporter of petroleum and gas. The traditional U.S. response has been to protect oil and gas suppliers, especially in the Middle East. The costs of defending these suppliers are a hidden price of fossil fuels.

C. Depending Less on Insecure Suppliers

Is the U.S. stuck bearing these defense externalities? Or can these costs be reduced over time? In principle, there is another way to deal with supply shocks: instead of defending insecure suppliers, we can depend less on them. Admittedly, reducing reliance on these suppliers can be difficult, especially on short notice. Yet easing this dependence has become much more plausible than it used to be, and the right policies can accelerate this progress.

1. An Illustrative Example

To illustrate different responses to defense externalities, assume that two neighboring countries, Emirate and Warmonger, are both oil exporters. Unfortunately, Warmonger has been threatening to invade Emirate. If war breaks out, the two countries’ combined exports of 4.3 million barrels per day will suddenly become unavailable.

The traditional way to avert this oil shock is for the U.S. and its allies to protect Emirate by issuing security guarantees and, if necessary, dispatching troops. If we replace “Emirate” with Kuwait and “Warmonger” with Iraq, this is precisely what happened in 1990.

Yet there are two other ways to avoid this oil shock. First, if another supplier can increase production by 4.3 million barrels per day, it can replace the exports from Emirate and Warmonger. To avoid extra defense costs, this supplier should be easy to defend. The U.S. obviously fits the bill, as do Canada, Brazil, Norway, Mexico, the U.K.,⁵⁴ and other secure jurisdictions. If enough additional supply can be coaxed from secure countries, there is less need to defend insecure ones. In this way, energy development can be a substitute for military spending. National security is protected with wells and pipelines, instead of troops and fighter planes.

Second, the same is true of reductions in demand. There would be no oil shock if the global economy could cut consumption by 4.3 million barrels per day through fuel efficiency, renewable energy, mass transit, and the like. “Meeting more of the energy needs of the United States through alternative sources of energy,” Bordoff and O’Sullivan have observed, “can lessen exposure to global markets by reducing U.S. consumption of oil and gas overall . . . .”⁵⁵ So, like new supply, efforts to reduce demand can be an alternative to military spending.

2. Reducing Dependence on Insecure Suppliers: Promising Trends

Admittedly, severing ties with a problematic supplier is sometimes quite challenging, especially in the short run. Indeed, after Russia invaded Ukraine in 2022, Europe’s efforts to stop buying oil, gas, and coal from Russia were painful. Even so, replacing—instead of defending—a supplier has become more realistic in recent years, and the right policies can make this alternative even more plausible.

For example, if some oil from the Middle East becomes unavailable, do other suppliers have the potential to replace it? A promising candidate is the U.S., where production has surged in recent years, as noted above. This increase (about seven million barrels per day) is much more than the 4.3 million barrels per day that Iraq and Kuwait were exporting in 1990 when Iraq invaded. In other words, the recent U.S. increase is almost twice the size of the disruption the U.S. intervened to prevent in the First Gulf War.

The U.S. also has ample reserves of natural gas and coal. As long as the U.S. has the necessary LNG terminals and other infrastructure to transport these fossil fuels, it may be able to replace other gas and coal producers in a crisis, even if they serve markets far from the U.S.

Obviously, any effort to replace other suppliers is more effective, and thus more likely to reduce defense externalities, when the products are fungible. For example, LNG can replace natural gas from a pipeline (though LNG is more expensive). Likewise, coal and natural gas are plausible substitutes for each other since both generate electricity. Yet neither can

substitute for oil, as long as oil (not electricity) is the main fuel for transportation.

Looking ahead, could the U.S. develop the potential to increase fossil fuel production even more in a crisis? Do U.S. firms have the capacity and incentives to ramp up? Could policymakers encourage them to do so? If the answer is “yes,” this backup capacity would reduce the pressure to defend other suppliers.

This pressure would ease not only if the U.S. and its allies could produce more fossil fuel, but also if they used less. In a supply shock, prices do not spike as much if demand also contracts. Even if prices do rise, there is less harm if the economy is less reliant on fossil fuel.

This brings us to a second promising trend: even as demand for fossil fuel has increased worldwide (and especially in the developing world), the U.S. and its allies have become less dependent on fossil fuel in recent years. For example, the “energy intensity” of the U.S. economy—a measure of how much energy is needed to produce a given level of economic output—is less than half of what it was forty years ago.⁵⁶ Even as the population and economy have grown significantly, U.S. oil consumption has held steady at about 18.5 million barrels per day.⁵⁷ Vehicles and appliances have become more energy efficient,⁵⁸ and the U.S. economy depends less on energy intensive industries, such as manufacturing. In addition, renewable energy has become less expensive, and thus more common. It generated 12.61% of all energy used in the U.S. in 2021—a new high⁵⁹—as well as 67% of new electric power generation in the first half of 2022.⁶⁰

Can U.S. firms and households build on this progress? Can policymakers encourage this trend? Again, if the answer is “yes,” there would be less pressure to defend insecure fossil fuel suppliers.

3. Encouraging Extra Supply

How can the U.S. and its allies keep reducing defense externalities? What else can they do to tap more supply from secure sources, while also cutting demand? How can policymakers reinforce these trends?

i. Stockpiles

A key challenge is timing. Supply shocks come on suddenly, but it takes time to tap new supply and reduce demand. Until these efforts bear fruit, the U.S. and its allies are exposed to higher prices. If these responses take years to implement, instead of weeks or months, there could be significant economic disruptions in the interim.

As a (partial) response, the U.S. and its allies can rely on stockpiles of fossil fuel, such as the Strategic Petroleum Reserve (“SPR”) for oil.⁶¹ “[E]mergency stocks could smooth economically harmful price spikes until markets are able to adjust,” observed Jason Bordoff, Antoine Halff, and Akos Losz.⁶²

Even so, a stockpile is more effective when the supply shock is temporary. Since a stockpile’s supply is finite, the market knows it eventually will run out. The key question, then, is whether the stockpile can outlast the supply shock. If the answer is “yes”—for instance, while a pipeline is being repaired—prices should remain stable. But a stockpile is less effective when the shock is expected to persist, which is likely for a revolution, an invasion, or another geopolitical crisis.⁶³ Since market prices are forward-looking, they will still rise, even when supply from the stockpile is released, because everyone knows the extra supply is only temporary.⁶⁴

As a result, a stockpile alone cannot address supply shocks. Other measures are also needed, which either increase supply or reduce demand. A shock is averted only if the market expects these measures to kick in before the stockpile runs out.

ii. Spare Capacity

When the solution is new supply, it needs to get to market quickly. Yet, although firms have economic incentives to ramp up production when prices rise, a rapid pace often is not feasible.

“Generally speaking, the oil industry is highly capital intensive and relatively slow moving,” observed Bordoff, Halff, and Losz.⁶⁵ “Most oil development projects cost billions of dollars and take years to bring into production.”⁶⁶ Natural gas projects have an added challenge, emphasized above: transporting gas requires either pipelines or liquefaction facilities, which take years to build.

Fortunately, some suppliers can respond more quickly. In the oil market, the fastest response is what the International Energy Agency calls “spare capacity”: additional production that comes online within thirty days and lasts for more than ninety days. This pace usually is feasible only for Saudi Arabia. It “maintains the largest spare capacity and has historically played the role of ‘swing’ supplier,” explained Bordoff, Halff, and Losz, “adjusting production in line with market conditions.”⁶⁷

Even so, Saudi Arabia is not always able (or willing) to ramp up oil production. For example, after Russia invaded Ukraine, the Saudis agreed to only a minor increase.⁶⁸ A few months later, they cut production, disregarding a U.S. request to pump at capacity.⁶⁹

As this disagreement highlighted, Saudi and U.S. interests sometimes diverge. For one thing, the Saudis benefit from high oil prices. The U.S. and the Saudis also have clashed over Saudi ties to Russia, U.S. diplomatic approaches to Iran (the Saudis’ main regional rival), and the murder of a dissident Saudi journalist. The relationship was further strained by Joe Biden’s comments on the kingdom while running for President: asserting that there was “very little social redeeming value in the present government in Saudi Arabia,” he pledged to make them “the pariah that they are.”⁷⁰ Indeed, ties between the Biden Administration and the Saudi leadership were so frayed that when the Saudis restored diplomatic relations with Iran in 2023, they worked through China instead of the U.S., a step that was “a real slap in the face to Biden.”⁷¹

iii. Increasing Supply in Other Ways and Reducing Demand

Instead of relying on Saudi Arabia to stabilize global oil markets, the U.S. would be better off developing its own backup capacity, which could be tapped in a crisis. But is this feasible? Can U.S. oil producers ramp up quickly enough to play this role? What about the U.S. natural gas industry? How can policymakers encourage faster responses?

In general, the answer depends on the type of well and the availability of key infrastructure. Offshore wells take years for permitting, construction, and drilling, costing billions of dollars. But fortunately, drilling in shale is different.⁷² The “ability of US shale producers to ramp output up or down relatively quickly in response to price signals or changing market conditions,” Bordoff, Halff and Losz have explained, “could be seen as a form of insurance against disruption risks . . . .”⁷³ The same is true of new natural gas wells in shale.

Yet even if wells can be drilled quickly, pipelines and other infrastructure are needed to bring oil and gas to market. Even so, with the right infrastructure in place—and, more generally, with the right policies—the U.S. could take advantage of the elasticity of shale production to respond to supply shocks. Part V of this Article explores this possibility, and the synergies and tradeoffs it presents for national security and the environment.

To become less dependent on insecure suppliers, the U.S. and its allies also should reduce demand. Like new supply, this response takes time but, again, the right policies can accelerate it. Part IV explores the national security and environmental implications of promoting energy efficiency and renewable energy.

Admittedly, neither of these strategies—increased supply or reduced demand—is easy to execute on short notice.⁷⁴ But the same is true of an effective military response. All of these efforts require long-term investment and preparation.

The fundamental question, then, is which response maximizes welfare. To head off supply shocks—and, more generally, to access energy at the lowest social cost—is it better to build aircraft carriers, drill new wells, or install electric vehicle charging stations? The answer is a combination of measures—not just military responses, but also new sources of fossil fuel, as well as efforts to use less of it.

D. Division of Labor Between the Private and Public Sectors

Which institutions are supposed to pursue these various goals? Unlike in some countries, the U.S. does not have government-owned energy companies, which could be tasked with implementing government policy along with earning profits.

By relying instead on the private sector, the U.S. reaps familiar benefits. In a competitive market, private firms have strong incentives to cut costs and experiment with new approaches. In this way, the private sector sometimes delivers transformative innovations, such as the U.S. shale boom.⁷⁵

Yet a familiar downside of private firms is that they do not minimize negative externalities, such as the national security and environmental costs in this Article. Rather, addressing these externalities requires a government response. Policymakers can choose from a range of policy instruments, including Pigouvian taxes, permitting policies, subsidies, moratoriums, and mandates. Part VI surveys various options, highlighting their advantages and disadvantages.

E. Objections to Considering Defense Externalities in Energy Policy

So far, this Part has argued that depending on fossil fuel adds to the defense budget, and that policymakers need to account for this cost in evaluating the merits of different energy sources. However, other commentators have taken the opposite view, urging policymakers to omit defense externalities from this analysis. Douglas Bohi and Michael Toman made this case in an influential 1996 book.⁷⁶ Several other commentators have followed their lead,⁷⁷ as have a number of U.S. government agencies. For example, a 2018 analysis of tougher fuel economy standards omitted the national security advantages of using less petroleum,⁷⁸ as did a 2009 National Research Council study⁷⁹ and a 1992 Congressional Research Service report.⁸⁰ The literature has offered two reasons to ignore defense externalities, and this Section shows why neither is persuasive.⁸¹

1. Many Factors Influence Defense Policy

The first argument is that energy is just one of many factors affecting the defense budget, so its impact is too hard to isolate.⁸² “Until an effort that yields a credible measure of the externality involved is completed,” Bohi and Toman wrote, “this externality is too uncertain to be used in determining energy policy.”⁸³

But even when a cost is difficult to quantify, we should not simply ignore it. After all, we do not do this with climate externalities, even though they are hard to measure.⁸⁴ Instead, the right approach is to use the best available estimate, however imperfect it is.

For example, a 2018 study concluded that the Pentagon spends 16% of its general operating budget to protect Middle Eastern oil.⁸⁵ To cover this cost, U.S. gasoline taxes would have to increase by 28 cents per gallon⁸⁶ (and by an additional 70 cents to fund the wars in Afghanistan and Iraq).⁸⁷ Admittedly, this estimate may be off the mark. Other studies propose estimates of their own—some higher, some lower—by using different methodologies and assumptions.⁸⁸ The goal here is not to defend a particular estimate, but to show that these costs are too substantial to ignore.

2. Can Shifts in Energy Markets Change the Defense Budget?

Second, these commentators argue that energy policy should ignore the cost of defending fossil fuel, not only because this cost is hard to measure, but also because it is fixed. In their view, the U.S. is stuck protecting insecure suppliers, and energy policy cannot do anything about it. For example, even if U.S. energy policy delivers modest increases in energy efficiency and in domestic oil and gas production, the U.S. would still have to defend the Middle East.⁸⁹

While this argument is persuasive for limited changes, there have been major shifts since Bohi and Toman made this claim in 1996. As emphasized above, domestic production of oil and gas has surged, while energy efficiency and renewable energy have enabled the U.S. and its allies to depend less on fossil fuel. If government policy can accelerate these trends, there will be less pressure to defend insecure suppliers.

To sum up, American dependence on fossil fuels has added to U.S. military and foreign policy burdens. These “defense externalities” are a hidden price of oil and gas. To reduce the cost of defending insecure suppliers, the U.S. and its allies need to depend less on them. The answer is a two-pronged strategy, which reduces demand for fossil fuel, while also tapping new supply in the U.S. and other secure locations.

II. FUNDING EXTERNALITIES: ANOTHER COST OF DEPENDING ON THE WRONG SUPPLIERS

While the last Part analyzed the cost of protecting fossil fuel suppliers, this Part considers the cost of strengthening them. Unfortunately, some energy exporters use fossil fuel revenue to pay for harmful conduct. For example, Russia’s energy exports have financed its war in Ukraine. Buying from bad actors can facilitate their threatening behavior. Like defense externalities, these “funding externalities”—the national security costs of providing revenue to dangerous suppliers—do not appear in the price of energy.

So how should policymakers respond? As with defense externalities, the key is to depend less on the wrong suppliers. Again, the U.S. and its allies should use less fossil fuel, while also finding other (friendly) suppliers. Even so, some commentators urge policymakers to ignore funding externalities, so the last Section of this Part responds to their claims.

A. National Security Risks from Dangerous Suppliers

There are national security risks from depending not only on insecure suppliers, but also on threatening ones. “Governments of some countries openly hostile to the United States . . . ,” the RAND Corporation observed, “rely on oil exports for most of their budget revenues.”⁹⁰ They use this revenue to pursue harmful agendas both abroad and at home.⁹¹ Unfortunately, buying from these suppliers undermines national security by facilitating this threatening behavior.

1. Funding War, Terrorism, and Other Threats

Let us begin with the harm these suppliers cause outside their borders. Russia is the quintessential example. In 2022, its energy exports paid for its invasion of Ukraine. Before the war, Russia was the world’s largest exporter of oil and natural gas⁹² and Europe’s main supplier.⁹³ Russia was also the world’s third largest exporter of coal in 2021 (behind Australia and Indonesia and ahead of the U.S.).⁹⁴ Since Russia’s largest energy companies were state owned and private producers were heavily taxed,⁹⁵ nearly half of the Russian government’s revenue in 2021 came from energy exports.⁹⁶ “Increased production and long periods of high prices gave President Vladimir Putin the resources to beef up Russia’s army and throw his weight around,” Ricardo Hausmann has observed.⁹⁷

Since the costs of “throwing his weight around” did not appear in the market price, consumers did not account for them in deciding how much fossil fuel oil to buy. Europe kept paying Russia for energy, even as troops amassed on the Ukrainian border. Once the war began, the human toll from these purchases became clear: hundreds of thousands of casualties, millions of displaced civilians, and massive economic dislocation.⁹⁸ As the foreign minister of Lithuania put it, “buying Russian oil and gas is financing war crimes.”⁹⁹ Yet even as the war raged, Russia still earned nearly $1 billion per day exporting energy. Although the U.S. and its allies tried to stop buying from Russia, soaring oil prices—stoked in part by the war itself—kept Russia’s coffers full in the months following the invasion.¹⁰⁰

Russia is not the only fossil fuel exporter that threatens the U.S. and its allies. Iran uses export revenue to finance its nuclear program,¹⁰¹ as well as terrorist organizations such as Hamas and Hezbollah.¹⁰² Venezuela poses a threat to its neighbors,¹⁰³ and Saudi Arabia funds institutions that promote Islamic extremism.¹⁰⁴

2. Extortion

Hostile fossil fuel exporters can threaten others by harnessing not just the revenue they earn, but also the leverage they exert.¹⁰⁵ To influence their buyers’ policies, exporters can use fossil fuel as a carrot (by dangling favorable terms) or a stick (by threatening to stop selling).

Again, Russia’s invasion of Ukraine is a paradigmatic example. When Europe supported Ukraine, Russia retaliated by reducing the flow of natural gas, causing prices in Europe to skyrocket.¹⁰⁶ The goal was to pressure Europeans to “vote their pained pocketbooks,” Daniel Yergin and Michael Stoppart explained.¹⁰⁷ “The ultimate aim is to bring governments to power in Europe that aren’t committed to supporting Ukraine . . . .”¹⁰⁸

Unfortunately, Europe could not easily replace Russian gas on short notice. The price of LNG skyrocketed—even as U.S. firms redirected their LNG exports from Asia to Europe—because there were not enough liquefaction facilities to meet Europe’s needs.¹⁰⁹ These shortages exacted a severe economic toll as inflation spiked and the economy slowed.¹¹⁰ This energy crisis exposed the geopolitical cost of depending on Russia, empowering it not only with export revenue, but also with the ability to turn off the spigot.

3. Entrenching Repressive Regimes

Buying from hostile petrostates empowers them to harm not just the U.S. and its allies, but also their own people. Authoritarian leaders often use this revenue to line their own pockets and stay in power.¹¹¹ Again, this cost does not appear in the price at the pump.

Venezuela is a tragic example. Despite its vast oil reserves,¹¹² Venezuela has faced hyperinflation and a steep decline in GDP in recent years.¹¹³ The poverty rate is 90%, and food shortages caused the average citizen to lose 24 pounds in 2017.¹¹⁴ Meanwhile, President Nicolás Maduro’s “policies are marked by authoritarianism, intolerance for dissent, and violent and systematic repression of human rights and fundamental freedoms.”¹¹⁵

Even so, Maduro clings to power by exporting oil. These sales represent 99% of the nation’s export earnings and about 25% of its GDP.¹¹⁶ Maduro controls this revenue, using it to maintain the military’s support and reward political allies.¹¹⁷

To sum up, there are national security risks from buying oil and gas from Russia, Iran, and other threatening suppliers. These “funding externalities” arise when suppliers use export revenue to finance wars and terrorism abroad and repressive policies at home.

B. Depending Less on Hostile Suppliers

So what should the U.S. and its allies do? How can they reduce these funding externalities? As with defense externalities, the key is to depend less on the wrong suppliers. Indeed, since the responses are so similar, the discussion here can be brief.

To avoid empowering hostile suppliers, the U.S. and its allies should stop buying from them, while encouraging others to do the same. But if these commercial ties need to be severed quickly, there is a risk of a supply shock. Indeed, this is what happened after Russia invaded Ukraine, prompting Europe to wean itself off of Russian oil, gas, and coal.¹¹⁸

How can the U.S. and its allies mitigate these supply shocks? As with defense externalities, the answer is a two-part effort. Along with reducing demand, they should tap more supply in friendly countries, such as the U.S., Canada, Mexico, Brazil, Norway, Israel, Cyprus, and the U.K.

In responding to funding externalities, the U.S. and its allies face an additional challenge, which does not arise with defense externalities: persuading other countries to stop buying from the relevant supplier.

Why the difference? Either way, the U.S. and its allies do not buy from the supplier, but the reason is different. With defense externalities, the supplier cannot sell (for example, because it has been invaded). In contrast, with funding externalities, the supplier might still want to sell, but the U.S. and its allies do not want to buy from it (for example, because it has launched an invasion).

In refusing to buy, their goal is to deprive the supplier of revenue, and thus to reduce its military and economic power. Yet this goal will not be achieved if the supplier can simply sell to other buyers. To discourage these other buyers, the U.S. and its allies can try a range of policies, including embargoes, tariffs, price caps, restrictions on financing and insuring cargoes, sanctions on buyers, and the like.

Admittedly, these policies can be hard to enforce. Some countries will not adopt them. Hostile suppliers also might evade them with deception (for example, by selling through intermediaries, falsifying records, and so forth).

Fortunately, however, even porous sanctions can still reduce funding externalities, as long as they force the hostile supplier to sell at a discount, eroding the funding for its harmful agenda. For example, even though China and India did not join the U.S.-led embargo of Russian oil in 2022, they bought this oil at a steep discount.¹¹⁹

C. Objections to Considering Funding Externalities in Energy Policy

While this Article warns about risks from buying fossil fuel from hostile suppliers and offers a strategy to deal with these funding externalities, some commentators are not troubled by these risks. In their view, the real problem is with the hostile regime itself, not with the commodities it exports, and that sometimes the best way to moderate the regime is to buy its energy. This Section responds to these claims.

1. The Problem is the Regime, Not its Fossil Fuel Exports

Even though a number of fossil fuel exporters pose a threat to the U.S. and its allies, some commentators urge us to distinguish between these regimes, on the one hand, and their exports, on the other.¹²⁰ This argument is a bit like the mantra of some gun rights advocates: “Guns don’t kill people, people kill people.”¹²¹ In this spirit, “fossil fuel exports don’t harm people, exporting regimes do.”

They are right that not all fossil fuel exporters are threatening. After all, Canada and Norway are major exporters.¹²² At the same time, some potentially threatening regimes are not fossil fuel exporters, including China and North Korea.¹²³

But unfortunately, some fossil fuel exporters clearly do pose a threat to the U.S. and its allies, including Russia and Iran. Their fossil fuel exports give them more power to pursue their threatening ambitions. Indeed, if the invasion of Ukraine in 2022 has taught us anything, it has revealed the folly of ignoring defense costs in energy policy. The willingness of Europe—and of Germany in particular—to become so dependent on Russian energy has turned out to be a grave mistake.

In Russia, Iran, and other energy producers, energy exports do not just facilitate harmful behavior; in some cases, they actually cause it. As Michael Ross has argued, a government funded by energy exports is less accountable,¹²⁴ and thus is more likely to pursue reckless policies. To extract oil and gas, the government can rely on a small fraction of the population (or on foreign partners).¹²⁵ So, instead of depending on the labor, tax dollars, and the good will of its people, the regime can use export revenue to fund a police state, buy off dissent, and control the press.¹²⁶ This revenue also can cause a “resource curse,” undermining entrepreneurship, diversified growth, and the social rights they facilitate.¹²⁷ For a regime presiding over this sort of stagnant economy, an aggressive foreign policy can rally domestic support, tapping into nationalist sentiment, justifying military expenditures that keep the military on its side, and distracting citizens from the regime’s failings. As a result, it is no accident that petrostates tend to be unstable or aggressive (or both).

In short, it is not always persuasive to distinguish between a threatening regime and its fossil fuel exports. These exports facilitate (and sometimes may even motivate) its aggressive and repressive policies.

2. Target the Harmful Conduct, Not the Revenue That Funds It

Even if fossil fuel exports contribute to harmful conduct, some commentators argue that the right response is to target the conduct, not the revenue that pays for it.

It would be better “to address the foreign policy problem directly,” the National Research Council argued in its 2006 report, instead of “reduc[ing] oil consumption to lower world prices,” since “such an effort would be an imperfect proxy for better targeted instruments and would hurt oil producing friends and foe alike.”¹²⁸

Admittedly, targeting the behavior is sometimes more efficient, but this is not always true. In some situations, going after the revenue stream could be cheaper, less risky, more technologically feasible, or otherwise more effective. Nor are these approaches necessarily alternatives.¹²⁹ For example, when Russia invaded Ukraine, the U.S. and its European allies reduced their purchases of oil and gas from Russia, while also supplying military and humanitarian aid to Ukraine. Ultimately, the right answer is to pick the response—or, indeed, the combination of responses—that is most efficient under the circumstances.

3. Exports Might Moderate the Regime

In this spirit, there may be times when the most efficient course is not to stop buying from a hostile regime, but to buy more from them. If trade would moderate a hostile regime, persuading it not to pursue aggressive or repressive policies, the externalities for these purchases actually would be positive, instead of negative.¹³⁰

How can trade have this beneficial impact? For one thing, it gives a regime’s leaders something to lose. They may shy away from an aggressive policy if they think it will jeopardize export revenue (but not if they expect this revenue to continue anyway). In addition, trade can moderate a regime by empowering constituencies that press for change, such as a pro-Western middle class. Unfortunately, fossil fuel exports often have the opposite effect of strengthening regime loyalists.¹³¹

For decades, Germany hoped to moderate Russia through trade (and, a cynic would add, to reap the commercial advantages of cheap Russian energy). Angela Merkel doggedly pursued this policy as chancellor.¹³² Her predecessor, Gerhard Schröder, struck the deal to build the Nord Stream 1 pipeline and then earned sizable sums after leaving office as chair of the pipeline’s shareholder committee and a board member of Russia’s state-controlled oil company.¹³³ Schröder has not been willing to concede error even after Russia invaded Ukraine. “I don’t do mea culpa,” he said.¹³⁴ “It’s not my thing.”¹³⁵ Nevertheless, his approach to Russia has been thoroughly discredited. “Obviously, this policy has totally failed,” said Marcel Dirsus, a German security expert, articulating a widely shared view.¹³⁶

Yet, although commercial ties have not moderated Russia (but, on the contrary, have made the country a more dangerous foe), this will not be true of every regime. To predict the effect of export revenue, policymakers need to make context-specific judgments about a country’s leadership, the potential influence of other constituencies, and the like. But the general assumption in this Article is that policymakers will want to weaken and deter hostile regimes, not to rely on trade to moderate them.

To sum up, the key to weakening hostile suppliers is to depend on them less. In this spirit, the U.S. and its allies should reduce demand for oil and gas, while also looking for new (friendly) suppliers. Through this two-part strategy, energy policy can enhance national security by reducing both defense and funding externalities.

III. ENVIRONMENTAL GOALS AND CONSTRAINTS: CLIMATE, POLLUTION, AND THE AUTHORITARIAN COMPARATIVE ADVANTAGE IN ENERGY PRODUCTION

So far, this Article has focused exclusively on national security. Yet environmental goals are also important in energy policy, so we need to understand how these goals affect the analysis. What are the environmental implications of the proposal in Parts I and II to reduce demand for fossil fuels and tap new supply? What changes, if any, are needed to ensure that this strategy protects the environment, as well as national security? The rest of this Article focuses on these issues.

To lay the groundwork for this analysis, this Part briefly surveys two familiar environmental goals in energy policy: limiting climate change and pollution. How can we advance these goals, while also reducing demand for fossil fuel and tapping new supply? Parts IV, V, and VI identify synergies and tensions among these various goals, showing how to make progress on all fronts.

But before the rest of this Article digs into these policy details, this Part identifies a blunter tension between the environment and national security, which is rooted more in political economy than in policy. To enhance national security, the U.S. and its allies should produce more energy domestically, so they depend less on insecure and hostile suppliers. But unfortunately, democracies are not easy places to produce energy. Opposition to energy production—whether from local residents, environmental organizations, or other groups—gains more traction in democracies than in authoritarian regimes. As a result, the production of fossil fuel gravitates to authoritarian countries, as do some aspects of the production of clean energy. This unfortunate reality, which this Article calls the “authoritarian comparative advantage,” can harm both national security and the environment.

A. Climate Harm from Fossil Fuels

The connection between energy policy and climate change is familiar: fossil fuel is the key driver of rising temperatures.

1. Fossil Fuel, Emissions, and the Social Cost of Rising Temperatures

The concentration of CO₂ in the atmosphere has increased by 50% in the 250 years since the industrial revolution began.¹³⁷ A scientific consensus has emerged that these emissions are raising global temperatures.¹³⁸

“The largest source of CO₂, and of overall greenhouse gas emissions,” the EPA recently reported, “was fossil fuel combustion primarily from transportation and power generation.”¹³⁹ For example, petroleum represents 90% of transportation fuel in the U.S., accounting for 27% of total U.S. emissions.

According to the U.N. Intergovernmental Panel on Climate Change (“UN IPCC”), rising emissions are already causing a range of harms, including extreme weather, wildfires, water shortages, rising sea levels, more heat-related deaths, and species extinctions.¹⁴⁰ Looking ahead, the UN IPCC warns of significant economic losses from submerged coastal property, damaged infrastructure, effects of heat on health and productivity, storm damage, and reduced crop yields.¹⁴¹

These costs do not appear in the market price of energy. So, like the funding and defense externalities discussed above, consumers do not account for them in deciding how much energy to use.

2. Climate Change as a National Security Threat

In addition to the costs described above, the Biden Administration has emphasized that some climate harms affect national security. When the administration requested an analysis of this question, the intelligence community highlighted three issues. First, there will be geopolitical tension about how to respond to climate change, including the speed of the response, who will pay for it, and whether China and India will join the effort.¹⁴²

Second, nations may clash over resources and refugees. For instance, there will be competition for fresh water, as well as for resources in the Arctic, a region that will become more accessible as temperatures rise.¹⁴³ In addition, when areas become uninhabitable, the flight of refugees will stoke tensions along borders.¹⁴⁴

Third, climate change will be especially costly in warmer regions. This could “increase the potential for instability and possibly internal conflict” in central Africa, Latin America, South and East Asia, and island nations in the Pacific.¹⁴⁵

In principle, this Article could label these climate-related national security risks either “climate” costs or “national security” costs. For clarity of exposition, this Article calls them “climate” costs, as noted above,¹⁴⁶ but this choice should not affect the analysis. After all, a cost is a cost, regardless of what we call it. Either way, energy policy is more efficient if it accounts for these externalities, as well as the others flagged in this Article.

3. Reducing Climate Externalities from Fossil Fuel

To mitigate climate harms, the UN IPCC has called for “[n]ear term actions that limit global warming to close to 1.5°C.”¹⁴⁷ This step, the UN IPCC has said, “would substantially reduce projected losses and damages related to climate change.”¹⁴⁸

Given the role of fossil fuel in climate change, energy policy needs to feature prominently in this effort. The right policies can reduce climate change in three ways. The first is to dial back the use of fossil fuel. Greater energy efficiency reduces the need for it, as does the wider use of clean energy, such as solar, wind, and nuclear power.

Second, since fossil fuels vary in their climate impacts, it is better to use ones with lower carbon footprints. Coal is the worst offender, since burning it produces nearly twice as much CO₂ as burning natural gas.¹⁴⁹ Admittedly, natural gas has a limitation of its own: its main component, methane, is a potent greenhouse gas that can leak into the atmosphere.¹⁵⁰ But as long as these leaks are prevented—and they are, indeed, preventable—emissions can be slashed by replacing coal with natural gas.¹⁵¹

This is precisely what has happened in the U.S., causing U.S. emissions to fall even as they have increased in China, India, and the developing world (and thus overall).¹⁵² In the U.S., the percentage of electricity generated by coal fell from about 50% to 24% between 2007 and 2019, with natural gas picking up most of the slack. “That was the main reason,” Dan Yergin observed, “why U.S. carbon dioxide (CO₂) emissions dropped down to the levels of the early 1990s, despite a doubling in the U.S. economy.”¹⁵³

Third, along with using less fossil fuel and changing the ones we use, another strategy is to offset or capture emissions. Planting trees and reclaiming land reduces the concentration of CO₂, as does trapping emissions underground or converting them into chemicals or plastics.¹⁵⁴

B. Pollution from Fossil Fuel

Along with climate change, energy policy also needs to account for pollution. It is well understood that fossil fuel is dirty to extract, transport, and burn, and that these costs are not always reflected in the market price.

1. Polluting Air, Water, and Soil

Extracting fossil fuel can damage the air, water, and land, harming human health, disrupting local economies, and disturbing animal habitats. Perhaps the most extreme example was the accident at Deepwater Horizon, an offshore oil rig, that released 130 million gallons of oil into the Gulf of Mexico in 2010. Tragically, it took eighty-seven days to stop the oil from flowing. During those long weeks, the spill caused $17.2 billion of environmental damage to animals, beaches, coral, fish, and marshes.¹⁵⁵ The spill killed millions of marine mammals, sea turtles, birds, and fish,¹⁵⁶ while also causing lasting health problems among workers who cleaned up the spill.¹⁵⁷

Extracting fossil fuel can cause pollution in more mundane ways as well. Coal mining causes miners to contract black lung disease and other health problems,¹⁵⁸ while also polluting streams and disfiguring landscapes. For example, “[m]ountaintop removal, a particularly destructive form of surface mining, involves stripping all trees and other vegetation from peaks and hilltops,” the Union of Concerned Scientists has explained, “and then blasting away hundreds of feet of the earth below with explosives.”¹⁵⁹ Likewise, extracting oil and gas also can cause pollution. For example, wastewater from hydraulic fracturing can contaminate water or induce seismic activity if not disposed of properly.¹⁶⁰

Transporting fossil fuels can also cause pollution, for instance, when pipelines leak or there are accidents involving tankers, barges, trains, and trucks. In March of 1989, for example, the Exxon Valdez, an oil supertanker, ran aground in Prince William Sound, releasing 11 million gallons of oil.¹⁶¹ While the ship’s hungover captain slept, his third mate missed a turn. This careless mistake dealt a devastating blow to local wildlife, with some effects lasting for years.¹⁶²

Likewise, a train carrying oil exploded in the small Canadian town of Lac-Mégantic in July of 2013, killing forty-seven people, destroying over forty buildings, and releasing millions of gallons of oil into the soil and the nearby Chaudière River. Sadly, another seven trains carrying oil derailed in Canada between 2013 and 2020.¹⁶³

Even if there are no mishaps in extracting or transporting fossil fuel, burning it is a familiar source of pollution. For example, coal-fired power plants and factories cause smog and acid rain, which can affect air quality thousands of miles away.¹⁶⁴ Auto exhaust also degrades air quality.¹⁶⁵ Indeed, air pollution from fossil fuel harms human health in a range of ways.¹⁶⁶

2. Reducing Pollution from Fossil Fuel

How can energy policy reduce pollution from fossil fuel? Although the literature on this topic is vast, and the details are beyond this Article’s scope, it is worth emphasizing that the three responses to climate change, noted above, also reduce pollution.

First, using less fossil fuel generally reduces the pollution it causes. Again, energy efficiency and clean energy can help, although some types of clean energy have pollution risks of their own (such as the radioactive waste from nuclear power).¹⁶⁷

Second, some types of fossil fuel are dirtier than others. Again, coal is the worst of them. It produces the most pollution, and its pollutants are most harmful to human health¹⁶⁸ At the same time, some types of coal—and, indeed, some types of mining—are worse than others.¹⁶⁹ As a result, replacing coal with natural gas reduces pollution, as well as emissions.

Third, when fossil fuels are used, there are ways to keep pollutants from being released. For instance, thick well casings prevent fracking fluid from seeping into drinking water when oil is extracted, while tankers with two hulls prevent oil spills when oil is transported.¹⁷⁰ Likewise, catalytic converters in cars and scrubbers in power plants contain some pollutants when fossil fuel is burned.¹⁷¹

C. National Security and the Environment: Synergies and Tensions

So far, this Article has showed that the U.S. and its allies need to pursue a range of goals in energy policy. Along with encouraging firms to generate and transport energy efficiently and reliably—goals that a competitive market usually is well suited to advance—policymakers also need to address four externalities, which require government intervention: first, the cost of protecting insecure suppliers; second, the cost of funding hostile suppliers; third, the cost of climate change; and fourth, the cost of pollution.

As Parts I and II showed, the key to addressing the first two externalities—and, thus, to protecting national security—is to reduce demand for fossil fuel, while also tapping new supply in secure and friendly countries. Yet what effect does this two-part strategy have on the environment?

In principle, the first strategy—reducing demand—has the potential to advance environmental goals. After all, using less fossil fuel can reduce emissions and pollution. But in fact, reducing demand is not always a “win-win” for national security and the environment. For example, even as clean energy eases dependence on problematic fossil fuel suppliers (such as Russia), it increases dependence on problematic clean energy suppliers (such as China). Part IV analyzes various options to reduce demand for fossil fuel, highlighting synergies and tensions between national security and environmental goals.

What about the second part of the two-part strategy? Is it feasible to tap new sources of fossil fuel while also protecting the environment? At first blush, these goals seem to conflict. Instead of drilling new wells (to protect national security), aren’t we supposed to phase out fossil fuel (to protect the environment)? But in fact, this tension can be resolved with the right policies, which tap new sources of fossil fuel while still reducing emissions and pollution. The key is for the new sources to be lower-carbon fossil fuels (for example, natural gas instead of coal) and for them to replace, instead of adding to, existing sources. Part V considers a range of strategies to tap new supplies of fossil fuel, identifying synergies and tensions between national security and environmental goals.

D. Authoritarian Comparative Advantage

The rest of this Article shows how nuanced policy judgments, with careful attention to the relevant tradeoffs, can deliver gains for both national security and the environment. But before turning to this challenge of policy, it is important to highlight a challenge of political economy that complicates efforts to adopt better policies: compared with authoritarian regimes, democracies are at a disadvantage in producing and transporting energy.

In a nutshell, the problem is interest group opposition. When democratic governments are asked to approve new wells, pipelines, or other fossil fuel infrastructure, there is almost always opposition from environmental groups, local residents and businesses (motivated by “not in my backyard” or “NIMBY” concerns), regulators who protect culturally significant sites, and economic competitors (such as coal companies, which regularly oppose natural gas pipelines).¹⁷² In the U.S. and Europe, these coalitions have banned fracking in several jurisdictions, halted drilling in some places, and blocked pipelines and LNG terminals.

Ironically, similar dynamics also have thwarted clean energy projects, including nuclear power plants and wind and solar facilities.¹⁷³ For example, after a failed effort to secure approval, which took sixteen years and cost $100 million, a clean energy company gave up on installing wind turbines off the coast of Cape Cod.¹⁷⁴ “The project unfortunately demonstrated,” observed a Massachusetts regulator who supported the project, “that well-funded opposition groups can effectively use the American court system to stop even a project with no material adverse environmental impacts . . . .”¹⁷⁵

In contrast, this sort of interest group pressure gains much less traction in authoritarian regimes. For instance, environmental campaigns in Russia often “butt up against political realities,” observed a 2021 report by a U.S. think tank, “leading to the prosecution of activists and even physical threats and abuse toward . . . them by state institutions, often on behalf of a private company.”¹⁷⁶ Likewise, “it can be said that there is no green movement in Iran,” concluded a 2019 study by Iranian academics.¹⁷⁷ “Policy makers in Iran still don’t cooperate with ENGOs [environmental NGOs] and even newspapers consider them as marginal issues.”¹⁷⁸

As a result, fossil fuel production (and, indeed, some clean energy initiatives) gravitate to authoritarian countries. In a sense, their insulation from political pressure gives them an edge, which this Article calls “authoritarian comparative advantage.”

This is the mirror image of a more familiar idea, noted above, that extractive industries encourage authoritarianism (for example, by freeing governments from depending on citizens for tax revenue and labor).¹⁷⁹ The point here is that the causal link can run in the other direction as well: not only do extractive industries facilitate authoritarianism, but authoritarianism also can facilitate extractive industries.

To weaken the competition, some authoritarian leaders cynically encourage environmental opposition in democracies. For example, Vladimir Putin regularly warns western audiences of the risks of fracking. “Today’s technology of shale oil production and shale gas,” he said at a 2019 business conference, “are without any doubt . . . barbaric.”¹⁸⁰ He made the same point quite heatedly at an earlier conference. “I was going to ask him a normal question about diversifying your economy,” recalled energy expert Daniel Yergin, whose question prompted this outburst.¹⁸¹ “And I said ‘shale,’ and to be shouted at by him in front of 3,000 people [was] a really unpleasant experience.”¹⁸² Putin’s vehemence presumably stems not from concern for the planet, but from economics and geopolitics. “[S]hale was a challenge for Russia,” Yergin explained.¹⁸³

To protect Russia’s market share, Putin has allegedly funded groups opposing shale development in Europe, as Hillary Clinton and the Secretary General of NATO each have claimed.¹⁸⁴ “We were . . . up against phony environmental groups, and I’m a big environmentalist,” Clinton asserted, “but these were funded by the Russians to stand against any effort, ‘Oh that pipeline, that fracking, that whatever will be a problem for you,’ and a lot of the money supporting that message was coming from Russia.”¹⁸⁵

As Putin understands, when democracies abstain from energy production, authoritarian regimes fill the gap. Unfortunately, this makes the U.S. and its allies more dependent on authoritarian suppliers, which often are insecure or hostile.¹⁸⁶ It would be far better to rely on production in democracies, which usually are more secure and friendly.¹⁸⁷ But as this Section has showed, this is an uphill climb politically.

Even so, this climb must be attempted. After all, relying on authoritarian suppliers is problematic not just for national security, but also for the environment. Who is more vigilant in regulating emissions and pollution? Do we trust Russia and Iran more than the U.S. and the EU? Admittedly, when environmental harms are localized, democracies can deflect these costs to the citizens of authoritarian countries—in effect, a form of global nimbyism. But two of the most important risks—climate change and air pollution—are global, not local. So instead of simply farming out fossil fuel development (and other energy initiatives) to authoritarian regimes, democracies should rely more on domestic production.

More specifically, the U.S. and its allies should pursue a two-part strategy that protects both national security and the environment: first, they should reduce the demand for fossil fuel; second, they should tap new supplies of fossil fuel in environmentally responsible ways. The next two Parts consider these strategies in turn.

IV. REDUCING DEMAND FOR FOSSIL FUELS: SYNERGIES AND TENSIONS

Let us begin with reducing demand. This Part shows how efforts to use less fossil fuel have the potential to be a “win-win,” protecting both national security and the environment. Yet the devil is in the details. Does an initiative actually reduce demand, once all the relevant fuel consumption is considered? If it does, are there offsetting costs, such as new risks to national security or the environment? Some strategies to reduce fossil fuel demand are better than others. Finding and implementing the right ones is critical.

At the same time, reducing demand should not be our exclusive focus. Since the transition away from fossil fuel will take years, the U.S. and its allies also need to find new sources that are secure, friendly, and can be tapped in environmentally responsible ways.

A. Potential to be a “Win-Win”

In general, the demand for fossil fuel can be cut in two ways: energy efficiency, and wider use of clean energy. Both are promising and should be pursued vigorously.

1. Energy Efficiency

A key step is to change the habits of consumers. For example, instead of driving to work, they should walk, carpool, take mass transit, or work from home. The right policies can encourage these shifts, including congestion pricing, bike lanes, cheaper mass transit fares, lower speed limits, and the like.

Technological innovations—and policies that encourage them—also can enhance energy efficiency. For example, switching from incandescent to more efficient LED bulbs—as the Biden Administration mandated in 2022—should reduce U.S. emissions by 222 million metric tons over thirty years and save nearly $3 billion annually in electricity costs.¹⁸⁸ Likewise, changing the idle power settings on computers also can “save $3 billion a year . . . and reduce CO₂ emissions by 20 million metric tons,” Kit Kennedy has explained, “without any impact on computer performance. . . .”¹⁸⁹ The same is true of better heating and cooling systems. For example, “heat pumps” use 50% less energy because they do not actually generate heat; instead, they extract it from the air.¹⁹⁰

Energy efficiency has obvious national security advantages, as German Vice-Chancellor Robert Habeck emphasized a few weeks after Russia invaded Ukraine. “If you can take the train or bike . . . , that’s good,” he said.¹⁹¹ “[I]t’s easy on the wallet and annoys Putin.”¹⁹² Obviously, there are parallel environmental advantages as well.

2. Clean Energy

Along with energy efficiency, another way to use less fossil fuel is to rely more on clean energy, including wind, solar, geothermal, nuclear, hydroelectric, and hydrogen. Fortunately, the cost of wind and solar has declined significantly in recent years, making them increasingly competitive even without subsidies.¹⁹³

So far, clean energy has been used mainly to generate electricity. This has been an effective way to burn less fossil fuel, since electric power plants are responsible for about 38% of all energy generated in the U.S.¹⁹⁴ The progress so far has been significant: in 2021, only 60% of electricity in the U.S. came from fossil fuels, compared with 21% from nuclear and 19% from renewable energy.¹⁹⁵

Another 37% of energy in the U.S. is used for transportation.¹⁹⁶ For decades, virtually all of this energy has come from fossil fuel—and, specifically, from petroleum.¹⁹⁷ Yet EVs can break petroleum’s monopoly, since the electricity powering them can come from clean energy (or, for that matter, from coal or natural gas). Fortunately, the performance and range of EVs has improved significantly. There also is a growing network of charging stations,¹⁹⁸ although this effort has a long way to go.¹⁹⁹

Like energy efficiency, clean energy has the potential to offer national security and environmental advantages. Again, using less fossil fuel not only reduces emissions and pollution, but also eases dependence on the wrong fossil fuel suppliers.

B. Are We Really Using Less Fossil Fuel?

Even so, before policymakers conclude that a policy or technology really is a “win-win,” they need to dig deeper. A key question is how much, if at all, it actually reduces the demand for fossil fuel.

1. Rebound

For example, a fuel-efficient car is supposed to use less fuel. But what if drivers respond by putting more miles on the car, since each additional mile is cheaper? Similarly, what if homeowners with heat pumps turn up the thermostat? If energy efficient products are used more, they do not save as much energy. This “rebound effect,” as it is called, reduces the national security and environmental advantages of energy efficient technology, since fossil fuel consumption declines less than expected.²⁰⁰

2. Life Cycle Calculations

Similarly, to determine how much fuel a new technology actually saves, we need to know how much is used not just in operating it, but also in manufacturing and powering it. For example, compared with a gasoline-powered car, less energy is needed to run an EV, but more is required to manufacture it because extra energy is needed to build the battery.²⁰¹ EVs make up for this disadvantage by using less energy when driving.²⁰² But how much less depends on how the electricity was generated. If it comes from solar or wind, the EV cuts fossil fuel demand more than if it comes from coal.²⁰³ This sort of “life cycle” analysis is needed to determine how effective a new technology is in cutting demand for fossil fuel, and thus in reducing emissions, pollution, and the national security risks from depending on the wrong fossil fuel suppliers.

C. New National Security Risks: “Just When I Thought I Was Out . . .”

Using less fossil fuel elicits another challenge as well: the transition to clean energy poses national security risks of its own. So as much as the U.S. and it allies would like to stop protecting insecure suppliers and funding adversaries, they will not necessarily get their wish. This Section shows that clean energy imposes parallel burdens. One is reminded of a famous line from The Godfather: “Just when I thought I was out, they pull me back in.”²⁰⁴

1. Defense Externalities: The Electrical Grid

For one thing, the U.S. and its allies become even more vulnerable to attacks on power plants, power lines, and other infrastructure. Since electricity is the most effective way to harness clean energy, using more of it means depending more on this grid.

There already are familiar risks from relying on the grid. Blackouts disrupt communications, finance, business, law enforcement, health care, and the delivery of water, food, and other essential goods and services.²⁰⁵ To avoid these hardships, the grid must be protected from extreme weather and natural disasters, as well as from cyber and physical attacks²⁰⁶—a lesson emphasized, sadly, by Russia’s repeated attacks on Ukraine’s grid in 2022.²⁰⁷

Yet these risks are bounded today because electricity is not the only game in town. It provides only 38% of the energy consumed in the U.S.²⁰⁸ Petroleum and other fossil fuels are the main sources for transportation,²⁰⁹ heating, and industrial processes.²¹⁰ Admittedly, the infrastructure for these fuels is also vulnerable. Pipelines can be hacked²¹¹ or sabotaged,²¹² refineries can be damaged in fires²¹³ or natural disasters,²¹⁴ oil depots can be attacked,²¹⁵ and the like. Yet the fact that this infrastructure is separate from the grid—and, for that matter, scattered across the country—offers useful diversification. If some pipelines, refineries, and gas stations go offline, others still function. Likewise, if the grid fails today, most homes will still be heated and most cars will still work.²¹⁶ But if all homes are heated with electricity and all cars are EVs, this will no longer be true.

In short, tapping clean energy means depending more on the grid. As a result, its security—and, more generally, its effectiveness—become even more essential.

2. Defense Externalities from Nuclear Power

The grid’s vulnerability is an example of a broader point: although fossil fuels have national security costs, so do other energy sources, and the risks from these new sources need to be addressed.

This is certainly true of nuclear power. On the one hand, it has national security advantages in easing dependence on problematic fossil fuel suppliers. For example, France has relied less on Russian natural gas because 70% of its electricity comes from nuclear plants.²¹⁷ In contrast, Germany has been in a weaker position because it started phasing out nuclear power in 2011.²¹⁸

On the other hand, nuclear power requires uranium. While some uranium suppliers are secure and friendly (such as Canada, Australia, and India),²¹⁹ others are not. For example, Kazakhstan (the world’s largest producer) shares a border with Russia, as do Uzbekistan and Ukraine.²²⁰ Meanwhile, Russia itself is a “top ten” producer, as is China.²²¹

Along with dependence on uranium, another risk is the security of the reactor itself. During a war, its core could be breached by missiles or artillery, or staff responsible for safety protocols could be incapacitated or driven away. Unfortunately, these risks became all too real in 2022 when Russian troops captured the Zaporizhzhya nuclear power plant in Ukraine.²²² Reactors also need protection from terrorist attacks, including truck bombs, plane crashes, and attempts to trigger a meltdown. The waste from reactors also must be secured, so terrorists cannot build dirty bombs. After the attacks on September 11, 2001, security at U.S. nuclear facilities was upgraded to address these threats.²²³

3. Defense Externalities: Clean Energy Raw Materials

Like nuclear power, other types of clean energy also ease some national security burdens, while creating others. A key challenge is the need for specialty minerals, such as cobalt and lithium.²²⁴ More are needed for solar panels, wind turbines, electricity networks, and EVs than for fossil fuel systems. “A typical electric car requires six times the mineral inputs of a conventional car,” the IEA has observed, “and an onshore wind plant requires nine times more mineral resources than a gas-fired power plant.”²²⁵ To scale up clean energy, the global economy will need far more of these minerals—four times more in 2040 to meet the goals of the Paris Accords and six times more to hit net-zero globally by 2050.²²⁶

Yet to source these minerals, the U.S. and its allies rely heavily on imports.²²⁷ Most come from only a handful of suppliers, since production “is more concentrated than that of oil or natural gas.”²²⁸ Unfortunately, “[m]uch of it comes from countries that are not our friends,” as Mark Mills has observed.²²⁹

For example, more than two-thirds of the world’s cobalt comes from the Democratic Republic of Congo,²³⁰ which has been wracked by factional violence and protests in recent years.²³¹ Likewise, the U.S. and its allies depend heavily on Gabon for manganese, as well as on Chile and Argentina for lithium.²³² China is the main supplier of rare earths,²³³ the global leader in processing other clean energy minerals,²³⁴ and a determined buyer of mines all over the world.²³⁵

Depending on other countries for these minerals poses familiar national security risks. Like with oil, the U.S. and its allies will feel pressure to defend insecure suppliers in a crisis, while also funding hostile suppliers’ harmful policies. “New geopolitics around the minerals for net zero may well emerge,” S&P Global has warned, “which will echo the geopolitics that have long surrounded oil and natural gas.”²³⁶

Fortunately, there are ways to reduce these national security costs. For one thing, the U.S. and its allies should ramp up efforts to recycle minerals, so newly-mined sources are less critical. In addition, they should try to replace minerals from an insecure supplier with alternatives that are easier to access (for example, by building batteries with lithium iron phosphates instead of cobalt).²³⁷

Likewise, the U.S. and its allies should encourage domestic mining. The good news is that they actually have deposits of most of the relevant minerals. But the bad news is that opening new mines is quite challenging, especially in democracies. Many projects whither on the vine, while successes usually require a decade or more of planning, negotiation, and construction to complete.²³⁸ “[D]isruptions from labor strikes, protests, environmental activism, domestic political rivalries, governmental shifts, and contractual disputes and renegotiations . . . delay projects and investment,” S&P Global has warned.²³⁹ “Brownfield and greenfield development of new projects turn on the complex interaction of permitting and policy, contracts and politics, and businesses and civil society . . . .”²⁴⁰ Unfortunately, some environmental groups are adamantly opposed to mining, even for minerals needed to reduce emissions.²⁴¹ Like when they oppose fossil fuel projects, these activists will find allies among local residents and economic competitors. Again, we see the authoritarian comparative advantage in extractive industries.²⁴²

Seeking to change this dynamic, the Inflation Reduction Act offered substantial subsidies for domestic mining and recycling. For example, half of the EV tax credit is available only if enough of the minerals in the battery were extracted and processed in the U.S. (or in a country with a free trade agreement with the U.S.) or were recycled in North America.²⁴³

Yet even with these subsidies, domestic mining and recycling cannot proceed without permits. Although Congress considered a permitting reform bill in 2022, it was not enacted.²⁴⁴ “[T]he United States is still in some early days of scrutinizing the existing web of federal and local mining permits and addressing NIMBY-ism,” Jane Nakano observed, “[so] a domestic supply chain is years away at best.”²⁴⁵

4. Funding Externalities: Clean Energy Manufacturing

The U.S. and its allies depend on other countries not just for raw materials, but also for the finished product. The main concern is China, a formidable geopolitical rival, ²⁴⁶ which has become the world’s leading manufacturer of clean energy technology.²⁴⁷

China has seven of the world’s top ten solar manufacturers,²⁴⁸ and produces over 75 percent of the world’s EV batteries.²⁴⁹ While the U.S. and its allies are less dependent on China for wind turbines, this could change. For land-based turbines, the U.S. is a leading manufacturer (though it faces stiff competition).²⁵⁰ For offshore turbines, however, the U.S. relies on European suppliers,²⁵¹ but China is ramping up, “buil[ding] more offshore wind turbines in 2021 than every other country did in the past five years.”²⁵²

Unfortunately, depending on China for clean energy could pose the same three risks, discussed above, as depending on rivals for fossil fuel. First, these purchases could fund policies that undermine U.S. interests, such as China’s efforts to control the South China Sea and Taiwan. Second, clean energy exports could give China leverage (for example, to stop exporting to countries that oppose its geopolitical agenda). Thus, just as Russia has weaponized natural gas while invading Ukraine, China might do the same with EV batteries and solar panels while attacking Taiwan. Third, China’s exports could also fund repressive policies at home, such as the use of forced labor to produce solar panels.²⁵³

Admittedly, even without clean energy, the U.S. and its allies already depend on China for other important products, ranging from semiconductors and cell phones to surgical masks. Even so, adding clean energy to this list is still significant—not just because the list grows longer—but also because energy is so fundamental in (literally) powering a modern economy.

While this sort of economic interdependence is not always bad—indeed, it can moderate potentially hostile regimes, as noted above—these benefits do not always materialize, as Germany learned in buying fossil fuel from Russia. Is China a safer bet? Although President Xi’s assertive foreign policy is not reassuring in this regard,²⁵⁴ the relationship between China and the West is complex. Over time, it could become either more confrontational or more cooperative. The goal here is not to offer a definitive prediction, but to highlight a meaningful risk.

Again, like with fossil fuel, the best way to mitigate funding externalities is to depend more on production in the U.S., Europe, and other friendly countries. In fact, Congress tried to encourage this sort of “friend-shoring” in the Inflation Reduction Act of 2022. Along with providing billions of dollars in subsidies directly for clean energy manufacturing in the U.S., Congress set conditions on other subsidies, so they would be available only for products with supply chains in the U.S. or other treaty partners.²⁵⁵

This is not to say that the Inflation Reduction Act has executed this policy flawlessly. For one thing, the definitions of which countries count as “friend-shoring” vary by provision,²⁵⁶ and have prompted complaints from U.S. allies.²⁵⁷

In addition, the Inflation Reduction Act also tries to “pick winners,” choosing which technologies get larger subsidies, which get smaller ones, and which get none at all. As I have emphasized elsewhere, government institutions often lack the expertise and incentives to make this sort of judgment effectively.²⁵⁸ As Part VI emphasizes below, a better strategy is to rely on policies that do not depend on the government to make these judgments, such as Pigouvian taxes.²⁵⁹

To sum up, clean energy can mitigate one national security risk (depending on the wrong fossil fuel suppliers) while creating another (relying on the wrong clean energy suppliers). To address this new risk, the key is to “friend-shore” the relevant minerals and manufacturing (and, of course, to do this the right way).

D. New Environmental Harms

Just as clean energy has national security costs, as well as benefits, the same is true of its environmental effects. While the benefits (such as reducing emissions and pollution) are very significant, they are not free.

1. Avian Impacts of Wind and Solar

For one thing, wind turbines and solar panels can harm birds and bats. These risks are regularly invoked to block clean energy projects.²⁶⁰ Although regrettable, these species impacts should not keep the U.S. and its allies from using renewable energy. As Professor Michael Gerrard has explained, we face a choice between saving “birds now or birds later.”²⁶¹ Halting these projects may save some birds now, but “won’t some of the animals we are trying to protect be gone anyway [because of climate change], together with untold numbers of others?”²⁶² Faced with this tradeoff, policymakers should target the greater threat, which is climate change.²⁶³ Unfortunately, some environmentalists resist this logic. “Rather than climate denial, the environmental community has tradeoff denial,” Professor Gerrard has observed.”²⁶⁴

2. Mining for Clean Energy Minerals

Clean energy has another set of environmental costs as well: mining for the necessary minerals can cause pollution, water shortages, accidents, and disruption of local communities and habitats.²⁶⁵ Invoking these risks, some environmental groups oppose mining for these minerals in the U.S. and E.U.²⁶⁶

Again, this is a mistake. As with the impact on birds, pollution from these mines is an unavoidable cost of combatting climate change. “[W]e need to be in an era of triage,” Michael Gerrard has urged, “where we save what we can but recognize that there are things we’ll have to give up.”²⁶⁷ Moreover, if these minerals are going to be extracted somewhere, isn’t it better to do it in jurisdictions with meaningful environmental regulation? The U.S. and E.U. are likely to be more responsible than many current suppliers.

3. Pollution and Accidents From Nuclear Energy

Like wind and solar power, nuclear power also poses environmental tradeoffs. On the one hand, the advantages are quite significant. No greenhouse gas is emitted²⁶⁸ and, unlike with wind and solar, output does not vary with the weather.²⁶⁹

On the other hand, nuclear power poses two familiar risks, which prompt staunch opposition from some environmentalists. First, there is radioactive waste, which must be disposed of safely. Second, there also is a risk of accidents. Fortunately, these have been rare. In the U.S., the most significant one, a partial meltdown at the Three Mile Island plant in 1979, had only negligible effects on public health and the environment.²⁷⁰ In contrast, the meltdowns at Fukushima in Japan in 2011 and at Chernobyl in the Soviet Union in 1986 were quite serious, causing disease and death from radiation exposure and also rendering some areas uninhabitable for decades.²⁷¹ Yet these tragedies were the product of unique circumstances: a tsunami in Japan, and a blend of human error and dysfunctional efforts to conceal the incident in the Soviet Union.²⁷²

With the right safety features and regulation, the risks from nuclear power should be quite limited. For example, new reactors have passive cooling systems that work even if power has been knocked out—the problem at Fukushima—as well as “core catchers” that contain radiation more effectively.²⁷³

Arguably, then, the risks of not using nuclear power are greater than the risks of using it. For example, after Germany began phasing out nuclear power as a response to Fukushima, its economy became even more dependent on Russian natural gas. This choice turned out badly not just for national security, but also for the environment: when the gas stopped flowing, Germany ramped up its use of coal, spewing more emissions and pollution into the air.

E. Timing: A Gradual Transition

Although replacing fossil fuel with clean energy has the potential to be a “win-win”—protecting both national security and the environment—a number of new national security and environmental risks must be addressed. In addition, there is another daunting challenge: for now, the world’s supply of clean energy is not even close to adequate. In 2021, renewables generated only 7% of the world’s energy. Paired with nuclear and hydroelectric power, the non-carbon total rose to just 18%. As Table 1 shows, fossil fuel still provided 82% of the world’s energy:

Table 1. Share of Global Energy By Source in 2021
Fuel	Amount (Exajoules)	Percentage
Oil	184.21	31%
Natural Gas	145.35	24%
Coal	160.10	27%
Nuclear	25.31	4%
Hydroelectric	40.26	7%
Renewables	39.91	7%
Total	595.15	100%
Notes: This data comes from BP Statistical Review of World Energy 9 (71st ed. 2022).

The market share of clean energy can increase, to be sure, but this progress inevitably will be gradual. Consumers do not replace cars and heating systems all that frequently. Even if they did, there are not enough EVs, heat pumps, solar panels, and wind turbines to accommodate everyone at once. As of now, we do not have enough factories to build them—or, for that matter, enough raw materials.

For example, replacing all petroleum-powered cars on the road today would require 1.39 billion EVs, whose batteries would need massive quantities of lithium, cobalt, and other minerals.²⁷⁴ But according to the Geological Survey of Finland, “[p]reliminary calculations show that global reserves, let alone global production, may not be enough to resource the quantity of batteries required.”²⁷⁵

There is a similar challenge with copper. Since it is essential for power infrastructure, renewable generation, and EVs, global demand is expected to double by 2035.²⁷⁶ According to S&P Global, the global supply cannot grow fast enough to meet the goal of net-zero global emissions by 2050.²⁷⁷ “Unless massive new supply comes online in a timely way,” they warn, “the goal of Net-Zero Emissions by 2050 will be short-circuited and remain out of reach.”²⁷⁸

The bottom line, then, is that the world has no realistic choice but to keep depending on fossil fuel for years to come. So although it is important to reduce demand for fossil fuel over time—the first part in this Article’s two-part proposal—it also is necessary to implement the second part: tapping new sources of supply.

V. TAPPING NEW SOURCES OF FOSSIL FUEL IN ENVIRONMENTALLY RESPONSIBLE WAYS

As Parts I and II showed, new sources of fossil fuel enhance national security when they come from the U.S. and other secure and friendly countries, and thus ease dependence on insecure or hostile suppliers. Yet notwithstanding these advantages of new sources, the IEA and other influential voices have called for an end to fossil fuel development.²⁷⁹ At times, the Biden Administration has also gestured in this direction, although at other times it has supported more drilling in response to rising energy prices, legal constraints, geopolitical imperatives, and political concerns.²⁸⁰

It is naïve—and, ultimately, misguided—to end fossil fuel development in the near term. On the contrary, to protect national security, the U.S. and its allies need to keep adding new wells and infrastructure in the right countries. Even so, this needs to be done in an environmentally responsible way. How can the U.S. and its allies tap new fossil fuel sources while still reducing emissions and pollution? This Part proposes three strategies to do both at once: first, new sources should be as “clean” as possible; second, they should replace, instead of adding to, sources that pose national security risks; and third, new sources should be temporary instead of permanent.

A. Increase Carbon Efficiency of Secure and Friendly Sources

As emphasized above, a key national security goal is to use less oil and gas from Russia, Venezuela, and Iran, and more from countries like the U.S., Brazil, Mexico, and Canada. If these friendly and secure sources also offer environmental advantages, developing them advances both national security and environmental goals. To pursue this “win-win” scenario, policymakers should look for ways to reduce the carbon and pollution footprints of these sources. How can we get more energy from them, while generating the same levels of emissions and pollution—or, ideally, reducing these levels?

1. Flaring

For one thing, we should get more energy from fuel we already burn. Unfortunately, massive amounts of natural gas are burned (or “flared”) at the wellhead. No one uses this energy, but it still produces significant emissions and pollution.²⁸¹

This means a great deal of energy is wasted: about eight percent of global natural gas production (accounting for six percent of global emissions).²⁸² “If half of the amount of gas flared annually [across the globe] was used for power generation,” Zubin Bamji observed, “it could provide about 400 billion kilowatt-hours of electricity – that’s roughly the annual electricity consumption of Sub-Saharan Africa.”²⁸³ In the U.S. alone, gas worth $10.6 billion was flared between 2012 and 2020.²⁸⁴

Why is so much natural gas wasted? Unfortunately, there is no infrastructure to bring it to market. This gas comes from oil wells, which have infrastructure to transport oil, but not gas.²⁸⁵ When gas cannot be delivered to consumers, the easiest alternatives are either to burn it or—even worse—to release it into the atmosphere.²⁸⁶

But instead of wasting this gas, we should find ways to use it—and, thus, to increase the supply of energy without increasing emissions (since this gas will be burned anyway). One option is to build pipelines to take it to market.²⁸⁷ Indeed, flaring is less common in Texas than in North Dakota because there are more pipelines.²⁸⁸ Where pipelines are not economical, facilities to use this gas can be added near the well, including small-scale generators, “micro” compression and liquefaction facilities, and petrochemical plants.²⁸⁹ If these solutions are not viable, the gas can be stored underground.²⁹⁰

2. Methane Leaks

Natural gas also is wasted when it leaks from wells and pipelines. Like flaring, these leaks increase emissions without generating useful energy,²⁹¹ so plugging them should be a priority. EPA proposed new rules on leaks in November of 2021, as well as supplemental rules a year later.²⁹² The Inflation Reduction Act also introduced a charge on methane leaks in some circumstances.²⁹³ Analyzing the details of these measures is beyond this Article’s scope. The goal here is not to determine whether they are the best ways to target leaks, but to emphasize the importance of addressing this issue.

3. Carbon Capture, Utilization, and Storage (“CCUS”)

Still another way to reduce environmental harms from fossil fuel is to capture and store CO₂, so it is not released into the atmosphere. For example, emissions from power plants can be piped to old oil and gas wells.²⁹⁴ “Carbon capture, utilisation and storage (CCUS) so far has not lived up to its promise,” the IEA has observed, but “[s]tronger climate targets and investment incentives are injecting new momentum into CCUS.”²⁹⁵ The U.S. tax code offers a tax credit for carbon capture, which the Inflation Reduction Act made more generous.²⁹⁶ Again, the details of this credit are beyond this Article’s scope.

4. Replace Coal With Natural Gas

Along with reducing emissions and pollution from specific types of fuel, policymakers also should change the mix of fuel. Specifically, a determined effort is needed to replace coal with natural gas.

Since the U.S. has ample reserves of both, they offer similar national security advantages.²⁹⁷ Yet burning coal produces nearly twice as many emissions as burning natural gas, as well as more pollution.²⁹⁸ Admittedly, natural gas poses the additional risk of methane leaks, as noted above.²⁹⁹ But as long as this problem is addressed, replacing coal with natural gas reduces emissions and pollution.³⁰⁰

Indeed, this switch has helped U.S. emissions decline substantially in recent years, as noted above.³⁰¹ Yet there is a lot of room for improvement, since coal still accounts for about 27% of the world’s energy,³⁰² as well as 11% of all energy used in the U.S.³⁰³

As a result, U.S. exports of natural gas do double duty. Not only do they enhance national security (by replacing Russian gas), but they also protect the environment (by replacing coal). For the same reasons, bringing natural gas to Europe from the Eastern Mediterranean is also good for both national security and the environment, so it is unfortunate that the Biden Administration has impeded this effort, at least initially, as noted above.³⁰⁴

B. Extra Supply Should Replace, Instead of Adding to, Existing Sources

As the previous Section showed, when the U.S. and its allies tap new sources of fossil fuel, they should favor cleaner ones. This Section adds a second environmental safeguard: in tapping new sources, the goal should be to stabilize—not increase—global supply.

Fortunately, increasing supply should not be necessary. Rather, to protect national security, the key is to fill a gap. If one supplier suddenly stops selling (because of an invasion or revolution) or should not be allowed to sell (because its revenue funds harmful conduct), another supplier needs to step in—not to add to global supply, but to replace the insecure or hostile source.

This reality reduces the tension with environmental goals. As long as new sources just fill a gap in the market, emissions and pollution should not increase. Overall, the same quantity of fossil fuel is burned; it just comes from different countries. Indeed, if friendly and secure sources are cleaner than the oil and gas they replace, as the previous Section recommended, global emissions and pollution would decline.

To be clear, this happens only if the insecure or hostile supplier’s oil and gas actually come off the market. This is quite likely for insecure sources, whose production is disrupted by an invasion or revolution. But with a hostile exporter, exiting the market is not automatic. If they want to keep selling, boycotts or other sanctions are needed to stop them. The key question, noted above, is whether these sanctions are effective.³⁰⁵ If not, adding new wells would increase global supply, instead of just stabilizing it, and thus could generate additional emissions and pollution.

To avoid this problem, new sources ideally should be elastic. They should increase production as insecure or hostile producers cut back, while reducing production as these other producers ramp up.

Is this feasible? The good news is that, at least to an extent, it happens automatically in response to market prices. On the one hand, if insecure or hostile producers cut production, prices rise, motivating secure and friendly suppliers to increase production. On the other hand, if insecure or hostile producers maintain their production, prices do not rise (or, at least, they revert after an initial panic). As a result, there is no market-based incentive to produce more (and, obviously, policymakers do not need to intervene with other incentives).

Yet, although prices provide some protection from oversupply (and the extra emissions and pollution it triggers), they are not a sure-fire solution. Suppliers sometimes respond slowly to changes in price, expecting prices to be volatile and waiting to see whether a trend endures.³⁰⁶ In addition, some suppliers are able to adjust more quickly than others, as emphasized above.³⁰⁷ When prices rise, how fast can they bring more product to market? When prices fall, how rapidly can they cut production? Producers vary widely in this regard; for example, Saudi Arabia is fast, U.S. offshore wells are slow, and so forth.³⁰⁸

The bottom line, then, is that tapping new sources of fossil fuel does not increase emissions or pollution if this new supply stabilizes (but does not increase) global supply. The same amount of fossil fuel is used, but it comes from different countries. This outcome is more likely when the new suppliers are flexible, so they can respond more quickly to market prices (and, therefore, to underlying shifts in global supply).

C. In Adding New Capacity, Retain Flexibility to Make It Temporary

This brings us to a third way to minimize environmental harm from tapping new sources of oil and gas: ideally, this extra supply should be reversible, producing only as long as it is needed. This Section shows how U.S. shale can offer this flexibility and explains how policymakers can leverage it.

1. U.S. Shale Has the Potential to Ramp Up Quickly

For one thing, shale producers can increase production fairly quickly, enabling them to replace suppliers that have become unavailable. Shale producers are not as fast as Saudi Arabia—which, as noted above, often can bring additional barrels to market within thirty days—but they are quicker than most other producers.³⁰⁹ In general, shale producers take between six and twelve months to react to price changes.³¹⁰ So when prices spike, these suppliers have the ability (and usually also the incentive) to increase production.

“Shale oil developments require relatively low amounts of initial capital and can be developed in relatively short order, making shale oil highly sensitive to price increases,” Bordoff, Halff and Losz have explained.³¹¹ “In contrast with the rest of the industry, which is highly concentrated, the shale oil industry is fragmented and made up of myriad small companies that are nimble, dynamic, innovative, and responsive to market changes.”³¹²

Admittedly, before a well is drilled—in a shale formation or anywhere else—years may be required to find the right location and secure permits. But this does not slow down well-run energy companies. They constantly explore and lease new sites and secure permits, sometimes years before they ever intend to drill there. As a result, these firms have an inventory of sites already approved. “The idea is that if there are delays with permitting or other land issues,” one analyst explained, “that the management team will have flexibility in deciding where they want to drill and not run short on options.”³¹³

Obviously, they still have to drill the well, but drilling in shale is a lot faster than drilling offshore.³¹⁴ To shorten the time even further, companies can drill the well, cap it, and then complete the process later when they actually need the oil or gas.³¹⁵

2. U.S. Shale Also Can Slow Production Quickly

Not only can U.S. shale producers ramp up quickly to fill a gap in the market, but they also can ramp down when extra production is no longer needed. As a result, shale wells are well positioned to replace, instead of supplementing, other production.

A more traditional well, whether drilled onshore or offshore, usually lasts twenty years or more.³¹⁶ As a result, it has more potential to become a stranded asset, which keeps pumping even after it is no longer needed.

In contrast, shale wells have much shorter useful lives. Hydraulic fracturing usually enables them to pump only for a year or two.³¹⁷ To keep producing, the firm needs another round of hydraulic fracturing or a new well. If demand has declined—so prices have fallen—the firm will not have the incentive to make this additional investment. “Unlike other types of oil projects, shale oil production declines steeply after initial production,” Bordoff, Halff and Losz have explained.³¹⁸ “Another distinctive quality of shale projects is their relatively high ongoing costs, which makes shale production sensitive to price declines as well.”³¹⁹

These differences give shale a significant edge over conventional wells, such as the Willow Project in Alaska, which the Biden Administration green-lighted in March 2023.³²⁰ Unlike shale wells, Willow is expected to have a thirty-year useful life.³²¹ Will the world still need Willow’s oil in thirty years? With a fast enough transition to clean energy proceeds, the answer could well be “no.” Arguably, then, approving Willow and other long-lived conventional projects is a mistake. Instead, the better approach is to rely more on shale to increase U.S. production.

In short, the geology of shale wells makes them much less likely to become stranded assets. They can ramp up to fill gaps in the market, and then slow production when there is excess supply.

3. Reversible Infrastructure

While shale producers can get oil and gas out of the ground quickly, it still needs to be refined and brought to market. This requires an elaborate infrastructure, including pipelines, refineries, and LNG terminals. Unlike shale wells, infrastructure take years to build.

i. Infrastructure Approvals: A Key Lever for the Government

A key question is whether this infrastructure is already in place. The answer varies with the location of the drilling, as well as the type of fossil fuel. In places where the infrastructure is adequate, shale producers already have the potential to serve as swing producers. But in other places, costly infrastructure investments are still needed, especially for natural gas, to take full advantage of their rapid reaction time. For example, the U.S. needs more LNG terminals to do more to replace Russian natural gas in Europe. Yet although a number of new export terminals have been built and more are under construction, the Biden Administration decided in January 2024 to “pause” the issuance of permits for new projects.³²²

In these efforts to ramp up production, the division of labor between the private sector and the government should be emphasized. In the U.S., private firms have significant discretion about how many wells to drill. In contrast, the government plays a critical role in major infrastructure projects. Under current law, the permitting process is as protracted as it is significant; a project cannot proceed unless the relevant agencies sign off. Deciding whether to do so is one of the main ways the government can either encourage or slow U.S. production.

In making these judgments, policymakers should balance the various considerations highlighted in this Article. How important is it to replace Russia? Or to have greater potential to replace Middle Eastern suppliers? Is the new source of oil and gas cleaner or dirtier than other sources? Would it really replace these other sources, or just supplement them?

ii. Investing in Infrastructure to Leverage the Flexibility of Shale

While these are context-specific judgments, the recommendation here is to err on the side of building more infrastructure. We should build it, even if we will not always use it.

This approach enables the U.S. and its allies to leverage the flexibility of shale production. On the one hand, when more fossil fuel is needed to replace insecure or hostile suppliers, the infrastructure is there to bring it to market. On the other hand, when there is too much supply—so shale producers are ramping down—the infrastructure does not need to be fully utilized.

Admittedly, this approach raises two potential concerns. First, once this infrastructure is built, we might keep using it longer than we should. For instance, what if we hope to stop using fossil fuel in fifteen years, but a pipeline has a thirty-year useful life? If the pipeline is built, there will be a temptation to use it for thirty years, instead of just fifteen.³²³

The solution to this problem is for infrastructure approvals to be contingent. In licenses and permits, the government should reserve the right to shut the infrastructure down before the end of its useful life. In the above example, the permit could allow the government to close the pipeline after fifteen years. This provides flexibility to respond to changed circumstances. In fifteen years, if the primary concern is climate and pollution, policymakers can shutter the pipeline. But if national security looms especially large, it can remain in use. Put another way, it is better to make permits contingent than to refuse to issue them at all—as the Biden Administration has done in “pausing” new LNG export permits—so the infrastructure is there when it is needed.

Admittedly, even if a contingent permit is granted, this does not mean that the project will proceed. This brings us to the second issue: limits on the use of infrastructure reduce its value to the private sector. The risk of an early shut down may keep projects from being built, even if they are urgently needed now. For example, the U.S. should build LNG terminals to be able to support its European allies and weaken Russia. But what if the risk of an early shut down discourages the private sector from building them?

The answer is for the government to help fund some projects. This is not meant as a handout to the fossil fuel industry, but as a response to the national security and environmental externalities highlighted in this Article. In some cases, investing in an LNG facility is more cost-effective than supplying military aid to Russia’s neighbors. Likewise, shutting down this facility when it is no longer needed may well be cheaper than building seawalls or repairing damage from storms. In short, the market failures discussed in this Article justify a government role, along with government expenditures.

“[G]overnments,” Bordoff and O’Sullivan have observed, “could develop innovative tools to plan for obsolescence.”³²⁴ For example, one approach would be for the government to pay compensation (for example, the infrastructure’s appraised value) in shutting down infrastructure after a period of time (for example, fifteen years). Another would be for the government to cover a share of the cost up front in exchange for acquiring ownership (or the right to shut the infrastructure down) after a preset term of years.³²⁵

In deciding which infrastructure projects to approve, policymakers should also consider whether they can be retooled for another purpose. An advantage of natural gas pipelines, for instance, is that they might someday transport hydrogen, a potential source of clean energy.³²⁶

Is investing in pipelines and other infrastructure the best use of public money? Obviously, rigorous judgments are needed about how this investment stacks up against other ways to address national security and environmental risks. But in some cases, reversible infrastructure is likely to be the most cost-effective way to pursue these goals.

4. So Why Did U.S. Shale Production Not Increase More Rapidly After Russia Invaded Ukraine?

With the right infrastructure, U.S. shale producers have the potential to avert (or at least dampen) supply shocks. Yet admittedly, they did not play this role after Russia invaded Ukraine in 2022. Even as prices spiked, they were slow to increase production.³²⁷

Even so, there were context-specific reasons for their hesitation, which will not necessarily recur. For one thing, the industry had just weathered the coronavirus pandemic, which slashed global demand, requiring steep production cuts, and plunged a number of producers into bankruptcy. This bruising experience made firms cautious about ramping up quickly.³²⁸

For firms that were willing to increase production, there was another barrier: the pandemic caused a host of supply chain bottlenecks. Like in other industries, shale producers struggled to get enough equipment and employees to increase production.³²⁹

Economic losses during the pandemic also burned investors. For years, they had provided capital even though shale producers were not (yet) profitable, prioritizing production increases and accepting that profits would come eventually. But the pandemic changed Wall Street’s attitude. After a wave of losses and bankruptcies, earnings—not increased production—became the priority.³³⁰ Executive compensation was adjusted to reflect this shift,³³¹ and the inventory of wells declined.³³² Yet the good news is that shale producers delivered record profits in 2022, which were turbocharged by a surge in oil and gas prices. Hopefully, these profits will ease investor concerns about expansion going forward.

Even so, there is still another barrier to overcome—one rooted in policy and perception, rather than in market dynamics. Before Russia invaded Ukraine, the Biden Administration’s rhetoric and policies sent a clear signal that fossil fuel production should decline.

“I want you to just take a look . . . I want you to look in my eyes,” Joe Biden said as a presidential candidate.³³³ “I guarantee you, I guarantee you we are going to end fossil fuel and I am not going to cooperate with them, OK?”³³⁴ In this spirit, he pledged to stop auctioning oil and gas leases on federal land. “And by the way,” he said, “no more drilling on federal lands, period. Period, period, period.”³³⁵ On his first day in office, President Biden canceled the Keystone Pipeline.³³⁶ Less than a week later, he imposed a “pause [on] new oil and natural gas leases on public lands or in offshore waters . . . .”³³⁷

Yet as energy prices started to rise—and then spiked after Russia invaded Ukraine—the Biden Administration began walking back this message. They resumed leasing federal land after a district court enjoined the “pause,”³³⁸ and agreed to allow more leases as a compromise to pass the Inflation Reduction Act.³³⁹ President Biden also began urging U.S. companies to increase production (while also criticizing them for profiting from higher prices).³⁴⁰

Even so, U.S. oil and gas producers were skeptical about the Administration’s shift in policy and rhetoric. “The Biden administration’s anti-fossil fuel policies and messaging have not helped the investment environment,” observed the CEO of an oil services firm.³⁴¹ “The White House may ask producers for more supply today, but their policy priorities seek to eliminate the need for that additional supply within five years.”³⁴² This pessimistic assessment was reinforced when the Biden Administration stopped issuing new LNG export permits early in 2024.

This chilling effect was unfortunate. Since the U.S. and its allies will rely on fossil fuel for years to come, discouraging new development comes at a cost.

To sum up, developing extra supply in the market for oil and gas has advantages for national security, but potential costs for the environment. Yet there are three ways to square this circle. First, policymakers should aim to make these new fossil fuel investments as “clean” as possible. Second, in adding new capacity, the goal should be to replace other fossil fuel sources, not to add to them. Third, the new sources should be flexible, so they can be ramped up and dialed back, as needed. In these ways, the U.S. and its allies can bring new oil and gas online while still reducing emissions and pollution.

VI. REGULATORY STRATEGY

As the last two Parts have shown, the U.S. and its allies need to reduce demand for fossil fuels, while also tapping new sources in environmentally responsible ways. This Part outlines a regulatory strategy to advance these goals. The best approach is a mix of Pigouvian taxes, targeting the various national security and environmental costs discussed in this Article. Unfortunately, this strategy has not gained any political traction in the U.S., at least so far.

As a fallback, some commentators (and, indeed, a number of celebrities) have called for a moratorium on new fossil fuel development. Yet this would be a mistake, as a moratorium would actually harm both national security and the environment.

Instead, the better approach is an incremental effort to alter the mix of energy sources over time. To guide this effort, this Part proposes a heuristic called “the marginal efficiency cost of energy”: policymakers should account for all the social costs of each source (for example, U.S. oil, Russian natural gas, U.S. coal, nuclear, and so forth)—not just private costs, but also national security and environmental costs—and then proceed step-by-step, looking for opportunities over time to replace high social cost sources with low social cost sources. To advance this agenda, policymakers can rely on whatever policy instruments are available, including permits, licenses, regulations, mandates, and subsidies.

A key challenge in implementing this agenda is regulatory fragmentation. A policymaker responsible solely for environmental risks will not have the incentives (and possibly also the expertise) to consider national security risks, and vice versa.

Lining up political support is also a challenge, but this Article’s approach—emphasizing both the environment and national security—could prove helpful. At the risk of dramatically oversimplifying U.S. politics, the environment tends to be more of a priority for the left, while national security tends to be more of a priority for the right. The key to bipartisan support could well be policies that advance both sets of goals. In other words, the right coalition could be both green and red, white, and blue.

A. Pigouvian Taxes

As I (and many others) have written elsewhere, arguably the best way to deal with negative externalities in energy is with Pigouvian taxes, which add these third-party costs to the price.³⁴³ This Section outlines the advantages of this regulatory approach, and briefly discusses how it can be used to target threats not only to the environment (which are well understood), but also to national security (which have received less attention). Yet since carbon taxes have attracted very little political support in the U.S., the discussion of Pigouvian taxes here is brief.

For the same reason, this Article does not offer a separate discussion of cap and trade. It is well understood that this regulatory strategy—which sets limits on an activity and issues tradable permits that authorize a designated level of it—offers similar benefits as Pigouvian taxes, so there is no need for a separate analysis here.

1. Efficiency of Pigouvian Taxes

Pricing externalities is a very efficient way to mitigate them. With a carbon tax, for example, if emissions from a gallon of gasoline cause fifty cents of harm to the climate, a tax of fifty cents per gallon is added to the price at the pump.³⁴⁴ A tax also is imposed on other sources of climate harms, including natural gas, coal, jet fuel, propane, livestock, chemicals, and so on. Since the harms from these various activities are not the same, a well-crafted carbon tax is calibrated to reflect these variations.

In implementing a Pigouvian tax, the regulator’s most important job is to estimate the externalities as accurately as possible—a responsibility that is difficult, to be sure, but also limited.³⁴⁵ The good news is that adding these costs to the price of goods and services fixes the market failure. Once regulators accomplish this, they can rely on the market to address the externality as efficiently as possible.

Instead of a “one-size-fits-all” approach, consumers have broad discretion to mitigate the relevant harm in whatever way is easiest for them. In response to a carbon tax, for instance, consumers can adjust their behavior in a host of ways: they can take mass transit, carpool, telecommute, move closer to work, get a car with a more fuel-efficient internal combustion engine, drive a hybrid, buy an EV, install solar panels on their roof, lower the thermostat in the winter, buy heat pumps and energy-efficient appliances, turn off the lights when they leave the room, use energy efficient bulbs, install better insulation, eat less meat, and much more. In dozens of choices every day, they can reduce their carbon footprint.³⁴⁶

Pigouvian taxes also offer similar flexibility to businesses. For example, by increasing gasoline prices, a carbon tax motivates auto manufacturers to prioritize fuel efficiency. Again, there are a host of ways to do this, including lighter materials, more efficient internal combustion engines, hybrids, EVs, and so on.³⁴⁷

With a subsidy, the government would have to pick which approaches to support—something the government usually lacks the incentives and expertise to do well.³⁴⁸ With a carbon tax, by contrast, the government does not have to make this sort of a judgment. Instead, the tax motivates businesses to respond to the problem. They compete for customers by experimenting with different approaches.³⁴⁹

2. The Perils of Picking Winners: EVs versus Hybrids

Sadly, the problems with “picking winners” were on full display in the Inflation Reduction Act. For example, it offers a generous subsidy for EVs, but no subsidy for hybrids, which have both a battery and a gas tank. At one level, this makes sense. EVs have a smaller carbon footprint, so the switch from a gasoline-powered car to an EV reduces emissions approximately twice as much as the switch to a hybrid.

But this analysis does not take account of an important downside of EVs: their batteries are a lot larger because, unlike hybrids, they can’t run on gasoline as a backup power source. So compared with a Toyota Camry hybrid, a Chevy Bolt’s battery is sixty times larger, and thus requires sixty times more lithium and other minerals. Hopefully, this differential won’t matter over time, as the global supply of the relevant minerals expands.

But for now, this supply is quite constrained. This means that the same quantity of scarce minerals can produce either one Chevy Bolt or sixty Toyota Camry hybrids. Although a Bolt is about twice as effective at reducing emissions as a hybrid on a one-for-one basis, the analysis is very different when one Bolt is compared—not to a single hybrid—but to sixty of them. Are emissions reduced more by replacing one gasoline-powered car with a Bolt, or sixty gasoline-powered cars with sixty Toyota Camry hybrids? The sixty hybrids reduce emissions twenty-nine times more than a single Bolt!³⁵⁰

In other words, once the analysis incorporates the scarcity of minerals—and thus the number of cars that actually can be produced—Congress’s decision to subsidize only hybrids, and not EVs, is questionable. The broader point, of course, is that Congress is not well positioned to pick one technology over another. Again, this is the great advantage of a carbon tax. It spares Congress from making these choices. After setting a price for emissions, Congress can rely on the market to develop the most cost effective ways to reduce them, such as hybrids in the short term and EVs in the long term.

3. A Menu of Pigouvian Taxes on Energy

Like carbon taxes, Pigouvian taxes on pollution and national security harms have the same advantages. For example, since coal causes more pollution than other fossil fuels, adding this cost to the price of coal motivates consumers and businesses to use less of it and favor cleaner alternatives.

To internalize the externalities discussed in this Article, four types of Pigouvian taxes are needed: first, a carbon tax; second, a tax on pollution; third, a tax to cover the cost of defending access to energy from insecure or unstable sources (including petroleum, specialized minerals used in clean energy, and uranium); and, finally, the cost of funding exporters that engage in aggressive or repressive conduct (including oil and gas from Russia and Iran, clean energy from China, and so forth).

4. Defense Externalities: A Tax on Oil

As an example of a tax on defense externalities, consider the case of oil. Should this tax apply to all oil, or only to barrels imported from insecure suppliers? In other words, should it be a version of a gasoline tax, or a tariff?

The argument for a broader tax, which would apply even to domestic production, is that oil is fungible. Using it exposes the U.S. to supply shocks, and the prospect of these shocks motivates the U.S. to defend insecure suppliers (even ones that do not sell oil in the U.S.). By taxing all oil, policymakers would reduce demand for oil overall, thereby mitigating these risks.

In contrast, the case for the narrower tax, which would apply only to imports from insecure suppliers (such as those in the Middle East), is that the U.S. incurs extra defense costs only to protect these suppliers, not suppliers in the U.S., Canada, and other secure countries. Favoring the latter (with either an exemption or a lower rate) would encourage more production in North America and other secure locations.

Notably, the U.S. could probably differentiate among these suppliers without violating its trade commitments. Under the General Agreement on Tariffs and Trade (“GATT”), countries have significant latitude to protect national security.³⁵¹

Even so, distinguishing among suppliers poses a number of administrability challenges. For example, how feasible would it be to trace the origin of crude oil?³⁵² What if crude from different sources is blended together?³⁵³

If these administrability issues can be addressed, the right approach may be to impose two taxes: one on all oil used in the U.S., regardless of where it is produced, and another on imports from insecure suppliers (so these imports are subject to both taxes). Yet a definitive analysis of this issue is beyond this Article’s scope.³⁵⁴

5. Funding Externalities: A Tariff on Russian Oil

A tax can be used to internalize the cost not only of defending insecure exporters (such as Kuwait), but also of funding threatening exporters (such as Russia). This sort of tax is supposed to reduce the revenue of rogue exporters, but this does not always happen. In some cases, the tax ends up hurting consumers, instead of the hostile exporter.³⁵⁵

The key question is, “who has more bargaining power?” To illustrate the difference, let us use a stylized example in which the global price of oil is $75 per barrel and the U.S. and E.U. impose a $25 per barrel tariff on Russian oil.

Let us start with the optimistic scenario. Assume that consumers have a lot of bargaining power (because, for example, they can either use less oil or buy it from other producers), while Russia cannot afford to cut production. In this case, Russia absorbs the tariff: the global price stays at $75, forcing Russia to cut its price to $50 to remain competitive. In this situation, the tariff does its job. It reduces Russia’s revenue—shifting Russia’s producer surplus to the taxing jurisdictions—so Russia has less money for the war in Ukraine.³⁵⁶

Unfortunately, this successful outcome is not inevitable. Instead, another possibility is that the tariff ends up hurting U.S. and E.U. consumers, without reducing Russia’s export revenue very much. This happens if Russia is the one with the bargaining power (for example, because it can afford to stop selling or can sell to other buyers, but consumers cannot cut their consumption or rely on other suppliers). In this case, consumers bear the economic burden of the tax.³⁵⁷ Russia raises its price to $100 (so it still gets $75 pre-tax per barrel), and the global price rises to $100. In this situation, the tariff does not reduce Russia’s revenue, at least by much. The modest advantage of this policy is that higher prices should reduce demand a bit in the short term—and, presumably, more over time as consumers find ways to adjust—so Russia sells fewer barrels.³⁵⁸

What does the evidence suggest about Russia? Instead of a tariff, the U.S. immediately stopped buying Russian oil, while the E.U. phased down its purchases more gradually. In response, Russia redirected its exports to China, India, and other countries that have not joined these boycotts. But as noted above, Russia has had to sell at a discount of approximately 25%. This lack of bargaining power suggests that if the U.S. and E.U. decided to impose a 25% tariff, instead of a boycott, Russia would be willing to keep selling at a 25% discount (as they already do in selling to China and India).³⁵⁹

So, what is the difference? Either way, Russia loses this 25%. The question is who gets it. With the tariff, it would go to the taxing countries (for example, the U.S. and members of the E.U.). With the embargo, it goes to buyers in China, India, and other countries that keep buying discounted Russian crude.

In December of 2022, the U.S. and its allies imposed another sanction: a cap on the price of Russian oil. Instead of a total ban on insuring and transporting Russian oil—a policy that was about to go into effect, and might have triggered a supply shock—the U.S. and its allies made an exception for Russian oil, as long as it was selling below $60 per barrel.³⁶⁰ Notably, Russian crude was already trading below this level because of the discount, as discussed above.³⁶¹ This price cap presumably gave India and China even more leverage to demand discounts, while also avoiding a supply shock by allowing Russia to keep selling crude. But eventually, Russia found ways to avoid this cap, for instance, by cobbling together its own fleet to ship oil (and overcharging on shipping as a way to make up for the discount).³⁶²

Although Russia was forced to accept discounts in selling oil, it has more bargaining power in selling natural gas. Because it is much harder to reroute, as noted above, Europe cannot easily replace Russian natural gas, at least in the short term. This means a tariff on Russian natural gas is likely to hurt E.U. consumers, not Russia, at least in the near term.³⁶³ Indeed, even without a tariff, Russia has dramatically cut its gas shipments to Europe, as noted above, causing prices to spike and pressuring Europe to ration natural gas.³⁶⁴

6. Political Constraints

While Pigouvian taxes have obvious advantages, which have prompted most of our allies to adopt carbon taxes,³⁶⁵ the political track record in the U.S. is discouraging. Indeed, few U.S. politicians have been willing even to propose carbon taxes.³⁶⁶ Instead, the Obama and Biden Administrations usually favored subsidies for green technology—a choice I have criticized elsewhere.³⁶⁷

Since a carbon tax still seems to be a political dead letter, a national security tax presumably also is a hard sell, at least in ordinary circumstances. Yet perhaps the idea could gain traction in a time of crisis.

For example, what if President George W. Bush had proposed a tax on petroleum (or on petroleum imports) in response to the terror attacks on September 11? Like Nixon going to China, a former oil executive like President Bush had added credibility in making this case. To rally support, he could have argued that the tax would weaken regimes that fund terrorism. Given the groundswell of support for a vigorous response to 9/11, one wonders whether a promising opportunity was missed.

A more recent crisis—Russia’s invasion of Ukraine—could also have justified a different national security tax: a tariff on Russian oil, like the one discussed above. The President already had statutory authority to impose this tariff.³⁶⁸ But instead, the Biden Administration initially opted to ban imports. A few weeks later, Treasury Secretary Janet Yellen floated the idea of a tariff with U.S. allies,³⁶⁹ but the focus quickly shifted to the price cap, discussed above.³⁷⁰ Maybe the concern was that a tariff might raise prices—and thus hurt U.S. and E.U. consumers, instead of Russia—but as noted above, this seems unlikely for oil.³⁷¹

In any event, the glaring absence of these proposals—even in times of crisis—is not an encouraging sign. Since the political prospects for Pigouvian taxes in the U.S. seem to be dim, at least for now, let us turn to potential alternatives.

B. Moratorium on New Exploration and Infrastructure: A Flawed Strategy

In principle, one option is a moratorium on new fossil fuel development and infrastructure. We may be stuck using existing wells and pipelines for many years, the logic goes, but let’s at least stop adding more.

This idea has gained significant traction. The International Energy Agency supports it.³⁷² The Biden Administration showed some sympathy for this approach early on, and returned to it in pausing LNG export permits, as noted above.³⁷³ Seattle and Vancouver have banned new fossil fuel infrastructure and development,³⁷⁴ while other state and local governments have taken more limited steps.³⁷⁵ A number of advocacy groups have also urged a moratorium. Calling for a “nonproliferation treaty” for fossil fuels, Fossil Fuel Treaty.org claims endorsements from 101 Nobel Laureates, 2900 scientists, hospitals representing over 100,000 doctors, 230 legislators from 60 countries, Hawaii’s state legislature, London’s City Council, the Foreign Minister of Tuvalu, and the Vatican.³⁷⁶ “Keep it in the ground” has drawn support from a number of prominent celebrities.³⁷⁷ The same drumbeat has been sounded also by Oil Watch,³⁷⁸ Clean Water Action,³⁷⁹ and “LINGO,” which is short for “Leave it in the ground.” “What is clear today is that looking for more fossil fuels needs to stop,” LINGO urged.³⁸⁰ “Allowing it to continue is like allowing a child to buy more sweets, when we already know its teeth are rotten and it has diabetes.”³⁸¹

Nevertheless, a moratorium on new development and infrastructure is a bad idea. The risks to national security are obvious. The world would have to depend solely on existing production and, as emphasized above, too many wells are in countries that either have to be defended or are themselves threats.³⁸² The decades-long useful life of these wells, moreover, is much longer than the typical two-year life of a well in U.S. shale. If new U.S. wells could not be drilled, shale production would fall dramatically, and the global economy would become even more dependent on the wrong producers.

Instead, the better course for national security, as emphasized above, is to rely increasingly on new production in the U.S. and other secure and friendly countries, while cutting back purchases from rogue exporters (for example, Russia and Iran) and insecure sources (for example, in the Middle East). This would not be possible with a moratorium.

Ironically, a moratorium also would harm the environment, locking us into a status quo that wastes energy and uses the wrong fossil fuels. As emphasized above, we need new pipelines to help end flaring.³⁸³ Likewise, we should keep replacing coal with natural gas, an effort that requires more natural gas wells and infrastructure, including more LNG export terminals.³⁸⁴ In short, changing the mix of the fossil fuels we use would help the environment, but a moratorium would stand in the way.

C. A Better Approach: Incremental Substitutions Based on the Marginal Efficiency Cost of Energy

Instead of a moratorium, a better strategy is to rely on incremental change. To vet these reforms, this part offers a heuristic called “the marginal efficiency cost of energy.” In essence, the idea is to consider all the social costs of energy—environmental and national security costs, along with private costs—and to hunt for ways to replace costlier sources with more efficient ones.

To be clear, the goal here is not to grant new power to regulators, but to help them make wiser use of the power they already have. They should use this framework in all the choices they are called upon to make, including decisions about permits, regulations, rates, leases, moratoriums, and subsidies. Whenever regulators make these judgments, they should compare alternative sources of energy, account for all their social costs, and favor the most (socially) efficient ones.

1. Parallel Problems: Tax and Energy

In offering this approach, this Article applies an idea from public finance, developed by Joel Slemrod and Shlomo Yitzhaki, called “the marginal efficiency cost of funds.”³⁸⁵ Notably, the problem they addressed—how to determine which marginal changes in the tax system improve efficiency³⁸⁶—resembles the challenge here in four important ways.

First, in each case, the goal is to figure out how to provide an additional unit of output at the lowest possible cost. In one case, the output is tax revenue, while in the other it is energy.

Second, in each case, there are several options for producing this additional output. Another dollar of tax can be collected with an income tax, wealth tax, value added tax, estate tax, carbon tax, or some other tax. For each type of tax, a range of adjustments can be considered, including in rates, audits, penalties, and particular rules. Like tax revenue, additional energy also can be generated in many ways. The next kilowatt hour can come from Russian natural gas, German coal, U.S. oil, solar panels from China, wind turbines from the U.S, or a host of other sources.

How do we know which option is most efficient? This brings us to the third parallel between tax and energy: each option has its own unique mix of costs, which often involve tradeoffs. In tax, there are administrative costs (such as when staffers write rules and auditors check returns), compliance costs (when accountants prepare returns), substitution effects (when taxpayers respond by working fewer hours or saving less), evasion costs (when taxpayers cheat), and avoidance costs (when taxpayers pursue legal tax minimization strategies). Likewise, in energy, there are different types of environmental and national security externalities, as well as private costs.

Fourth, making a change can increase some costs, while reducing others. For example, if Congress starts requiring foreign banks to share information about U.S. depositors, this change in the tax system increases compliance costs (as banks prepare these reports) and administrative costs (as the IRS reviews them), but (hopefully) reduces evasion costs (as taxpayers stop hiding money in offshore banks). Likewise, switching from German coal to Russian natural gas reduces environmental harms, while increasing national security risks.

2. The Answer in Tax Policy: Marginal Efficiency Cost of Funds

When there are a host of options, and each offers a unique mix of different costs, what should policymakers do? For one thing, they need to account for all the relevant costs. “[I]f an essential part of the problem is overlooked,” Slemrod and Yitzhaki observed, “partial models may give incorrect answers.”³⁸⁷

Policymakers then should strive to reduce the sum of these various costs, so they can collect a specified amount of revenue as efficiently as possible. The key is to figure out which features of the tax system are more costly, and to replace them with more efficient alternatives. “In reality, the MECF [marginal efficiency cost of funds] of different instruments can differ,” Slemrod and Yitzhaki showed, “and it is feasible to raise revenue utilizing only those policy instruments with a relatively low MECF.”³⁸⁸

For example, what if the same amount of revenue can be raised either by eliminating a deduction or by raising the tax rate? Policymakers should pick the one with the lowest total social costs, including administrative costs, compliance costs, and tax-motivated changes in taxpayer behavior. “One can calculate the MECF for alternative ways of raising revenue,” Slemrod and Yitzhaki explained, “and other things being equal, the one with the lowest MECF is the one that should be recommended.”³⁸⁹

3. The Answer in Energy Policy: Marginal Efficiency Cost of Energy

The same approach should be used in energy policy. Like another dollar of revenue, another kilowatt hour can be generated in various ways. What is the social cost of each alternative?

Like in tax policy, it is essential to account for all the costs. Again, the established practice among some commentators and government agencies to omit national security costs is simply wrong.³⁹⁰ Hopefully, the invasion of Ukraine in 2022—and the ensuing scramble to replace Russian oil and gas on short notice—has discredited this misguided approach.

Instead, policymakers should consider the five different types of costs emphasized in this Article: first, private costs (X); second, climate externalities (C); third, pollution externalities (P); fourth, defense externalities (D); and, fifth, funding externalities (F). (In accounting for all these costs, this heuristic seeks to replicate the effect of a menu of Pigouvian taxes, which was recommended above.)³⁹¹

The cost of producing another kilowatt hour from a specific source—that is, this source’s “marginal efficiency cost of energy” (“MECE”)—must include all of these costs. For example, assume that two sources of energy are available, A and B. To decide which to favor, policymakers should calculate the MECF of each one:

MECE_A = [X_A + C_A+ P_A + D_A + F_A] / kWh

MECE_B = [X_B + C_B+ P_B + D_B + F_B] / kWh

After comparing these two options, policymakers should favor the one with the lowest total social cost. So, if MECE_A> MECE_B, policymakers should favor B.

For example, if A is U.S. coal and B is U.S. natural gas, policymakers should replace coal with gas. More generally, within the set of sources with comparable national security impacts (such as energy produced in the U.S.), policymakers should favor ones with environmental advantages (for example, natural gas instead of coal). This is analogous to a Pareto improvement: one goal is advanced, without setting the other back.³⁹²

The same analysis holds if A is Russian natural gas and B is U.S. natural gas. Within a set of energy sources with comparable environmental impacts (for example, natural gas), policymakers should favor ones with national security advantages (gas produced in the U.S., instead of in Russia). Again, policymakers can advance one goal, without losing ground on the other.

Policymakers also can trade off environmental and national security benefits. Since the goal is to minimize the sum of the relevant costs, it usually makes sense to accept a modest increase in some costs in exchange for major reductions in others.³⁹³

D. Regulatory Expertise and Stability

To make these judgments effectively, policymakers need the right information, expertise, and incentives—but this is a tall order. Just understanding the relevant technology and markets is hard enough. Yet energy policy is even harder because of its implications for the environment and national security. Therefore, a truly interdisciplinary effort is needed. Wise decisions require a keen understanding not only of the relevant science, markets, and law, but also of defense strategy and foreign policy.

While the U.S. government as a whole has expertise on this diverse range of issues, these experts are not all in the same agency. On the one hand, EPA (and their counterparts at the state level) understand environmental challenges and the laws governing them. On the other hand, the Pentagon, State Department, and various intelligence agencies know the nuances of defense and foreign policy. Meanwhile, other institutions master the details of trade and industrial policy (for example, Treasury, Commerce, and Department of Energy (“DOE”)), oil and gas drilling (state and local agencies), approval of oil and gas exports (DOE and Federal Energy Regulatory Commission (“FERC”)), fuel economy standards and vehicle emissions (the National Highway Traffic Safety Administration, EPA, state regulators), the regulation of nuclear power (Nuclear Regulatory Commission), disposal of nuclear materials (DOE), the regulation of electricity (FERC and state public utility commissions), and the regulation of pipelines (FERC, Department of Transportation, and state agencies).

There is room to wonder whether this fragmented structure serves us well enough. Are these various regulators accounting for all the relevant costs? Are they valuing them the same way? For example, when regulators develop U.S. fuel economy standards, they should account not just for pollution and emissions, but also for the national security costs of defending access to petroleum. Yet unfortunately—and, indeed, somewhat unfathomably—they have omitted this important national security cost, as noted above.³⁹⁴ National security costs are not easy to value, to be sure. But like with the social cost of carbon, the best available estimate should be developed and periodically updated. The Office of Information and Regulatory Affairs (or some other body of experts) should ensure that the same estimate is used throughout the government.

The problem with our fragmented system of energy regulation is not only one of information and expertise, but also of decision-making authority. There are different ways to pursue our various policy goals, but no single agency has broad enough jurisdiction to compare them all and pick the best one. For example, as this Article has emphasized, one way to counter Russian influence is with diplomacy, covert capabilities, and military force. Another is to “starve the beast” by weaning Europe off Russian energy, whether with the right fossil fuel infrastructure (for example, to deliver U.S. natural gas) or with the wider use of alternative energy and energy efficient technology. Yet these various alternatives each fall under the jurisdiction of a different cluster of government institutions. If some are more promising than others, does anyone actually have the authority—and, for that matter, the incentives—to compare all the relevant options and pick the best ones?

As if this were not hard enough, still another challenge is worth emphasizing. Energy policy goals cannot be achieved overnight. They require sustained effort and investment over the course of years, or even decades. This means that a measure of stability is needed in U.S. policy.

But unfortunately, there have been wild gyrations from one administration to the next. For example, nurturing renewable energy was a high priority under President Obama, a lower priority under President Trump, and a high priority again under President Biden. Likewise, tapping domestic oil and gas was a high priority under President Trump, but not under President Biden, at least initially, as noted above.³⁹⁵ Unfortunately, mixed signals and constant changes in priorities come at a cost; without certainty, the private sector is less likely to invest, experiment, and innovate.

To sum up, two things should be clear. First, whoever is responsible for energy policy needs to have a broad enough mandate to consider all the relevant issues. Second, there should be a measure of policy stability from one administration to the next, so long-term goals can be pursued effectively.

The good news is that there is an institution that checks both of these boxes and, of course, is charged with these responsibilities under the constitution: the U.S. Congress. Although individual committees have specialized mandates, Congress as a whole has more general jurisdiction, so members are supposed to see “the big picture.” Their decisions also have unique legitimacy, since they answer directly to the people.

Admittedly, there is a familiar challenge in relying on Congress: political deadlock often prevents it from acting. But in a way, this weakness is also a strength: once legislation is enacted, it is quite hard to repeal, so a measure of stability is assured even as the White House changes hands. As a result, congressional action on these issues is especially valuable.

To administer the relevant statutes, Congress should consider consolidating more responsibilities under a single energy regulator with broad jurisdiction. On the one hand, if the priority is political accountability, the model could be a cabinet-level department like Homeland Security. On the other hand, if the priority is independence and policy stability, the model could be an independent agency like the Federal Reserve. For instance, just as the Federal Reserve has a dual mandate to target both inflation and unemployment, this energy regulator could have a triple mandate to (1) assure that the supply of energy is cheap and reliable; (2) strengthen national security; and (3) protect the environment.

In any event, an analysis of the right institutional division of labor is beyond this Article’s scope. The goal here is to flag these issues, not to resolve them. After all, designing the right structure for crafting energy policy—one that accesses all the relevant information, creates the right incentives, and accords with constitutional norms—is a complex task. It warrants hundreds of pages of analysis, not just a few paragraphs.

E. Political Economy: A “Red, White, and Blue—and Green” Coalition

The same is true of the political dynamics driving energy policy—another issue that is beyond this Article’s scope, but still is critically important. After all, in reflecting on the recommendations here, one might easily say, “This is all fine in theory, but could any of this ever actually happen in our polarized political environment?”

While Congress did pass climate legislation in 2022, it used reconciliation instead of its regular process so the Vice President could cast the deciding vote in the Senate. Doesn’t this suggest that the prospects for more robust legislation are dim?

Not necessarily. For one thing, the legislation made it past the finish line because Joe Manchin, the deciding vote in the Senate at the time, insisted that the bill should include support for both clean energy and fossil fuels. This is not to say that the relevant provisions were the right ones. Rather, the point is that there could be a coalition—even a bipartisan one—for efforts to promote clean energy, while also encouraging environmentally responsible fossil fuel development, as this Article has urged.

How does this sort of effort, which pursues multiple goals at once, help to attract political support? A cynic would observe that it appeals to more interest groups, and thus may draw a measure of support from both environmental groups and fossil fuel producers.

But there is another political advantage as well: national security has broad political appeal, especially in times of crisis. Invoking this goal allows legislation to resonate not only with voters who are passionate about the environment, but also with voters who want to thwart terrorism, block the global ambitions of America’s adversaries, and support our troops. As emphasized above, these are not necessarily the same voters. As a result, energy policy that is grounded in both the environment and national security is likely to attract a broader coalition.

CONCLUSION

This Article has shown that energy policy must consider risks not only to the environment, but also to national security. It is important to account for the costs of securing access to energy (defense externalities) and of funding exporters that engage in harmful conduct (funding externalities), even though a number of commentators have argued over the years that these costs should not be considered.

This Article has offered guidance about how energy policy can protect both national security and the environment. The key goal for national security is to depend less on insecure or hostile suppliers. To do so, while also reducing emissions and pollution, policymakers need to pursue a two-part agenda: they should reduce the demand for fossil fuels, while also tapping new sources of supply in environmentally responsible ways. Pigouvian taxes would be an effective way to implement this agenda. Alternatively, policymakers could use the heuristic proposed in this Article, the marginal efficiency cost of energy, to replace high (social) cost energy sources with more efficient alternatives.

Generating the requisite political support will require compromise, as well as an alliance between supporters of the environment, on one hand, and national security, on the other. Ultimately, the policy goals, as well as the political coalition supporting them, need to be red, white, and blue—and also green.

96 S. Cal. L. Rev. 1157

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David M. Schizer*

Dean Emeritus & Harvey R. Miller Professor of Law and Economics, Columbia Law School. Helpful comments were received from Jason Bordoff, Mike Gerrard, Miryl Hilibrand, Erica Hur, Tom Merrill, Kira Patterson, Alex Raskolnikov, Joel Slemrod, Matt Waxman, Dan Yergin, and participants at the annual conference of the American Law and Economics Association, the N.Y. State Bar Association Tax Section’s Annual Meeting, as well as at workshops at Columbia Law School, Hebrew University, IAC-Edge, the Institute for Law and Strategy, the University of British Columbia, the World Law Congress, the Center on Capitalism and Society at Columbia University, and the Louis D. Brandeis Law Society.

Inflation, Market Failures, and Algorithms

February 2024February 2024Rory Van Loo*

Inflation is a problem of tremendous scale. But the leading response to inflation—raising interest rates—also poses economic risks. Raising interest rates rapidly may increase unemployment and heighten the chance of recession. This Article argues that there is a better way to think about anti-inflation policy. Rather than defaulting to interest rate hikes that harm markets, policymakers should prioritize laws that lower prices while improving markets. Most importantly, there is evidence that businesses have raised prices by colluding with one another, exploiting consumers’ behavioral and informational limits, and lobbying for protectionist laws that block competition. Artificial intelligence pricing algorithms and dark pattern online manipulation tools have further enhanced businesses’ ability to charge higher prices. Although those preexisting market failures did not cause the high levels of inflation that began in 2021, they create new inflation challenges and opportunities.

A key challenge is that in an era of automated pricing algorithms and market failures, direct solutions to inflation, like the end of the war in Ukraine, may not bring the full level of lowered prices that would be otherwise expected. Fortunately, market failures now also provide an inflation-fighting tool that would not otherwise exist—like a piggy bank of market improvements that the law can break open to offset some portion of inflation. Interest rate hikes would surely still be needed, perhaps to address the bulk of inflation, but avoiding even a small amount of economically harmful rate hikes is still worthwhile. Many of these market improvement opportunities lie in existing administrative agency authority, but considerably more could be done through new legislation, such as a wide-ranging Price Transparency Act. Moreover, these legal reforms are desirable independent of inflation because they would improve efficiency. Thus, policymakers should resist the urge to rely solely on interest rate hikes that destroy wealth and should instead simultaneously pursue legal rules that promote prosperity. Doing so could even transform a grave crisis into a tremendous economic opportunity.

INTRODUCTION

The dominant narrative surrounding inflation is that we must pick our economic poison: high inflation or high interest rates. Doing nothing and allowing high inflation to continue can cause economic volatility and leave people poorer if their wages fail to keep up.¹ Unfortunately, the leading policy response currently being deployed—increasing interest rates—also tends to be economically harmful, even if less harmful than inflation.² The aim of interest rate hikes is to encourage less spending, which brings down prices. However, lower spending levels also slow down the economy and increase the chance of a recession.³ Rising interest rates thus risk increasing poverty, eliminating jobs, and making households of all income levels worse off.⁴

What if this choice between two poisons is framed incorrectly? This Article argues that lawmakers and scholars have paid insufficient attention to a more attractive policy tool for helping to reduce inflation: using legal authority to correct market failures. Three categories of market failures are particularly worthy of greater consideration. First, inflation policy conversations proceed without considering the research, especially related to behavioral economics, that suggests that even prior to the recent rise in inflation businesses deployed numerous strategies to cause customers to pay higher prices on everything from mortgages to paper towels.⁵ Price transparency laws can help consumers find the best deals and thereby counteract those price increases.⁶ Second, another overlooked way to fix market failures would be to remove excess licensing laws, which raise consumer prices by requiring everyone from hairstylists to casket sellers to undergo training and pass an exam before offering their services.⁷ Finally, scholars and policymakers have paid some attention to antitrust as an inflation-fighting tool, but most have dismissed that possibility without analyzing the institutional nuances of different types of antitrust intervention and how they might fit into a broader anti-inflation toolkit.⁸ Because legal reforms in each of these areas—price transparency, government licensing, and antitrust—move markets toward what economic theory refers to as their “perfect” equilibrium,⁹ they will be referred to below as “market improvement laws.”

Importantly, effective market improvement laws are desirable even in normal times. They would overall increase efficiency, promote economic growth, raise employment, and make a dent in economic inequality.¹⁰ Consequently, this Article concludes that policymakers should prioritize addressing whatever portion of inflation is possible through market improvement laws and other laws that are overall more economically beneficial.¹¹ Whether that amounts to reducing one point of inflation through market improvements or ten points, and even if interest rates still need to be used in addition to market improvement laws, the result would be some quantity less of interest rate increases that have heavy economic costs.

Despite the economic appeal of market improvement laws, scholars and lawmakers have almost completely ignored them in fighting inflation. The market improvement reforms that this Article concludes are most immediately promising—price transparency laws—are not even part of those debates. Although antitrust laws had their legislative moment in the spotlight in the 1970s,¹² scholars dismissed the idea that they could be used to reduce inflation based on many arguments that are not valid today, if they ever were.¹³ These various objections are considered in greater depth below, but one common argument is that market failures did not cause inflation and thus it would be a mistake to look to market failures as a solution.¹⁴ However, that reasoning would mean that we should not rely on interest rates to address all of inflation either, since the war in Ukraine and supply-chain disruptions in China caused much of the current inflation. Yet interest rates are used without asking whether they are addressing the direct causes of inflation. Despite the limits to such objections, similar arguments are being repeated today to dismiss the idea of using antitrust.¹⁵ The real question should instead be what will work to address inflation.

If win-win market improvement laws exist, why would so many observers overlook and even dismiss their importance without engaging in a more nuanced legal institutional analysis? Although politicization clouds the debate, conceptual barriers also impede a comprehensive analysis. As a threshold matter, the scholarly inattention to market improvement laws partly reflects intellectual silos. Economists, like legal scholars, are not generalists. They focus on either macroeconomics or microeconomics, and within those broad areas have further specializations. Inflation lies in the domain of macroeconomics. Indeed, the leading alternatives to interest rates that lawmakers have pursued are macroeconomic tools such as taxes and federal spending, as demonstrated by the Inflation Reduction Act of 2022.¹⁶ Yet consumer law, antitrust, and other market improvement laws are the domain of microeconomics.¹⁷ Further complicating matters, most legal scholars engaging in economic analysis focus on microeconomics.¹⁸ Although areas such as financial regulation involve macroeconomic considerations, the broader inattention to macroeconomics has prompted the observation that “[l]aw and economics should be called law and microeconomics.”¹⁹ Consequently, most of the scholars best situated to design microeconomic market improvement laws rarely pay attention to macroeconomic issues like inflation.²⁰

These conceptual silos may help explain why the macroeconomic inflation toolkit has not fully incorporated recent microeconomic evidence about market failures. Inflation has not been a major problem in the U.S. since the early 1980s.²¹ Whereas in 1980 the average markup on goods sold in the United States was 21% above cost, by 2016 that figure had reached 61%.²² This data alone suggest that there could be a far greater magnitude of opportunity for the law to improve markets than there was in 1980.²³

Moreover, since 1980, firms have greatly enhanced their capabilities to deploy behavioral economics insights and algorithmic pricing to push consumers into paying higher prices, including through online interfaces designed to confuse shoppers, known as “dark patterns.”²⁴ The portion of U.S. employees who need a license to legally work grew from 5% in the 1950s to almost 30% by 2013, thereby raising the average prices people pay by about an estimated 15% on everything from cosmetology to funeral services.²⁵ And over the last two decades, the average market concentration level increased 90%, meaning that a smaller number of companies now hold greater market share throughout the economy.²⁶ Although the consequences are disputed, several leading studies have found growing market power over time.²⁷

Thus, interest rates became the default anti-inflation tool in a prior world with fewer market failures and when automated profit-maximizing algorithms did not drive market prices. In 1980, when markups were only 21% above costs, there may not have been much room to push prices lower while addressing market failures, especially because some markup is needed above costs for a business to survive.²⁸ Whatever the merits of scholars’ dismissal of antitrust as a tool for combatting inflation in the 1970s and 1980s, the last time the issue received significant attention, that issue should be reexamined in light of major subsequent market developments.²⁹

Although the question of magnitude of impact is difficult to determine, as a threshold matter it is worth observing that markup increases from 21% to 61% are not insignificant next to the concerns about inflation of about 8% or 9% annually.³⁰ Yet instead of starting with anti-inflation tools that increase prosperity, lawmakers have allowed the country to rely mostly on interest rate increases that lower prosperity for all, as they did in the 1970s and 1980s. Legal scholars have also not turned their attention to the connection between market failures and inflation in any sustained manner.³¹ In short, there is an absence of sustained effort to update the anti-inflation policy paradigm to the modern algorithmic markup economy.

To reach the conclusion that microeconomic market improvement laws deserve greater attention in a macroeconomic inflation policy toolkit, this Article synthesizes the theory and evidence. It shows why many of the main reservations about market improvement laws can be addressed with a more comprehensive legal and economic institutional analysis. It also offers a framework for analyzing inflation laws that shows why many of the dismissals of market improvement laws rest on an incomplete economic picture.

Although a comprehensive economic cost-benefit analysis anti-inflation framework has many components, one of the most essential is giving greater weight to the side effects that inflation policies have on the economy beyond inflation. Once the side effects are not assumed to be inevitably negative, and are given greater weight, it becomes difficult to justify ignoring market improvement laws that advance both total wealth and distributional goals. Regardless of the magnitude of their impact on inflation, such laws should be the highest priority largely because they benefit society regardless of their impact on inflation. Whatever portion of interest rate increases they prevent can save the economy from damage that does not need to happen.

Another key factor in an anti-inflation framework that has received insufficiently nuanced analysis is the ease with which they can be implemented. Once that administrability factor is analyzed more fully, for example, it becomes clear that the market improvement laws that have defined past debates—especially antitrust laws that would address oligopoly industries—suffer from major limitations that other market improvement laws do not. For instance, the most significant antitrust remedy for reducing monopoly power—breaking up large companies—typically takes years to implement and may cost the broken-up firm billions of dollars to complete.³² Thus, lower prices from breakups may not materialize for years.

In contrast, price transparency laws are better situated to create a fast reduction in prices. For example, consider a 2015 Israeli regulation that required stores to make their price information available in machine-readable form.³³ That law was aimed at allowing third-party price comparison tools to help consumers locate the best prices.³⁴ Within eight months of that regulation’s enactment, prices had begun to decline, and within two years of the regulation’s enactment prices decreased by an average of 4% to 5%.³⁵ Price transparency laws may even overall act on prices faster than an increase in interest rates.³⁶

The point here is not that antitrust law should be ignored as an anti-inflation tool. Indeed, some areas of antitrust law could have a quicker effect on pricing, such as investigations into price fixing.³⁷ It is also possible that price transparency laws with faster price effects might be accompanied by antitrust remedies whose impact will take a few years, thereby offering a more enduring market improvement package for lowering inflation.

Instead, the point is that a more in-depth consideration of administrability shows how structural antitrust interventions may be less immediately helpful than other market improvement laws. Additionally, since these difficult-to-administer antitrust laws have dominated consideration of market improvement laws, the focus on them negatively skews perceptions of the extent to which market improvement laws should be considered in fighting inflation.³⁸

These dynamics speak to a final institutional implication. Limited governmental resources and a dysfunctional legislative process mean that Congress and other governmental leaders do not implement every important policy that should exist on the economic merits. Thus, simply because a policy would improve efficiency does not mean it will be enacted as law. Yet the threat of a recession is a well-known way to break political impasse.³⁹ Consequently, inflation could provide the means to enact market improvement laws that will leave the economy better off than when inflation began its precipitous rise. Responding to inflation with an emphasis on market improvement laws therefore channels the wisdom that policymakers should “[n]ever let a crisis go to waste.”⁴⁰

The Article proceeds as follows. Part I explains the theory behind why market improvement laws can help to combat inflation. In so doing, it addresses common objections to looking beyond interest rates. Part II reviews the evidence that market failures drive up prices, and that legal reforms can bring them back down. Part III offers several concrete suggestions for reform, ranging from a universal price transparency statute to inflation impact statements. It also sketches a framework for choosing among inflation policies. That framework shows the potential to build an anti-inflation toolkit rooted not in weakening the economy, but in strengthening it.

I. THE THEORY: WHY IMPROVED MARKETS CAN LOWER INFLATION

Economic theory alone cannot determine the best anti-inflation policy. But theory is important, particularly because empirical evidence is usually insufficient to dispositively prove that any one policy choice is optimal.⁴¹ Several theoretical considerations provide essential foundational support for the possibility of using market improvement laws to counter inflation. The theory behind relying on interest rates tends to fail to recognize that (1) unlike interest rates, some alternative anti-inflation policies cause no economic harm or even have economic benefits; (2) market improvement laws can offset inflation from even unrelated causes, such as wars; (3) market improvement laws can complement direct inflation efforts; and (4) efficiency considerations alone have not produced all beneficial market laws. Each of these oversights will be taken in turn, in the process laying the theoretical foundations for a more comprehensive anti-inflation framework.

A. Avoiding Economic Harm Should Be a High Priority

All else equal, policymakers should seek to lower inflation through interventions that avoid as much collateral economic damage as possible, and ideally even through interventions that help the economy. Arguably price controls are disfavored for this reason. When inflation skyrocketed in the 1970s, an event sometimes called the “Great Inflation,” a period of price controls followed.⁴² Most aggressively, in 1971, President Nixon issued an executive order freezing wages, rents, and prices for ninety days.⁴³ That shock briefly decreased inflation, but by the mid-1970s those freezes had contributed to a recession.⁴⁴ Largely because it is believed that they “eventually lead to the destruction of the free-enterprise system,”⁴⁵ price controls are a heavily disfavored tool for fighting inflation.⁴⁶ Thus, minimizing economic harm is a priority in choosing how to respond to inflation.

Compared with price controls, interest rates are seen as a more appealing tool because they leave intact markets’ ability to set prices based on supply and (reduced) demand rather than a government-commanded price. However, interest rate increases still distort markets by causing a retraction in spending.⁴⁷ That raises the question of whether preferable responses to inflation exist that would have less dire consequences.

Policymakers considered such an option in the 1970s, when lawmakers passed legislation strengthening antitrust and the Federal Trade Commission (“FTC”) exercised its authority more aggressively.⁴⁸ It is difficult to know what effect these reforms had on inflation.⁴⁹ Nonetheless, one point is worth recognizing, because it speaks to the possibility of using market improvement laws today. Unlike with price controls and interest rate increases, there is no strong evidence that the increase in antitrust enforcement in the 1970s harmed the economy. Instead, there are good reasons, based in theory and evidence, to think that effective antitrust laws, like other market improvement laws, strengthen the economy.⁵⁰

Faced with a choice between two tools for lowering inflation, one that is viewed as harming the economy (interest rates) and one that is viewed as strengthening the economy (market improvement laws), it would seem straightforward to choose the latter. Since market improvement laws are preferable to interest rates on the issue of their economic effects outside of inflation, the main sources of resistance to them must lie in questions about whether and how they affect inflation.

B. Market Interventions Help Even If One-Off and Unrelated to Inflation’s Causes

One of the main sources of resistance to using antitrust to combat inflation, both in the 1970s and more recently, is that shortcomings in competition did not create inflation.⁵¹ As a result, even in the best-case scenario, antitrust solutions leave in place the structural causes of inflation.⁵² That means that antitrust, and by extension market improvement laws more broadly, are seen as one-off while inflation occurs on an ongoing basis.

For instance, when gas or grain supplies shrink due to the Russia-Ukraine war, there is a real increase in cost because the supply has been lowered, and price is the product of supply and demand. Additionally, a potential structural demand-side contributor is an increase in the supply of money, such as through a government stimulus package, which can increase demand because people have a greater capacity to spend.⁵³ Critics have thus argued that antitrust is an inadequate response to inflation because it can only be used once and does not address the inflation’s ongoing structural causes.⁵⁴

Before responding to that concern, it is helpful to address a threshold mathematical issue that can lead to confusion. Inflation is calculated by averaging the prices paid on a large list of goods and services, ranging from medical expenses to paper towels. Those weighted average prices are then compared to the prices paid in a previous time period, to obtain an average price increase. Inflation is thus the rate of change in prices as measured by the percentage increase between two periods. Consequently, anything that causes the prices to change between those two periods averaged—whether market anxiety, a war abroad, supply-chain disruptions, greater competition, or something else—can contribute to raising or lowering the inputs to the number reported out as inflation. And because inflation is based on weighted average prices across markets, that average can be brought up or down by even industry-specific market improvements whose effects would then feed into the average price.⁵⁵ Of course, there may be differences in the magnitudes or timing of the price reductions and the degree to which the reductions are sustained, as discussed in Part III. But as a purely mathematical matter, market improvement laws can offset price increases resulting from structural causes of inflation between those two measured points in time.

Nonetheless, the core proposition in the critiques that market failures did not necessarily cause most of inflation is correct. It is also therefore true that improving markets may leave in place contributors such as high demand and supply chain breakdowns.⁵⁶ However, interest rate changes do not necessarily directly address the bulk of inflation’s structural causes either, such as supply chain shortcomings and the Ukraine war in the current inflationary period.⁵⁷ A requirement that only the causes of inflation can be deployed in response to inflation would mean that we cannot use interest rates to address inflation caused by these supply-side developments, such as the war in Ukraine. Yet clearly that is not how either policymakers or scholars approach inflation, and thus we should not dismiss market improvement laws simply because market failures are not the direct cause of all inflation that exists.

Perhaps the most generous way to view this critique is as speaking to the perceived comprehensiveness of the solution. After the desired market improvements are achieved, prices could not be reduced further because businesses cannot sell below cost for sustained periods. Yet because market failures did not cause the inflation, some level of inflation may still remain after market improvement interventions. Accordingly, once market improvement laws reach their limits in addressing market failures, they also reach a ceiling for lowering inflation. In contrast, at least in theory, interest rates can be increased indefinitely over a span of many years.⁵⁸

This concern ultimately speaks to the issues of magnitude and timing. A threshold observation is that because most conversations focus on antitrust, the magnitude of price reduction assumed to be possible is less than it would be if the array of legal reforms considered also included consumer laws and reduced occupational licensing. If each of these areas can lower prices by two percentage points each year, together they can offset a more meaningful magnitude of inflation each year, six percentage points each year, than any one of them could individually. Indeed, a series of one-time market improvement reforms could lower inflation for several years, in ways that are in some ways interchangeable with a series of interest rate hikes over several years—interchangeable at least in the sense of the impact on the announced inflation figures.⁵⁹ For now, the point is theoretical, but Part II will explore the empirical evidence of the potential magnitude of price reduction in each of these areas.

Pushing this point further, in theory, market improvement laws could even in some inflationary contexts serve as the sole anti-inflationary policy tool. (To be clear, in reality, given questions of magnitude and administrability discussed in greater depth below, market improvement laws are more likely to be partial supplements for interest rate hikes in high-inflation periods).⁶⁰ By way of illustration, imagine a simplified island-nation that sells two products, bananas and coconut water, each accounting for half of households’ expenditures. The bananas are sold by a cartel for $10 per bunch, even though without price fixing the price would be $8 per bunch. Coconut water is sold at a competitive price of $10 per gallon. Now imagine a storm decimates the island’s coconut trees, such that the price per gallon of coconut water increases to $12. The supply-side shock would cause inflation of 10%, from an average price paid of $20 to an average price paid of $22. If authorities responded by prosecuting the banana cartel, thereby pushing the price of bananas down to $8 per bunch, the total price level would be driven back down to $20 ($8 for bananas and $12 for coconuts), thus containing inflation. This containment of inflation could last long enough for the island’s coconut producers to plant enough trees, or find alternative sources of coconuts on nearby islands, at which point the price of a gallon of coconut water could move back towards its pre-inflationary level. Under these assumptions, the antitrust intervention would have served as the sole inflation-reducing intervention needed.⁶¹ Moreover, the result would be a more competitive economy post-inflation due to the removal of the cartel.

Of course, the economic implications of such a policy become much more complex with a dynamic rather than a static model, and in a real economy. Still, this hypothetical illustrates how a market improvement policy can be used as the primary tool for responding to inflation despite not at all addressing the causes of inflation. Applying this reasoning to the current macroeconomic context, the war in Ukraine, labor shortages, and the supply-chain constraints from lockdowns in China have contributed significantly to inflation but may require several years to resolve. If market-oriented price reductions offset the price effects of some of those temporary structural contributors to inflation, they could in theory reduce inflation until those direct structural causes can be resolved. At a minimum, assuming market improvement reforms could not address all of the excess inflation, they could require some amount less of interest rate increases and thereby lessen the resulting collateral economic risks and costs of addressing inflation.

A related issue is that policy responses to inflation involve a prediction about the likely persistence of the shock to prices. One-time, short-term shocks that increase prices would ultimately provoke different policy responses, if any at all, compared with shocks expected to persist. For policy shocks that last for long periods, say decades, one-off market interventions may in the larger picture prove to be of more limited help, such as only delaying the inevitably large-scale interest rate increases. In such a scenario, market improvements could still be economically beneficial, but a less significant part of the overall response to inflation.

Two points provide valuable perspective here. First, when central banks make decisions about interest rates, they will often need to make highly uncertain predictions about the potential persistence of price shocks. It would be almost impossible to reliably predict, for instance, how long the war in Ukraine would depress energy and food supplies or how long supply chains would be disrupted by China’s COVID policies. In the face of such uncertainty about persistence, arguably the case is even stronger for starting with one-off investments in market improvements as the default initial response to signs of inflation. Then if it turns out that inflation is more enduring, policymakers would always have more aggressive interest rates as a backup or to make up the difference. So faced with uncertainty about the persistence of inflation, and about whether we’re dealing with a short-term shock, the smarter choice may still be to double down on market improvement policies that are beneficial either way, rather than potentially harming markets unnecessarily.

Second, many instances of inflation would have at least some direct structural solutions that will eventually arrive and that are preferable to interest rate increases—such as the end of a war, investment in alternative energy sources, and supply chain improvements. Additionally, interest rate increases are typically implemented gradually over many years. Simply classifying the shock as either a permanent change in the rate or a one-off event seems too binary of an analysis, whereas most causes and solutions will lie on a spectrum of duration depending on how long various structural solutions will take to arrive. Again, by offsetting some portion of otherwise needed interest rate increases in the first five to ten years of inflation, market improvement laws could, in theory, still end up preventing some level of interest rate increases in years eight to ten of an inflationary period, by buying time for slower structural causes to arrive.

Furthermore, this gap-filling effect can offer a different type of long-term benefit because inflation can result from purely psychological factors rather than any structural cause.⁶² In other words, even if there is no shortage of supply or increase in demand, prices can go up (or stay up) if people expect inflation.⁶³ For instance, if there are widespread rumors that inflation will happen, many consumers might decide to quickly purchase large amounts of goods at the current price. The sudden spike in demand can drive up prices, further stoking fears of inflation.⁶⁴ Consequently, market improvement laws could prevent—or lessen the intensity of—longer lasting, self-fulfilling inflation by keeping the expectation of inflation from ever taking root in consumers’ minds, even if the direct impact on prices from market improvement laws only lasts a few years as a gap-filler until structural causes of inflation can be resolved.

In short, it would be a mistake to require that inflationary solutions directly address the causes of inflation or have the potential to address the entirety of inflation in order to be considered. Nor should market improvement laws be dismissed simply because they lead to one-off price changes while inflation is a rate of change. The more important question is whether market improvement laws can help meaningfully ameliorate inflation. At a minimum, when the direct causes of inflation have potential direct solutions that will potentially arrive within a few years, market improvement laws can still offset some of that inflation because they can lower prices with comparable if not greater speed than interest rate increases.⁶⁵

C. Market Failures and Algorithmic Pricing Are Relevant to Direct Solutions

There is a certain irony in criticism that market improvement laws do not address the structural causes of inflation. Those critiques have overlooked a key feature of market improvement laws. Such laws have a potentially important supportive role to help address inflation’s direct causes. That supportive role may be especially important in an era of algorithmic pricing and widespread market failures.

To have their full impact, direct solutions may depend on market improvement laws. Assume that structural shocks—such as China’s COVID-19 shutdown, which deprived factories of workers—increase prices by ten percentage points, but only for a year or two. If consumers are not discerning enough to choose sellers who quickly adjust prices downward after that shock has passed, then what could have been a temporary price hike can become a sustained price increase because consumers, on autopilot, are continuing to purchase as before or expecting prices to continue rising. Temporarily high inflation may thus condition consumers to expect ongoing high levels of inflation.

Price transparency laws are perhaps uniquely situated among legal reforms to eliminate this potential psychological contribution to inflation. Antitrust alone cannot fix this problem, because consumers need to be able to understand and locate low prices to provide competing businesses with sufficient incentives to offer them.⁶⁶ If consumers can quickly understand that the structural increases in costs amount to only four percentage points, a ten percent price increase should arouse their suspicions and drive them to look for a better deal. Consumers would thereby reward sellers offering lower prices by seeking them out rather than assuming such sellers do not exist.⁶⁷ Increasing consumers’ accuracy in understanding prices may therefore be necessary for direct solutions to lessen the level of inflation fully.

Market improvement laws may also directly contribute to addressing inflation before structural solutions arrive. Structural and psychological factors can combine to contribute to high levels of inflation.⁶⁸ For instance, if there are structural reasons for an additional price increase of two or three percentage points, people may expect the impact to be even higher, such as eight percentage points. Moreover, the rapid changes in price mean that prices learned in past shopping trips are no longer relevant. Consequently, assessing current prices becomes more cognitively difficult. The research on behavioral economics suggests that the greater the cognitive load, the easier it is for sellers to charge anticompetitively higher prices.⁶⁹ As a result, consumers may have more difficulty determining the true competitive price during inflationary times.⁷⁰

Businesses would be expected to exploit these consumer expectations and cognitive limits. Unfortunately, that issue has become politicized, as if the whole problem of inflation can be reframed as “greedflation.”⁷¹ But once this conversation moves away from such framing, the idea that businesses would charge the highest prices possible simply restates economic theory about how markets work.⁷² Furthermore, managers arguably have a fiduciary duty to charge the highest prices legally possible in order to maximize shareholder value or would see themselves as having such a duty.⁷³

Unlike in prior periods of high U.S. inflation, today many managers need not ever even consciously decide to capitalize on inflation or be aware that such behavior is occurring. Many prices are set by automated algorithms instructed to maximize profits.⁷⁴ An effective algorithm following those instructions would be expected to exploit whatever confusion arises from inflation, whether the manager knew that was happening or not. It is possible that whereas managers observing lowered costs as inflation subsides would lower prices assuming that consumers would expect such adjustments, algorithms would only do so once the consumers show, through market behavior, that they expect lower prices. Indeed, in theory, the algorithm could even learn from an inflationary period that prices could be more rapidly raised and encourage continued price increases. In other words, the algorithm would be trained to encourage inflation. Inflation would thereby become an algorithmically reinforced phenomenon. Although the research on automated pricing algorithms is still nascent, there is evidence that these algorithms increase prices.⁷⁵

At a minimum, policymakers would ideally consider the possible effects of algorithms on inflation. An anti-inflation toolkit that fails to consider the possible changes to inflation introduced by algorithmic pricing could produce more muted price reductions than in prior eras. That would necessitate even greater interest rate cuts to achieve the same level of price reduction as in the past, meaning more economic harm would be caused and an increased risk of recession. It follows that market improvement laws that improve consumers’ ability to advance their interests in the face of algorithmic pricing could prove to be a valuable tool in either avoiding algorithmically enhanced inflation or in getting more of an anti-inflation effect from addressing the original causes of inflation.⁷⁶ Without such laws, there is a risk that perceptions of inflation—and businesses’ inevitable efforts to exploit those perceptions—will cause inflation to endure long after the original structural contributors have ended.

D. Lawmakers Have Not Necessarily Produced Efficient Laws

Skepticism about using market improvement laws against inflation sometimes implicitly assumes that little or nothing more can be done to improve markets.⁷⁷ That assumption might seem sensible at first glance because an independent basis exists for market improvement laws: efficiency. Efficiency has long been one of the most powerful influences in designing the law.⁷⁸ Since market improvement laws already have such a persuasive intellectual cornerstone pushing them forward, it is understandable why observers might posit that the extra motivation added by inflation would be inconsequential. After all, if there are legal rules that would move markets toward perfection, they would improve efficiency and thus they would be expected to already exist.

If this assumption were true, lawmakers would have already passed up-to-date price transparency and antitrust laws and would have previously removed any excess governmental licensing. State and federal lawmakers would also have refrained from succumbing to interest groups’ lobbying for laws that provide protections for various products and occupations. Under this assumption, the Department of Justice (“DOJ”) and FTC would also already have all the authority, resources, expertise, and motivation necessary to prevent price increases resulting from market failures. In such a world, there would be no additional room for legal reforms to push prices down and meaningfully address inflation.

However, that assumption is suspect. There is a rich literature arguing that laws are not passed as a result of a rational process that reflects society’s best interests.⁷⁹ Laws are instead the product of a messy set of interest group advocacy and political considerations that often reflect powerful opposition to regulation.⁸⁰ More specifically, scholars have observed these political economy dysfunctions in each of the three areas of market improvement laws. Consumers have had limited success in bringing about favorable price transparency and licensing laws because they are so dispersed,⁸¹ whereas concentrated industry lobbyists exert great influence on legislatures.⁸² And a consensus has emerged that the antitrust framework has fallen far short, even if there is disagreement about the best ways to improve that framework.⁸³ Stated otherwise, the skeptics have inadequately considered how institutional dysfunctions make it unlikely that the law has done everything it can to prevent widespread market failures that cause high prices.

Ultimately, each of the theoretical points made in this Part hinges on an empirical claim about whether most of what can be done to address market failures has already been done. Thus, to have a full sense of the potential for market improvement laws to meaningfully reduce inflation, the next Part turns to the empirical evidence.

II. THE EVIDENCE: MARKET IMPROVEMENT LAWS CAN LOWER INFLATION

Part I showed that, in theory, inflation can be addressed by improving consumer markets, rather than by holding them back. That theory rests on two key empirical assumptions: (1) market failures significantly raise consumer prices, and (2) legal reforms can address those market failures. This Part summarizes the evidence relevant to both assumptions, divided into the three areas of market improvement laws: price transparency, licensing, and antitrust.

Before turning to that discussion, a caveat is in order. A well-known limitation of macroeconomics is the ability to predict magnitude, as demonstrated by the difficulty in estimating what the effects of any given interest rate hike will have on inflation.⁸⁴ Microeconomics offers greater precision by studying a particular market, but a similar magnitude challenge plagues the study of aggregate market failures across the economy, in part because information about costs, prices, and preferences are often unavailable.⁸⁵ Thus, market improvement laws face predictive difficulties, but since other anti-inflation tools face related limits, that should not be grounds for dismissing market improvement laws. It bears emphasis that this Article’s core arguments do not depend on establishing any particular magnitude of market failure. They instead depend on concluding that there are some significant price-increasing market failures that the law can address.

A. Market Failures Significantly Raise Consumer Prices

Despite empirical limits, a growing body of empirical research has begun to quantify the higher prices paid due to inadequate price transparency, occupational licensing, and antitrust laws.⁸⁶ The following summary aims to provide a sense of the potential magnitudes rather than to establish any particular level of price increases.

1. Price Transparency Market Failures

Businesses systematically charge consumers higher prices by making it harder to compare options. The list of tactics that businesses use for this purpose is too vast to summarize. In one common strategy, known as drip pricing, businesses shift costs to later phases in the purchase process.⁸⁷ Airlines charge fees for baggage, printer manufacturers charge high prices for ink refills, and Airbnb adds cleaning and convenience fees that significantly increase the final price beyond what originally appeared in the search results.⁸⁸ Researchers have found that these practices weaken consumers’ ability to compare full prices—even if consumers know that those costs will be added later.⁸⁹ As another example, companies offer teaser rates for online subscriptions or credit cards, knowing that many people will not follow through with unsubscribing or changing credit cards before the prices increase.⁹⁰

Behavioral surcharges are not limited to complex purchases. Even in seemingly straightforward retail settings, sellers like Walmart and Target implement countless strategies to profit systematically from “market manipulation.”⁹¹ For instance, stores put higher-price items where most consumers’ eyes naturally gravitate on the shelves and misleadingly frame prices as being “discounted” from some original higher price.⁹² The ability to influence people’s choices has only grown in the digital era. Sellers scientifically study details including facial patterns of people in advertisements and the ordering of items on the screen.⁹³ I have previously argued that such practices, both across retail and the broader economy, have macroeconomic implications for issues such as the distribution of wealth.⁹⁴ These strategies, and countless more like them, may sound trivial, but for the purposes of anti-inflation, it is important to view them through an empirical lens.

Economists empirically studying the resulting price effects have consistently found that these strategies cause consumers to pay significantly more. For instance, excessively complex cell phone plans were associated with 8% higher consumer prices.⁹⁵ Hiding mandatory fees on StubHub until later in the purchase process increased ticket payments by 21%.⁹⁶ Even in straightforward online settings, where price comparisons are a click away, economists have linked obfuscation practices such as lengthy product descriptions and add-on shipping costs to price increases of possibly around 6%.⁹⁷

In short, the empirical evidence indicates that a lack of pricing transparency significantly increases prices by exploiting informational and behavioral market failures—even for products of identical quality.⁹⁸ Moreover, many of these studies only look at one pricing strategy. Therefore, the full effects of multiple practices could produce even higher magnitudes of increased prices.⁹⁹ Inflation policies designed in an era before these practices became widespread do not reflect a comprehensive understanding of consumer prices today.¹⁰⁰

2. Licensing Law Market Failures

Legislatures regularly enact laws that insulate existing market participants from competition and consequently produce higher prices in consumer transactions. For example, tariffs increase the prices of foreign sellers, thereby enabling domestic sellers to charge higher prices.¹⁰¹ Less widely recognized is that state license laws protect about 25% of occupations.¹⁰² These laws require massage therapists, hair braiders, fortune tellers, and many others to satisfy various conditions to work. They typically mandate that the aspiring worker complete a year of expensive training, pay hundreds of dollars for a license, and pass a licensure exam that also comes with a fee.¹⁰³ Some licensing provides valuable quality control, but the restrictions often go beyond what is needed for consumer protection—such as Louisiana and Tennessee statutes requiring that caskets only be sold by licensed sellers.¹⁰⁴ Economists have found, for instance, that some licensing restrictions raised dental service prices by over 10% without improving oral health.¹⁰⁵ Evidence also suggests that legal reforms giving nurse practitioners greater licensing independence reduced prices by as much as 16% without diminishing the “quality and safety of health services.”¹⁰⁶ Economists’ rough estimate of the aggregate impact of licensing restrictions is that they raise consumer prices by about 15% across much of the service economy.¹⁰⁷

Other restrictive laws also reach consumer goods. Laws in all fifty states limit the number of franchises that can sell any manufacturer’s car in a given territory, thereby providing auto dealers with local monopolies, preventing online sales of new vehicles, and making in-person price comparisons difficult.¹⁰⁸ A DOJ study, relying on estimates by Goldman Sachs, concluded these statutes raise prices by 8.6%.¹⁰⁹

A final related category is zoning laws, which often make obtaining a government building permit far more onerous. For example, economists have estimated that such zoning regulations cause a “regulatory tax” on single-family homes of over 50% of the total home value in the San Francisco Bay Area and over 20% in Boston.¹¹⁰ The price impact varies greatly by location, and not all areas have zoning laws. However, because housing has a strong impact on inflation, even a few percentage points would prove particularly meaningful for inflation.¹¹¹

3. Antitrust Market Failures

The empirical study of antitrust is, in key ways, less reliable than research in other areas of market improvement laws. Nonetheless, it provides reason to believe that antitrust could play a meaningful role in lowering prices. Economists have linked many mergers and high levels of industry concentration with lower consumer welfare and higher prices.¹¹² One study of fifty mergers, albeit not necessarily representative ones, found that most of them increased prices, typically by about 10%.¹¹³

Whereas that examination covered numerous industries, other research has focused on particular industries. For instance, since the mid-1990s alone, over one thousand hospital mergers have occurred.¹¹⁴ A large body of research demonstrates that hospital mergers have overall led to higher prices, but not necessarily improvements in health care quality.¹¹⁵ The most comprehensive of these studies, a longitudinal analysis of ninety-seven mergers between 1989 and 1996, found that hospital mergers led to price increases of 40%.¹¹⁶ Studies have found price increases following mergers in other areas as well, including banking,¹¹⁷ insurance,¹¹⁸ and food and beverage.¹¹⁹

Despite this evidence, estimating prices at specific points in time before and after individual mergers faces methodological limitations because other factors may contribute to the measured price differences.¹²⁰ It is also difficult to know what to make of the literature finding that most industries have become more concentrated and dominated by an ever-shrinking number of competitors over the past several decades.¹²¹ The presence of large businesses in a concentrated industry with high markups cannot, by itself, establish that the high markups are caused by the concentration of the industry.¹²² Increased productivity and quality—such as Apple’s advancements in smart phone quality—can contribute to higher markups in concentrated industries.¹²³ And some mergers and industry consolidation have been linked to lower prices.¹²⁴ Thus, the evidence about how industry consolidation has affected consumers is mixed, but it suggests that in at least some industries, such as health care, there are opportunities to promote more competitive prices by improving antitrust enforcement related to mergers and industry structure.

Another potential source of antitrust-related price inflation comes not from mergers or industry concentration but from price coordination among firms. One prominent example is the pharmaceutical industry. After their patents expire, drug companies such as Pfizer, Merck, and Johnson & Johnson often pay other companies to refrain from offering competing drugs. One estimate put the resulting annual price increase at 5% in the costs of pharmaceuticals.¹²⁵

Usually, however, price coordination occurs in a more hidden manner. Legal scholars have argued that unprosecuted price-fixing is widespread.¹²⁶ According to various studies, price-fixing has raised prices to U.S. consumers by 18% to 37% in markets ranging from baby food to cosmetics.¹²⁷ By one estimate, the total cost to consumers globally reaches over half a trillion dollars.¹²⁸

Price-fixing may be more of a problem in today’s economy because prices are increasingly set using algorithms. Businesses’ programmers typically instruct algorithms to find the profit-maximizing price, meaning that the “invisible hand” has become the “digitized hand.”¹²⁹ Intelligently maximizing profits inevitably amounts to finding ways to set prices above the competitive level.¹³⁰ Moreover, the potential magnitude of resulting price increases can be large, with one study showing gas prices increased by 9% to 28% after gas station owners switched from traditional to algorithmic pricing.¹³¹ It is thus plausible that algorithms have expanded what was already believed to be a high level of undetected price-fixing throughout the economy.¹³²

In sum, across price transparency, licensing laws, and antitrust, it would be difficult to estimate the precise total level of market failures causing higher prices across the economy. Many markets have not been studied, whether due to the lack of data available, the resource priorities of researchers, or other factors. Nonetheless, there is evidence of potentially widespread market failures causing higher prices. If so, laws effectively addressing those market failures could lead to significantly lower prices.

B. Market Improvement Laws Can Work

A causal relationship between market failures and high prices implies, but does not necessarily prove, that the law can address those high prices. Given limited governmental resources and reluctance to intervene in markets, it is important to consider the evidence about whether market improvement laws might work.

1. Price Transparency Laws Can Lower Prices

Many consumer laws lower prices. Yet unlike the attention paid to antitrust decades ago, the absence of scholarship considering consumer laws as a response to inflation suggests that this basic function of consumer laws is not broadly understood. One explanation for that inattention is that the most prominent consumer laws tend to be framed in ethical terms, such as whether a company’s practices were unfair or deceptive.¹³³

Part of the disconnect may also be that the few consumer laws that most explicitly target prices only apply in narrow circumstances. Most notably, price gouging laws prohibit sellers from exploiting crises to charge considerably more. For example, sellers risk prosecution if they dramatically increase the price of masks or other medical supplies upon the start of a pandemic.¹³⁴ Another visible area of consumer pricing laws prohibits “unconscionable” prices in areas such as pharmaceuticals and mortgages, which have been described as pricing practices significantly varying from industry standards.¹³⁵ Although relevant as part of a broader anti-inflation toolkit, price gouging and unconscionability do not immediately appear promising for having a large-scale impact on inflation because they are designed to address unusual instances of extreme prices, not routine and systemic price increases across the economy.¹³⁶

Instead, an area of consumer law offers more promise in addressing inflation despite the reality that it is less commonly understood to be about prices. What this Article refers to as price transparency laws is more commonly known as disclosures or nudges and seeks to contain the everyday pricing practices that companies deploy.

Price transparency proposals tend to raise scholarly concerns about the possibility of facilitating seller collusion, and some such mandates have been followed by increases in prices.¹³⁷ However, overall more informed consumer markets tend to lead to lower prices.¹³⁸ As the examples that follow show, how the mandates are designed is important in determining whether they are helpful.¹³⁹

In several field experiments, simply providing consumers with helpful information lowered the prices those consumers paid. In one experiment, researchers found that sending Medicare recipients a letter advising which of the available plans would be best saved recipients 5% in out-of-pocket expenses.¹⁴⁰ In another, disclosures at the point of sale for payday loans lowered borrowing costs by 11%.¹⁴¹

Other studies have found similar effects due to new laws requiring businesses to make prices more broadly available. For instance, consumers paid an estimated 20% less for gas following a law that required electronic billboards on the highways to show all nearby gas stations’ prices.¹⁴² Additionally, as mentioned above, another study concluded that an Israeli statute requiring stores to make their prices and product information available in machine-readable formats led to a 4% to 5% reduction in price.¹⁴³

Other research has looked at interventions that sought to help consumers better calculate prices. For example, many states have mandated that grocery stores provide unit pricing labels on the shelf to facilitate price comparisons.¹⁴⁴ These rules require stores to list per unit prices alongside the full purchase price, like the price per ounce of peanut butter or per battery. This allows shoppers to compare offerings of differing sizes and determine which items are cheapest without needing a calculator.¹⁴⁵ Studies suggest that consumers use these labels to save money in their purchase choices. Even a basic application of unit pricing led to 1% savings.¹⁴⁶ When combined with other tools for comparison, such as an education campaign, information on unit price disclosures have led to 10% to 13% savings.¹⁴⁷

Another category aimed at improving the analysis of information focuses on the algorithms that increasingly direct people to their ultimate purchase. In one study with unusual access to internal company data, economists found that a subtle change to eBay’s algorithm saved consumers 5% to 15% by returning lower-priced search results first.¹⁴⁸ Yet search results are almost entirely unregulated, and companies have an incentive to increase the prices that consumers pay.¹⁴⁹ It follows that laws pushing online marketplaces toward more helpful search results could bring consumers considerable savings.

This discussion should not be read to imply that consumer price laws are straightforward. Disclosures require careful design and measurement of results to avoid waste or even counterproductive effects.¹⁵⁰ These complications are described in greater depth below. Note, however, that the importance of design underscores how many of the above interventions could be improved, providing even greater price reductions. For instance, the 5% Medicare savings resulted from text inserted into a letter that many people presumably did not read. The researchers observed that, had all Medicare patients followed the advice, the average savings would have been 31%.¹⁵¹ And while the Israeli statute produced results from mandating machine-readable disclosures, more active support for helpful digital intermediaries that would analyze all available prices for the consumer could create more powerful shopping tools, putting even greater price pressure on sellers.¹⁵² Thus, the empirical evidence suggests that price transparency laws can significantly lower prices in a variety of markets.

2. Removing Licensing Restrictions Can Lower Prices

Unlike price transparency and antitrust laws, addressing higher prices that result from governmental licensing requirements has a more straightforward legal solution: removal of the laws that require those licenses. The above studies estimating price increases suggest that the removal of inefficient occupational licensing laws, territorial restrictions for car dealerships, and zoning laws could significantly lower prices.¹⁵³ Indeed, some of that research goes beyond just estimating price increases by also modeling the effects of removing such laws.¹⁵⁴

More direct evidence also comes from studies of licensing laws that have already been improved. For instance, in jurisdictions that expanded the role of nurse practitioners and allowed them to provide medical services previously only administered by doctors (albeit still supervised in a doctor’s office), prices lowered an estimated 3% to 16%.¹⁵⁵ As another example, in 1983, Colorado lawmakers removed licensing requirements mandating that anyone offering funeral services graduate from a mortuary college, train for a year, and pass oral and written license examinations.¹⁵⁶ A comparison of the resulting prices in Colorado before and after the licensing removal found that the reforms lowered prices in Colorado by 15%.¹⁵⁷

The removal of licensing laws has mixed effects on labor markets, as discussed below. For purposes of inflation, however, improvements to widespread licensing laws offer an opportunity to lower prices substantially.¹⁵⁸

3. Antitrust Reforms Can Lower Prices

Unfortunately, there is limited evidence that speaks directly to the question of how antitrust reforms would work in the U.S. economy. A big part of the challenge is simply methodological. Changes to price transparency and licensing laws are more readily studied because they occur more frequently and offer researchers the ability to compare prices in a specific market before and after a statutory legal reform.¹⁵⁹ In contrast, new market-wide antitrust laws have been enacted less frequently. New policies have been implemented through ex-post law enforcement processes against individual firms, but it is difficult to measure the market-wide deterrence effects of such developments.¹⁶⁰ Consequently, there are simply fewer rigorous studies of antitrust law’s ability to lower prices.

Although it is debatable what level of confidence can be had based on the existing evidence, a few studies speak to this fundamental question of antitrust effectiveness. Research from decades ago found that in the months and years after the filing of a successful price-fixing antitrust complaint, antitrust actions for price-fixing or collusion lowered prices by several percentage points.¹⁶¹ If scholars are correct that most cartels go undetected,¹⁶² these empirical studies suggest that finding a way to prosecute those cartels could rapidly lower prices.¹⁶³ Of course, this raises the question of whether adequate legal authority exists or could be enacted—a topic returned to below in the discussion of administrability. But for now the point is simply that there is empirical support for tentatively concluding that a stronger regime for addressing price-fixing could provide help with inflation.

Antitrust enforcers’ ability to address industry concentration is less clear. Part of the problem is simply that the most powerful remedy—breaking up companies—is seldom applied in the United States, so there has been limited ability to study its price effects.¹⁶⁴ Moreover, many empirical studies of existing U.S. antitrust interventions tend not to quantify the price effects, presumably due to methodological difficulties.¹⁶⁵

The most methodologically convincing study comes from the Netherlands, where a new law forced some owners to divest gas stations chosen at random.¹⁶⁶ It found that when concentrated gas stations were broken up, prices decreased from 1.3% to 2.3%.¹⁶⁷ Those findings come with the caveat that they do not reflect a large-scale organizational breakup. Instead, the study measured the effects of the forced sale of existing gas stations whose day-to-day operations presumably could remain uninterrupted.¹⁶⁸ Although these findings are limited in terms of magnitude and market applicability, they provide some cautious support for the possibility of using divestitures in at least some contexts to lower prices.

Finally, a newer wave of research has begun to look at the strength of the overall competition policy of a country in order to determine the effects of those policies on markets.¹⁶⁹ In one study, the antitrust regimes of large economies were evaluated in terms of factors such as the ability to impose significant penalties for violations, the level of investigative authority, and the intensity of oversight applied by enforcers.¹⁷⁰ Although this metric has limits, the study found that when countries weaken competition policies, average profits increase.¹⁷¹ Another study estimated the impact of competition policy on market concentration.¹⁷² It concluded that removing barriers to entry and blocking mergers lowered concentration levels.¹⁷³ These findings speak to the potential impact of competition policy on prices because higher concentration levels are associated with higher markups.¹⁷⁴

These findings are complicated by the debate about whether higher profits and margins are good or bad. Again, profits can increase for pro-competitive reasons, such as greater innovation.¹⁷⁵ Or rising profits and margins can reflect increased market power and lower productivity. The potential for high profits also provides motivation to innovate and invest.

In sum, although antitrust reforms overall have proved more difficult to study directly than price transparency and licensing reforms, there is some limited empirical support for concluding that stronger antitrust interventions can reduce prices. Due to the debates about the benefits and drawbacks of concentration, the least controversial antitrust reforms would be those aimed at undetected price-fixing and algorithmic collusion. The variability of options not only within antitrust but also among all market improvement laws speaks to the importance of a framework for deciding among anti-inflation policy tools.

III. DESIGNING ANTI-INFLATION LAWS

The preceding discussion has shown the theoretical and empirical foundations for using market improvement laws to address inflation. The evidence suggests that consumers face difficulties finding the best deals and that in many markets well-designed market improvement laws can lower the prices paid at magnitudes that would offset a meaningful amount of inflation. This Part offers a framework for choosing among anti-inflation policies. The goal is to comprehensively compare underappreciated microeconomic options, such as market improvement laws, to those more macroeconomic options that tend to be the default choice. It then sketches in greater detail what it would mean to integrate market improvement laws during an inflationary period.

A. A Framework for Choosing Inflation Laws

Even after recognizing that market improvement laws have significant potential to lower prices, policymakers are faced with the task of deciding how to prioritize among the various anti-inflation laws. Yet in the rare academic discussions of how more microeconomic laws may address inflation, there is usually an absence of any framework for choosing among options.¹⁷⁶ The discussion above has indicated four key criteria that can be used to choose among policy options: direct magnitude, indirect structural support, administrability, and side effects. Analytic shifts in applying these criteria would help to better incorporate microeconomic laws into inflation.

1. Direct Magnitude

The direct magnitude refers to the percentage of reduction in inflation as an immediate consequence of the policy. At first glance, this is one metric on which market improvement laws come up short compared to macroeconomic tools such as interest rate hikes. In theory, the Federal Reserve could raise interest rates from its current level of roughly 2% to something dramatically higher, like 40%, to tame high levels of inflation.¹⁷⁷ Similarly, in a command-and-control economy, price controls can dictate the level of inflation and thereby, in theory, reduce fifty points of inflation or more.¹⁷⁸

In contrast, market improvement laws have built-in limits to their impact on prices because businesses can only lower prices so far before operating at a loss.¹⁷⁹ Additionally, there is great variability in the magnitude of price decreases from market improvement laws across industries,¹⁸⁰ making it difficult to know the precise magnitude achievable across the entire economy.

One caveat is in order when comparing magnitude. Any such analysis must consider practical institutional limits. For instance, interest rates can only be raised to certain levels before the costs (especially low growth and unemployment) become too high to push further. Consequently, the various criteria for anti-inflation laws influence one another. In this case, the criterion of direct magnitude interacts with negative side effects, which can limit the practical magnitude of an anti-inflation tool.

Nonetheless, putting other criteria aside for now, there is reason to think that the direct magnitude of market improvement laws has been underestimated. This underestimation illuminates how an anti-inflation framework should analyze magnitude. Relevant academic and policy conversations have focused on antitrust.¹⁸¹ Yet among the three major areas of market improvement laws, antitrust offers the most limited empirical support for concluding that there is a possibility of high magnitude.¹⁸² In aggregate, the market improvement laws discussed herein have a much larger potential total anti-inflation magnitude than antitrust alone.

The broader point here is that a siloed approach to considering microeconomic laws has weakened analyses of anti-inflation laws’ direct magnitude. With respect to market improvement laws, the analysis of antitrust law’s magnitude in isolation, without considering related areas of law, obscures the relevance of market failures to inflation. For a comprehensive estimate of the direct magnitude of anti-inflation policies, it will sometimes be necessary to combine various areas of law that are united by a common economic frame.

Moreover, academics and policymakers may have underappreciated market improvement laws’ direct magnitude even within some of the three areas of law discussed herein. Studies of market improvement laws are often scattered among various markets, such as gasoline, food, and cell phone plans.¹⁸³ These individual microeconomic studies do not immediately provide macroeconomic magnitudes. To conceptualize the magnitude of a specific type of reform, such as price transparency laws, observers must synthesize various micro-level empirical studies into a macro-level magnitude.

Thus, research silos for different areas of law and diverse markets must be overcome to obtain a more comprehensive sense of the potential direct magnitude of anti-inflation laws. Only then can policymakers and scholars form an accurate sense of whether market policies are worth being in the conversation about fighting inflation.

2. Indirect Structural Support

The direct magnitude analysis discussed above is not by itself sufficient to understand the full contributions that an anti-inflation policy has to offer. Some policies, like market improvement laws, have the potential to provide indirect support to other anti-inflation laws.¹⁸⁴ That complementary role must also be weighed.

As mentioned above, structural solutions to inflation (such as ending China’s COVID lockdown) may not work unless consumers have the capacity and motivation to effectively compare prices. Price transparency is thus crucial for helping ensure that structural solutions, like repairing the supply chain, swiftly impact prices paid. This complementary role in addressing inflation constitutes the second criteria in this Article’s framework: indirect structural support.

The indirect structural support provided by other anti-inflation tools is less clear. In theory, antitrust enforcement and licensing reforms should also indirectly help other interventions because competitive pressures would push companies to pass on any sudden supply-chain savings to customers. However, there is some limited evidence that oligopolies may be quicker than firms in more competitive industries to pass on later cost-savings to consumers.¹⁸⁵ If that research is correct, antitrust would provide less indirect structural support for anti-inflation than price transparency laws. Nor do price controls and interest rates offer such indirect support that make it more likely that direct solutions will work.

Consequently, the failure to consider the indirect ways that anti-inflation laws may operate can distort the design of the policy response. In particular, a failure to consider this criterion biases the choice away from price transparency laws. Another way of thinking about structural support is as contributing to a more comprehensive picture of the full magnitude of the policy response.

3. Administrability

Administrability refers to the feasibility of effectively implementing a policy. Anti-inflation policies would ideally not only lower prices, but do so reasonably rapidly and with some degree of confidence. At first glance, these considerations cast doubt on at least some types of market improvement laws, since many of those reforms come with the risk of failure—especially antitrust laws and poorly designed disclosure mandates.¹⁸⁶ Additionally, market improvement laws involve decisions by various regulators, judges, and attorneys general. The dispersed nature of that implementation creates administrability challenges. Economists studying inflation have assumed that antitrust reforms take years to affect prices.¹⁸⁷ Whether those perspectives are correct is subject to debate and will be returned to shortly, but it is necessary to recognize that the general perception has been that market improvement laws are low on administrability.

In contrast, policymakers are more likely to feel confident that raising interest rates will lower inflation because this tool has been used repeatedly for that purpose in the past.¹⁸⁸ It is also institutionally straightforward to implement—requiring a single administrative agency, the Federal Reserve, to make a single decision. Strictly enforcing price caps can also immediately lower the prices that consumers pay, although this is more institutionally complicated because it mostly requires the passage of legislation.¹⁸⁹

While these advantages to interest rates and price caps are real, they should not be exaggerated. The political response to interest rates and price controls adds unpredictability, as backlash may ensue from their potentially devastating economic side effects. That backlash may get in the way of interest rate reductions’ ability to fully address inflation.

The direct magnitude of inflation reduced by interest rate hikes is also difficult to know in advance due to macroeconomic conditions that differ from those in previous inflationary periods.¹⁹⁰ Additionally, it typically takes a year before interest rates meaningfully hit inflation, with peak impact occurring at close to two years.¹⁹¹ Price controls can have a more immediate impact on prices, but they are extremely difficult to administer beyond the short term, making their sustained effectiveness uncertain.¹⁹² Thus, the Federal Reserve’s raising of interest rates comes with considerable administrability challenges.

Moreover, differences in administrability are difficult to compare rigorously. Some market improvement laws have been found to lower prices considerably in specific markets.¹⁹³ They can also do so on a relatively short timeline, with one field experiment finding that consumer education campaigns lowered prices paid by about 17% to 18% within six weeks.¹⁹⁴ In the aforementioned study of the Israeli statute that required price transparency for grocery stores, the researchers found that prices had begun to decline within eight months, and the full price effects of 4% to 5% happened within two years.¹⁹⁵ For a full sense of the timeline for new legislation, it is necessary to also add the time needed to write and pass a bill, although that can happen rapidly if lawmakers feel sufficient pressure. Other avenues offer a shorter timeline for an impact on consumer prices, such as administrative agencies or attorneys general enforcing current laws more aggressively.¹⁹⁶

Antitrust faces more significant administrability challenges than price transparency laws. Even assuming that industry concentration anticompetitively contributes to high prices, it is not clear what can be done about that on a short timeframe. Breaking up large companies would be the most direct response, but breakups take years and cost billions of dollars to implement.¹⁹⁷ As a result, even a successful breakup could increase prices in the short term and may require years to lower prices. Moreover, antitrust enforcers can only prosecute a small number of cases at any time and must act against individual firms, meaning that it could take decades to go through all the major industries and bring cases against individual companies.¹⁹⁸ If economists are right that some portion of rising markups is due to arguably pro-competitive factors, the identification of targets comes with the additional risk of possibly undermining consumers’ interests. Discouraging cartels and collusion is not without its challenges, but it would not come with the same level of concerns about deterring productive behavior.¹⁹⁹ Importantly, price-fixing enforcement could produce faster price reductions within a few months of the announcement of initiating the case.²⁰⁰

Perhaps the most straightforward market improvement reform in terms of design is the removal of existing licensing laws. Whatever law that was passed can simply be repealed. However, even repeals ideally would be implemented in a thoughtful manner to preserve any valuable consumer protections. Because most licensing laws are at the state or local level, there is a complicated legislative and judicial path to reforming such laws in a systematic manner.²⁰¹ Legal avenues for challenging governmental licensing regimes may also exist, though they are uncertain.²⁰²

Overall, the criterion of administrability disfavors market improvement laws as a tool for fighting inflation to varying degrees depending on the sub-category. But it is important not to exaggerate the administrability challenges of market improvement laws compared to interest rates and price caps. Once a broader view is taken on administrability, interest rate increases also entail institutional difficulties. It is also not clear why administrability should receive greater weight than other criteria, like side effects.

4. Side Effects

Before selecting an anti-inflation policy, its side effects must be closely considered. This criterion has traditionally focused only on the economic sacrifices that must be made to control inflation.²⁰³ That focus makes more sense in a world in which markets are as close to perfection as possible, since every major anti-inflation intervention would then be expected to distort markets away from the current level of near perfection. However, as detailed above, assumptions about markets being as efficient as possible are disconnected from the evidence of market failure across the economy. Moreover, the consequence of overlooking the possibility of beneficial side effects is to disfavor market improvement laws because beneficial side effects is the strongest reason to favor market improvement laws over alternatives.

As discussed above, significant interest rate hikes raise the risks of a recession and increased unemployment. Price caps come with the risk of harming efficiency and discouraging innovation.²⁰⁴ In contrast, transparency laws, the removal of licensing restrictions, and antitrust move the economy toward greater efficiency, growth, and innovation.²⁰⁵

This is not to say that market improvement laws are without negative side effects. Price transparency laws impose compliance costs on businesses. The impact of such costs must always be considered and mitigated as much as possible. However, all regulations inevitably have costs. Therefore, the existence of costs alone cannot determine whether a regulation is warranted. Those costs must be weighed against the benefits. Supplying customers with helpful information is a standard component of transacting that has long been expected in markets.²⁰⁶ It is thus consistent with basic market functions to expect actors to inform the parties with whom they transact. Since inflation is economically destructive, and given the efficiency gains of consumers making more informed decisions, the costs of complying with regulations should not defeat a proposal for effective price transparency laws that would correct significant market failures.

Beyond the costs of complying with any given legal rule, there is also a risk of designing the policy intervention in a way that unintentionally harms the market. In particular, blocking a beneficial merger or breaking up an efficient company could lead to higher prices. This is where the existing research on what has worked in the past can help to prioritize and inform anti-inflation laws.²⁰⁷

The removal of licensing laws comes with likely more controversial side effects than price transparency and antitrust laws. One of the risks of removing these laws is less consumer protection. To mitigate this, the reforms could replace licensing with optional certification. Consumers could then choose to pay more for the certified services if they would like, such as for hair salons or funeral services. Low-income consumers who otherwise might not be able to afford services would then still have the option of lower price points. Moreover, those lower-priced offerings would put some price pressure on the certified services.²⁰⁸ Additionally, Yelp and other rating websites can mitigate the risk that removing licensing leads to worse quality because they can provide some reputational accountability.²⁰⁹ Finally, it is worth noting that in many contexts, the consumer protection implications of removing licensing will not be significant. For example, seven years after the state legislature had delicensed funeral services, the Colorado Department of Regulatory Agencies investigated the impact on customers and found that the “[c]laims that the public in Colorado had suffered or might suffer significant detriment due to a lack of trained mortuary science practitioners . . . were unsupported.”²¹⁰

The removal of occupational licensing also has a complex mix of employment results. Removal should normally decrease wages because more people could enter the occupation, while also increasing the number of jobs, especially for low-income and immigrant workers who might not be able to access or afford the expensive training often required to satisfy licensing requirements.²¹¹

In summary, the removal of occupational licensing would improve market efficiency and expand employment, but it could lower some consumer protection and wages. The price savings to consumers, increase in aggregate wealth, and job creation make these side effects overall positive. Consequently, the removal of licensing has more appealing economic side effects than raising interest rates, which has overwhelmingly negative side effects.²¹² But occupational licensing improvements offer more mixed side effects than antitrust and price transparency improvements, which bring overwhelmingly positive side effects. More broadly, the anti-inflation analysis should comprehensively weigh the full positive and negative side effects in choosing anti-inflation policies.

* * *

Given that no policy is superior with respect to all four criteria, the task becomes how to balance the criteria. Two considerations will prove helpful. First, it is important not to let administrability and direct magnitude alone outweigh all other criteria. Yet that appears to be the traditional approach to inflation. To ignore indirect structural support and side effects risks missing more subtle impacts of policies on inflation and the economy.

Second, even if policymakers were to decide that administrability and magnitude were the most important criteria, it would be a mistake to discard other policy options. An anti-inflation toolkit can deploy multiple tools. That is particularly true because interest rates do not require legislative involvement and can be adjusted rapidly. Thus, legislatures and regulators can work to design and implement price transparency, antitrust, and licensing solutions while the Federal Reserve adjusts interest rates. Any portion of prices driven down by market improvement laws could later prevent some portion of interest rate increases and their side harms, while also making it more likely that some of the main structural solutions to inflation actually work.

In short, once the criteria of direct magnitude, indirect structural support, administrability, and side effects are all fully considered, policymakers would be hard-pressed to find a more promising area than market improvement laws, especially price transparency, to mobilize against inflation. Table 1 provides a summary of how these criteria might apply to various policies to offer a working hypothesis and illustrate this framework. The most important conceptual takeaway is that anti-inflation analyses have historically paid too little attention to the possibility that there are options that bring positive side effects. Regardless of the magnitude, policymakers should do as much as possible with laws offering side benefits to minimize the need to use those with side costs.

Table 1. Level of Attractiveness for Fighting Inflation
	Direct Magnitude	Structural Support	Admin-istrability	Side Effects
Interest rates	High	Low	High-Medium	Low
Price Controls	High	Low	Low	Low
Antitrust: Breakups	Low	Medium-Low	Low	High
Antitrust: Price-fixing	Medium	Medium-Low	Medium	High
Occupational Licensing	Medium	Low	Medium	High-Medium
Price Transparency	Medium	High-Medium	Medium	High
Notes: This table is meant to summarize parts of the discussion from this section and to illustrate how the framework might be applied, rather than to suggest a definitive account. Of course, more sustained analysis of each of these determinations would be warranted, and judgment calls in such an exercise are inevitable.

B. Integrating Market Improvement Laws into Inflation Policy

Recognizing that an area of law should become a higher priority in an inflationary period is an important conceptual step. However, deploying nontraditional anti-inflation tools poses a challenge of designing the institutional integration of market improvement laws into inflation policymaking. There are essentially two ways to go about this: creating new authority and changing the way existing authority is exercised. The most powerful method would be to create new authority. Most importantly, those developing responses to inflation—especially lawmakers—should create new legal rules. However, even without any new rules, a variety of existing actors can still have a potentially meaningful impact by changing how they exercise existing authority. The discussion that follows focuses on the subset of market laws that seem most immediately promising—price transparency laws—but situates such reforms within a more comprehensive market improvement strategy.

1. Creating New Laws

The review of the evidence above suggests that new legal rules can push prices down. Accordingly, a straightforward way to integrate market improvement laws into inflation policy would be to create legal rules that would help consumers to obtain and analyze pricing information, remove unhelpful licensing, and strengthen antitrust. It bears emphasis that state legislatures have passed many price transparency, antitrust, and licensing laws.²¹³ Thus, meaningful legislative solutions need not wait for Congress.

In terms of institutional design, it would be suboptimal for lawmakers to take the lead on writing all such legal rules. Given legislatures’ limited expertise, as well as the general challenges of passing laws at the federal level and in many states, it would be preferable for an administrative agency to be empowered to study and enact market correction rules. The FTC is the logical choice among existing agencies. It has a Bureau of Economics that can research and study the price effects, a Bureau of Consumer Protection that understands consumer laws, and a Bureau of Competition that enforces antitrust.²¹⁴ Yet the FTC has limited rulemaking authority related to market improvement laws.²¹⁵

Therefore, Congress should empower the FTC and other administrative agencies to write new market correction laws, even if only on a temporary basis until inflation subsides.²¹⁶ The highest-priority legislation, and probably the most politically viable, would be something like a Price Transparency Act. The act would focus on giving consumers—and the digital intermediaries that help them—the tools they need to easily locate the best deals. Such an act has potentially widespread intellectual appeal because it leverages what is known as “regulation for conservatives,” or behavioral interventions that would still allow businesses and consumers to do what they want, rather than prohibiting certain practices.²¹⁷ Administrative agencies, such as the Consumer Financial Protection Bureau and the FTC, would then ideally study and write any new rules not specifically outlined in the statute.

To decide which of many possible market improvement laws to pursue, policymakers can apply the criteria of direct magnitude, indirect structural support, administrability, and side effects. They should prioritize those laws that have the strongest empirical support based on legislation enacted in other countries or in U.S. states. They can also ask what interventions have worked in some contexts, such as mandating price disclosures in grocery stores, that may be worth trying in other contexts, like auto dealerships.

This prioritization analysis involves not just asking what types of law are most appealing, but also which markets. In real terms, a dollar saved in gas purchases is no different from a dollar saved in dry cleaning, but they are potentially different in terms of inflation. To elaborate, consider how the price of gasoline per gallon has a disproportionate impact on people’s perceptions of inflation.²¹⁸ That is the case because gasoline prices are visible on billboards, regularly paid by much of the population, and frequently reported in the media.²¹⁹ In reality, gasoline price-changes overall contribute little to inflation because they are a small part of overall consumer spending.²²⁰ However, because expectations of inflation can lead to actual inflation, pushing down gasoline prices can disproportionately help with lessening a direct cause of inflation. Consequently, if gas prices are elevated in ways that price transparency laws might address, devoting more resources to transparency rules for gas prices would disproportionately help manage perceptions of inflation when compared with the impacts of devoting similar resources to industries that have a weaker psychological connection to inflation. Other products with outsized influence on the perception of inflation, albeit to a lesser extent than gasoline, are food and clothing.²²¹ Targeting these industries would be one way to implement a policy strategically designed to address the psychological side of inflation.

Space constraints do not allow for identifying each of the many specific legal rules that might be enacted, whether individually or under a broad Price Transparency Act. But the review of the literature above offers many promising concrete examples. Those include the kind of price transparency laws that have been demonstrated to work elsewhere, such as the Israeli grocery store statute aimed at digital intermediaries and the Italian Parliament’s mandate of gas price billboards.²²²

Lawmakers should not, however, limit themselves to those laws that have already been implemented somewhere else. They can also look to promising proposals in each area of market improvement laws. In the past, legal scholars have proposed the types of laws that legislatures subsequently implemented to lower prices. For instance, before the Israeli legislature passed the grocery store disclosure law that ultimately lowered prices, Oren Bar-Gill had in other markets proposed “smart disclosures” that consumers could share with third-party intermediaries.²²³

With the right political will, more aggressive reform would be warranted. For instance, it would be worthwhile to prohibit some specific manipulative practices, such as teaser rates for credit cards, as proposed by Ryan Bubb and Bar-Gill.²²⁴ Legislatures could also roll back the more unreasonable licensing regimes, as proposed by David Hyman and Shirley Svorny.²²⁵

Although antitrust may be less appealing as an anti-inflation tool, scholars have identified numerous antitrust reforms that are worth considering. Since price-fixing is one of the more attractive areas in terms of the inflation criteria, new legislation might target such practices, particularly those resulting from algorithmic coordination. One noteworthy proposal is Michal Gal’s idea of fighting companies’ algorithms with algorithms that would alert regulators to violations or help consumers exert pricing pressure on sellers.²²⁶ D. Daniel Sokol has proposed leniency programs and corporate monitors for addressing cartels, while Christopher Leslie sees the legal standard of proof as currently too difficult.²²⁷ A number of other proposals have been made, including Einer Elhauge’s call for cracking down on potentially anticompetitive ownership structures, such as the same mutual funds owning large portions of competing firms.²²⁸ These examples are meant to sketch the landscape of reforms to consider, rather than to serve as endorsements of particular proposals.

Of course, the weaker the evidence supporting a proposal, the lower priority that proposal is for policymakers. Particularly with many antitrust proposals, the strongest support lies in theory, rather than empirics. For these types of proposals, it would be particularly important to study their impact after they are implemented, perhaps with a sunset provision requiring the new rule to be reexamined empirically and reauthorized based on that evidence after a certain number of years. Although there will often be uncertainty due to limits on what is known, in many of these cases, the obstacle seems to be politics rather than knowledge.²²⁹

2. Exercising Existing Authority More Aggressively

Many legal actors could shift their priorities, or change their legal decisions, in ways that have the potential to bring down prices. These actors include attorneys general, administrative agencies, and judges.

Consumer law scholars have shown how a variety of regulations in all fifty states, and at the federal level, could discourage the kinds of pricing obfuscation practices outlined above. One move would be for attorneys general, private plaintiffs, and the FTC to more aggressively exercise the Unfair or Deceptive Acts and Practices (“UDAP”) authority that exists at the state and federal level.²³⁰ I and others have argued that UDAP authority would likely reach the kinds of behavioral pricing practices outlined above.²³¹ Since UDAP authority comes with doctrinal uncertainty, another possibility lies in simply devoting more energy to enforcing laws that clearly prohibit specific pricing practices. For instance, David Friedman has documented how retailers systematically fabricate a high price and then claim to discount it in order to make it look like a bargain.²³² They do this despite the fact that such practices are illegal.²³³ Attorneys general, administrative agencies, and sometimes private plaintiff-side attorneys could simply devote greater attention to an array of existing laws that promote price transparency.

Judges and enforcers also have some discretion to expand existing antitrust laws. Some existing proposals would directly target practices that have a well-documented and significant impact on high prices. As one example, to address pharmaceutical companies’ tactic of paying to delay competitive, generic entries, Scott Hemphill argued that such agreements should be “accorded a presumption of illegality as unreasonable restraints of trade.”²³⁴ Judges face expertise limits in determining which laws are worth expanding for inflation-fighting purposes, but in most of these instances, judges would need only devote more attention and resources to determining the microeconomic cases that would lower prices while increasing consumer welfare.

Other antitrust proposals would target anticompetitive behavior more broadly. Fiona Scott Morton and Jonathan Baker argue that online platforms violate antitrust laws when their contracts favor certain partners.²³⁵ Tim Wu and Hemphill have called for judges to shift their thinking on firms’ “parallel exclusion” tactics, such as when Visa and Mastercard adopted rules that served to block American Express from dealing with banks.²³⁶ Additionally, Christopher Leslie has shown that “despite the fact that direct evidence of collusion is rarely available, federal judges have made it harder to prove collusion . . . by effectively requiring direct evidence.”²³⁷

As discussed above, more structural interventions, such as breaking up large firms, may not produce price results fast enough to warrant high priority. But if antitrust enforcers credibly signal that they are willing to break up firms that engage in anticompetitive pricing, or even begin to take such actions, it is possible that the threat could immediately exert downward pressure on firms fearing they will be targeted for such enforcement actions.²³⁸ Additionally, whereas other interventions would have more immediate price effects, a few targeted breakups or other significant antitrust remedies in major industries might bring price relief years down the line, after faster market improvement laws had reached their limits. Breakups could thereby be part of a more sustained anti-inflation strategy based on market improvements.

To be clear, legislation would be more likely to have an immediate, sustained, and economy-wide impact on collusion and other problematic behavior than solely increased enforcement of existing authority. But progress is also possible if key legal actors, especially judges, simply update their outdated decisions in accordance with market developments and advances in economic research.²³⁹

It is also worth noting that in the absence of any legislative action at the state or federal level, some limited new legal rules, or at least policies, are still possible through administrative agencies. To some extent this process is already underway, with the National Economic Council and the White House pushing seventeen agencies administering some form of competition policy to exercise their full authority in matters related to pricing.²⁴⁰ For example, the Federal Communications Commission voted to prohibit “sweetheart deals,” in which landlords receive payments for allowing only a single internet provider to serve a building, a practice that had significantly driven up prices for tenants.²⁴¹ Therefore, a diverse array of legal actors currently have at their fingertips the power to chip away at inflation while improving markets.

3. Encouraging Action

Legal design tools could be deployed to increase the chances that diverse legal actors overcome institutional inertia and political economy obstacles. This section briefly explores two such tools: inflation impact statements and sunset provisions.

Inflation Impact Statements. Since the contributors to prices are so dispersed, and their additions to inflation are often opaque, many of the actors who can individually play a part in addressing inflation may not feel sufficient democratic pressure to do so. Or they may fail to undertake the analysis necessary to see their potential impact on inflation because fighting inflation has not previously been an obvious component of their job. A common tool for promoting awareness and providing accountability in such situations is the impact statement.

Impact statements are currently required, among other contexts, of legislation that might have a detrimental impact on the environment.²⁴² The idea in environmental law is to compel lawmakers or administrative agencies to consider the environmental impact of any new legal rules.²⁴³ In 1974, President Ford issued an executive order requiring administrative agencies to study and disclose the effects that their rules might have on inflation.²⁴⁴ It is worth considering impact statements again today to pressure lawmakers and administrative agencies to pay greater attention to how their actions may subtly or unexpectedly influence inflation.

Inflation impact statements might also incentivize action at the state level. The federal government could publish state-level inflation reports that would summarize inflation dynamics in each state. The Bureau of Labor already collects pricing data from multiple sources in every state as part of its inflation reports and publishes some regional rates.²⁴⁵ When combined with a study of the effects of specific policies, such reports could put pressure on state-level legislators, attorneys general, and agency leaders best positioned to remove unnecessary occupational licensing laws and encourage the enforcement, or enactment, of price transparency laws. The goal of the reports would be to remove any lack of pressure state actors may feel due to their own or voters’ inadequate knowledge of how such microeconomic laws can affect inflation. Inflation impact statements could thus foster greater integration of law and macroeconomics for the benefit of society.

Sunset Inflation Laws. If lawmakers face political resistance to passing market improvement legislation, sunset provisions may help.²⁴⁶ Sunset provisions ensure that laws are revoked after a certain period of time—at which point, metaphorically, the sun sets on the law. These provisions can be designed in numerous ways, but in the case of inflation-oriented sunset laws, one sensible approach could be to state in the statute that the legal rules will end once inflation reaches a moderate level for a certain duration, such as under 3% for two years. Another approach would be to simply set a certain number of years, such as ten years, after which the laws are no longer valid.

A better design would be to require an empirical assessment of the law’s effects at the end of some period of time. After a certain number of years, the new policy would be studied to determine its impact on inflation, burden on businesses, and broader influence on the economy. If it is found that the policy is ineffective, perhaps because it fails to lower prices, it would be revoked.

Sunset provisions have previously accompanied contentious price-reducing legislation. When Colorado legislators removed funeral services licensing restrictions in 1983, they were met with warnings of “significant threats to the public health, safety and welfare.”²⁴⁷ The legislature responded to those concerns by including a sunset provision in the statute, requiring a state agency to investigate the impact of the statute after several years of operation to determine whether to continue the new policy.²⁴⁸

Ideally, the decisions to pass and keep market improvement laws would be made based on informed studies of the laws’ impacts on markets. And if those laws are overall beneficial to society in the long term regardless of inflation levels, as would be expected from market improvement laws, then those laws should remain. However, if political compromise is necessary, then it would be preferable for market improvement laws to end with inflation rather than to not have them at all when the stakes are so high.

CONCLUSION: INFLATION AS OPPORTUNITY

Once-in-a-generation threats such as alarming inflation require a pluralistic policy response involving all parts of the government—the executive, judicial, and legislative branches at both the state and federal levels. Diverse areas of law should be considered to resolve the problem in a way that is as economically productive as possible, rather than relying on the Federal Reserve to raise interest rates out of institutional inertia. Yet the dominant analytic framework for anti-inflation law is currently an obstacle to designing such a comprehensive response.

By not connecting law and microeconomics to the macroeconomic issue of inflation, by not considering the evidence of widespread market failures, and by failing to fully consider how artificial intelligence tools interact with pricing, scholarship has contributed to an underappreciation of the potential impact of market improvement laws on price. The literature also overlooks the ways that price transparency laws can both lower prices in the short term and later provide secondary support for direct structural solutions by helping consumers find the best prices available in the marketplace once supply chains are no longer decimated. These analytic shortcomings have contributed to an inflation policy that erodes economic health and risks driving the economy toward a recession.

Fortunately, a consensus in favor of market improvement laws may be possible. The potential benefits of market improvement laws to society are undeniable and embraced across much of the political spectrum. One reason lawmakers have not always done everything they could to advance markets is that consumers are a dispersed group when compared with the concentrated interests of businesses. That political economy means sensible market improvement laws are not always passed or vigorously enforced during normal times. Instead, throughout history, the political barriers to consumer reforms have usually been overcome by shocks such as the 2008 financial crisis.²⁴⁹ Earlier periods of high inflation were no exception, driving lawmakers to increase antitrust penalties in 1974 and enact other antitrust reforms.²⁵⁰ Although the political process has since become more polarized, other bipartisan efforts are underway in a number of areas, including gun control, privacy, and antitrust, all in response to extreme concerns and events.²⁵¹ Consequently, with the threat of a deeper recession looming, it is not unrealistic to imagine inflation providing the necessary motivation to overcome the political failures that otherwise prevent beneficial market legislation.²⁵²

However, policymakers should not need the threat of a recession. A more robust analytic framework for selecting anti-inflation laws would ideally push key legal actors to start with those laws that bring beneficial side effects. Indeed, since inflation tends to take years to address, different market improvement laws can be pursued simultaneously, such as using price transparency laws to help inflation within a year or two while structural antitrust interventions and occupational licensing reforms would reach prices in subsequent years. Although interest rate hikes would need to be used in parallel or shortly thereafter, those hikes can be smaller or reversed more quickly because market improvements will be simultaneously doing some of the inflation-reducing work in the background.

Indeed, even if market improvement laws fail to play a meaningful role in reducing inflation, such reforms would still prove societally beneficial. It is independently important to reverse the alarming trend of businesses in recent decades becoming more skilled at charging prices higher than justified by their costs. Investing in improving markets is particularly important in the face of evidence of a looming recession, since stronger markets can help lessen the downturn’s severity and boost the ensuing economic recovery. Thus, inflation could provide the keys to unlocking valuable legal reforms that would significantly increase total wealth in the long run. Paradoxically, in the depths of inflation may lie an uplifting economic opportunity.

96 S. Cal. L. Rev. 825

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Rory Van Loo*

* Professor of Law, Boston University; Affiliated Fellow, Yale Law School Information Society Project. I am indebted to Ian Ayres, Christine Desan, Louis Kaplow, Saul Levmore, Josh Macey, Adriana Robertson, David Walker, Kathy Zeiler, and to participants in the Law and Macro workshop at Wharton Business School and the Cambridge-USC Virtual Antitrust Workshop for valuable input. For formative early conversations and feedback, I am particularly grateful to Yair Listokin. Joseph Brav, Allyson Brennan, Maria Cosma, Tess Cushing, Heather Flokos, Keenan Hunt-Stone, Nicholas Massoni, Jane Murphy, and Sam Norum contributed excellent research.

Divided Agencies

December 2022April 2024Brian D. Feinstein* & Abby K. Wood†

Clashes between presidential appointees and civil servants are front-page news. Whether styled as a “deep state” hostile to its democratically selected political principals or as bold “resisters” countering those principals’ ultra vires proposals, accounts of civil servant opposition are legion. Move beyond headlines, however, and little is known about the impact of political divisions within agencies on their workaday functioning.

This Article presents the first comprehensive, empirical examination of the effects of intra-agency political dynamics on policymaking. Leveraging data on political preferences based on campaign donations, we identify “ideological scores” for both appointees and civil servants in dozens of agencies over thirty-four years—the first measure of the political gap between these two groups across agencies and time. We use these scores to examine how ideological divergence between appointees and civil servants affects regulatory activity.

We find that agencies with greater distance between these two groups—which we term “divided agencies”—may adopt a more cautious posture. They tend to extend the rulemaking process and allow consideration of late-filed comments. These features provide appointees with extra time to gather and digest comments from politically aligned outside experts. Divided agencies’ caution may extend to the completion of final rules, which—in some but not all models—tend to be less numerous. Remarkably, we find no evidence that divided agencies are any less successful in shepherding proposed rules to final status. That finding casts doubt on the claim that the longer rulemaking timeframes in these agencies are attributable to civil servants’ attempts to derail oppositional appointees’ initiatives. Instead, one possible interpretation is that divided agencies’ caution pays off.

These findings imply that, with agency heads oscillating between left and right based on the party in power, the generally more moderate civil service can serve as a ballast. Specifically, faced with appointees that may be responsive only to a bare electoral majority, the presence of oppositional civil servants may encourage regulatory caution and push decision-making away from the extremes—thus, paradoxically, moving policy toward the median voter.

Our findings also spotlight the critical role that the notice-and-comment process—which is often maligned as pretextual—can play in divided agencies. Generalist appointees face a principal-agent problem when crafting rules: their key source of necessary in-house expertise, civil servants, may be misaligned. In this circumstance, comments from outside allies can provide a check on civil servants’ work. That civil servants can play a promajoritarian, moderating role in divided agencies highlights the importance of preserving civil service protections—especially in today’s polarized political climate.

Introduction

Secretary of the Interior Ryan Zinke, who served during the Trump Administration, and John Morton, who helmed Immigration and Customs Enforcement (“ICE”) under President Obama, may not have much in common politically, but they do share one experience: they managed agencies in which approximately one-third of their workforce was estranged. A proponent of increasing industry access to public lands, Secretary Zinke believed he had “thirty [percent] of the crew that’s not loyal to the flag” concerning that goal.[1] He compared his situation to capturing “a prized ship at sea and only the captain”—that would be Secretary Zinke, incidentally, a former Navy SEAL—“and the first mate row over” to manage the captured crew.[2] In response, some Interior Department civil servants styled themselves “the disloyals,” printing T-shirts with that epithet.[3]

Director Morton faced a similar mutiny. After issuing a directive prioritizing deportations of people convicted of crimes and urging prosecutorial discretion in other cases,[4] the union representing nearly thirty-nine percent of ICE employees passed a no-confidence vote against Morton’s leadership.[5] That move was unprecedented.[6]

That other apostates can be found across the executive branch is unsurprising;[7] the conditions are ripe for such conflicts. Civil servants often hold differing views from appointees.[8] With only four thousand appointees atop a federal workforce of over two million[9]—many of whom hold job protections—the former group’s ability to supervise the latter will, by practical necessity, be incomplete. As political polarization grows and hardball tactics typically associated with electoral politics enter administrative agencies,[10] we expect that conflicts between appointees and civil servants will only increase.

In recent years, legal scholars have turned their attention to examining these inner workings of administrative agencies. For instance, some scholars posit that competing centers of power within agencies—civil servants and appointees, along with public participants—serve a checking function on each other’s power and thus mimic the more familiar constitutional separation of powers.[11] Others theorize about the policies produced by agencies that contain competing powers, some of which pull in majoritarian and others in countermajoritarian directions.[12]

Yet while the legislative consequences of political divisions among the branches of government are well studied,[13] relatively little empirical work analyzes the impact on policy of political divisions within agencies.[14] Empirically, political dynamics inside administrative agencies remain terra incognita in some important respects. How do agencies in which key subgroups are at loggerheads differ from agencies that are more politically cohesive? Do deeply divided agencies take longer to regulate, perhaps because of distrust or civil servant foot-dragging? Is White House review more exacting for these agencies, on the theory that White House officials are less likely to trust proposed rules emanating from ideologically divided entities? And do these agencies ultimately produce fewer rules?

This Article seeks answers to these questions. It examines how ideological differences between political appointees and civil servants affect the rulemaking process. These two groups share power within agencies, with generalist appointees relying on expert civil servants to implement the former group’s preferred policies. That division gives rise to a well-studied principal-agent problem: appointees must rely on civil servants who may have very different policy preferences and over whom appointees have limited ability to monitor or control.[15]

Faced with agents they may distrust, appointees may seek out and spend more time considering informed “second opinions” from other sources. These alternative sources of information include comments received during the notice-and-comment process, informal feedback from allies in Congress, and recommendations from advisory committees of outside experts occupying a privileged position within agencies. Indeed, public choice theorists posit that administrative structures and processes can serve just this purpose.[16]

We put this theory to the test, examining how appointees respond when their agents in the civil service hold differing views. To do so, we first develop a measure of ideological distance over time and within agencies so that we can identify divided agencies.

Existing measures are inadequate for that purpose,[17] so we create our own. We leverage a dataset on ideological preferences based on campaign donations to do so. We use these data to generate dynamic “ideal point” estimates for agency heads and civil servants in forty-seven agencies over thirty-four years—and thus, a new measure of the ideological gap between these two groups across agencies and time.[18] We then connect this measure to data concerning the rulemaking process.

Our results show that divided agencies—that is, those with ideologically opposed agency heads and civil servants—adopt a slower rulemaking posture than agencies that are more unified. Several of our findings suggest that greater caution may be at play. Once civil servants generate a proposed rule, appointees take their time. While we cannot rule out all alternative explanations, we observe that one feature of the delay is consideration of late-filed comments. Considering late-filed comments allows appointees to hear from a greater number of ideologically aligned outside groups as a check on civil servants’ work. Delay may also result from appointees spending additional time assessing those comments. In either case, slower rulemaking at divided agencies suggests that appointees may be utilizing rulemaking procedures to blunt civil servants’ informational advantages. Additionally, divided agencies may tend to issue fewer rules. That their rules are no less likely to become final, however, is perhaps evidence that their caution pays off.

This claimed cautious approach means that, whatever policy changes one desires in a first-best world, the reality of policymaking in divided agencies likely will leave one disappointed. Indeed, divided agencies are likely status quo-preserving. Whether this feature is normatively desirable turns, in part, on one’s risk aversion and the extent to which one values policy certainty.

Given that partisan polarization—and thus divided agencies—likely will persist into the foreseeable future, our findings provide a set of best practices for agencies to function as well as possible under these conditions. The policy implication that most closely follows from our findings is that officials must preserve the independence of the civil service. At a time when that independence is challenged, our findings about rulemaking suggest that civil servants comprise a moderating counterweight against more ideologically extreme appointees; thus, they serve as a bulwark against wild changes in regulatory policy. With agency leadership swinging between liberal and conservative poles, as we find, civil servants—who tend to be more moderate, albeit left of center—can pull agency policies toward the median voter. This moderation serves to improve democratic representation in agency policymaking: appointees are aligned with the Presidents who appoint them, and Presidents tend to be more ideologically extreme than the median voter. Allowing policy to swing all the way to their appointees’ preferences would therefore not reflect the public’s preferences. In contrast to common laments of employment-protected civil servants serving as a countermajoritarian force in policymaking, we show that they can serve a democratizing function in divided agencies.[19]

Further, to prevent divided agencies from descending into the gridlock and paralysis that plague other polarized institutions, appointees must have access to high-quality information from ideological allies, which we infer from divided agencies’ greater willingness to consider late-filed comments. We argue that the notice-and-comment process is well suited to transferring high-quality information to distrustful appointees. Notice-and-comment also may discourage civil servants, aware that their work will be “checked” by outsiders, from straying too far from their principals’ goals. Additional measures to inject diverse outside sources of information into agency decision-making could further enhance agencies’ ability to function, even in a challenging partisan climate within their walls—though they would increase resource costs associated with rulemaking.

This Article proceeds in four parts. Part I situates our study in twin literatures: empirical scholarship examining extra-agency influences on regulatory dynamics and descriptive and positive work concerning intra-agency dynamics. Part II presents our theory and expectations concerning the effects of appointee-civil servant preference divergence on regulatory processes and outputs. In Part III, we describe our research design, including our creation of an original dataset identifying appointees’ and civil servants’ political ideologies across agencies and time, and we present our analysis. Part IV discusses normative implications and offers policy prescriptions.

[1]. Evan Osnos, Trump vs. the “Deep State,” New Yorker (May 14, 2018), https://
http://www.newyorker.com/magazine/2018/05/21/trump-vs-the-deep-state [https://perma.cc/9862-ZBGM].

[2]. Matthew Daly, Interior Chief’s Loyalty Comments Draw Widespread Criticism, Associated Press (Sept. 26, 2017), https://apnews.com/article/8c3ae77664f44159823903b3add31e65 [https://
perma.cc/AN4H-W8N6].

[3]. Osnos, supra note 1.

[4]. Memorandum from John Morton, Dir., U.S. Immigr. & Customs Enf’t, to All Field Off. Dirs., All Special Agents in Charge, & All Chief Couns., U.S. Immigr. & Customs Enf’t (June 17, 2011), https://
http://www.ice.gov/doclib/foia/prosecutorial-discretion/certain-victims-witnesses-plaintiffs.pdf [https://perma.
cc/JM2G-ZSVX].

[5]. Ted Hesson, 7 Numbers that Tell the Story of an Immigration Boss’s Tenure, ABC News (June 17, 2013, 12:34 PM), https://abcnews.go.com/ABC_Univision/Politics/ice-director-john-mortons-
tenure-numbers/story?id=19422159 [https://perma.cc/W37D-R4QM]; see also Julia Preston, Single-Minded Mission to Block an Immigration Bill, N.Y. Times (June 1, 2013), https://www.nytimes
.com/2013/06/02/us/for-chris-crane-a-quest-to-block-an-immigration-bill.html [https://perma.cc/2ZLK-
TXUC] (providing figures used to calculate the union’s share of ICE’s workforce).

[6]. Preston, supra note 5.

[7]. See Osnos, supra note 1 (providing other examples).

[8]. See infra Part III.

[9]. Fiona Hill, Public Service and the Federal Government, Brookings (May 27, 2020), https://
http://www.brookings.edu/policy2020/votervital/public-service-and-the-federal-government [https://perma.cc/
JRK2-QYRM] (reporting the size of the federal nonmilitary, nonpostal workforce and the approximate number of political appointees).

[10]. See Brian D. Feinstein & M. Todd Henderson, Congress’s Commissioners: Former Hill Staffers at the S.E.C. and Other Independent Regulatory Commissions, 38 Yale J. on Regul. 175, 223, 226 (2021) (documenting these developments).

[11]. See Jon D. Michaels, Of Constitutional Custodians and Regulatory Rivals: An Account of the Old and New Separation of Powers, 91 N.Y.U. L. Rev. 227, 238–39 (2016); Gillian E. Metzger, The Interdependent Relationship Between Internal and External Separation of Powers, 59 Emory L.J. 423, 425 (2009); Neal Kumar Katyal, Internal Separation of Powers: Checking Today’s Most Dangerous Branch from Within, 115 Yale L.J. 2314, 2346 (2006).

[12]. See Matthew C. Stephenson, Optimal Political Control of the Bureaucracy, 107 Mich. L. Rev. 53, 72 (2008).

[13]. See generally Daryl J. Levinson & Richard H. Pildes, Separation of Parties, Not Powers, 119 Harv. L. Rev. 2311 (2006); Gary W. Cox & Mathew D. McCubbins, Setting the Agenda: Responsible Party Government in the U.S. House of Representatives (2005); John J. Coleman, Unified Government, Divided Government, and Party Responsiveness, 93 Am. Pol. Sci. Rev. 821 (1999); David R. Mayhew, Divided We Govern: Party Control, Lawmaking, and Investigations, 1946–2002 (2d ed. 2005).

[14]. But see generally Rachel Augustine Potter, Bending the Rules: Procedural Politicking in the Bureaucracy (2019); Rachel Augustine Potter, Slow-Rolling, Fast-Tracking, and the Pace of Bureaucratic Decisions in Rulemaking, 79 J. Pol. 841 (2017) [hereinafter Potter, Slow-Rolling, Fast-Tracking]; Anne Joseph O’Connell, Political Cycles of Rulemaking: An Empirical Portrait of the Modern Administrative State, 94 Va. L. Rev. 889 (2008); George A. Krause, A Two-Way Street: The Institutional Dynamics of the Modern Administrative State (1999).

[15]. See Mathew D. McCubbins, Roger G. Noll & Barry R. Weingast, Administrative Procedures as Instruments of Political Control, 3 J.L. Econ. & Org. 243, 243–44 (1987) (outlining this principal-agent problem).

[16]. See, e.g., id. at 255 (“[P]olitical principals in both branches of government suffer an informational disadvantage with respect to the bureaucracy. . . . [M]any of the provisions of the Administrative Procedures [sic] Act solve this asymmetric information problem.”).

[17]. For instance, measures based solely on the ideology of the appointing President fail to capture ideological differences in consecutive agency heads appointed by the same President. In other words, they do not capture enough variation over time. Other measures only occur sporadically in time.

[18]. The included executive agencies are the Departments of Agriculture, Commerce, Defense, Education, Energy, Health and Human Services, Homeland Security, Housing and Urban Development, Interior, Justice, Labor, State, Transportation, Treasury, and Veterans Affairs (operating as the Veterans Administration until 1989); Environmental Protection Agency; and Small Business Administration. The included independent agencies are the Agency for International Development, Civil Aeronautics Board (until its dissolution in 1985), Commodity Futures Trading Commission, Equal Employment Opportunity Commission, Farm Credit Administration, Federal Communications Commission, Federal Deposit Insurance Corporation, Federal Emergency Management Agency (until its subordination to the Department of Homeland Security in 2003), Federal Energy Regulatory Commission, Federal Housing Finance Agency, Federal Housing Finance Board (until its dissolution in 2009), Federal Labor Relations Authority, Federal Maritime Commission, Federal Reserve Board, Federal Trade Commission, General Services Administration, Interstate Commerce Commission (until its dissolution in 1996), National Aeronautics and Space Administration, National Archives and Records Administration, National Credit Union Administration, National Transportation Safety Board, Nuclear Regulatory Commission, Office of Federal Housing Enterprise Oversight (until its dissolution in 2009), Office of Personnel Management, Pension Benefit Guaranty Corporation, Securities and Exchange Commission, Social Security Administration, Surface Transportation Board, and U.S. Postal Service. Also, the Internal Revenue Service, although part of the Treasury Department, is included as a separate agency.

[19]. See Stephenson, supra note 12, at 72 (presenting a positive theory of this dynamic).

* Assistant Professor of Legal Studies and Business Ethics, the Wharton School of the University of Pennsylvania.

† Professor of Law, Political Science and Public Policy, University of Southern California Gould School of Law. We thank Adam Bonica, Devin Judge-Lord, and Rachel Potter for data, and Ming Hsu Chen, John Harrison, Erin Hartman, Kathryn Kovacs, Jeff Lubbers, Neysun Mahboubi, Jennifer Mascott, John McGinnis, Jon Michaels, David Noll, Anne Joseph O’Connell, Richard Pierce, Zach Price, Michael Rappaport, Noah Rosenblum, Amy Semet, Bijal Shah, Kevin Stack, Matthew Stephenson, Chris Walker, Dan Walters, Adam White, and participants at the Presidential Administration in a Polarized Era conference at the C. Boyden Gray Center for the Study of the Administrative State for helpful comments. The authors also gratefully acknowledge the Gray Center’s financial support of this research.

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Divided Agencies

Brian D. Feinstein* & Abby K. Wood†

Clashes between presidential appointees and civil servants are front-page news. Whether styled as a “deep state” hostile to its democratically

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The Modern American Law of Race by David E. Bernstein

August 2021March 2022Southern California Law Review Admin

Article | Anti-discrimination Law
The Modern American Law of Race
by David E. Bernstein*

From Vol. 94, No. 2
94 S. Cal. L. Rev. 171 (2021)

Keywords: Anti-discrimination Law, Public Policy

Most Americans believe that a person’s ethnic or racial identity is currently a matter of self-identification in the United States, but that is not entirely true. Government agencies and courts have established rules for what makes someone African American, Asian, Hispanic, Native American, or white, and for how one proves that one meets the relevant criteria.1 One can get a sense of the scope of these rules by considering how authorities would resolve some recent public controversies over individuals’ racial and ethnic identities.

For example, is golf star Tiger Woods, who calls himself “Cablinasian,” legally classified as Asian based on his predominant ethnic origin,2 African American based on his appearance and the principle of hypo-descent,3 or something else? Until 2019, in Washington State, a government employee would have determined Woods’ ethnic status by looking at his picture.4 Under federal law, Woods could claim Asian American or African American status based on his partial Asian and African ancestry, but he would need to affirm that he holds himself out as a member of the group.5 Whether identifying as “Cablinasian” counts as holding oneself out as Black or Asian is not clear. To successfully claim Native American status based on his Native American great-grandparent, Woods would generally need to show membership in a federally recognized tribe.6 There is, of course, no official Cablinasian category, nor could Woods claim a Thai or Chinese identity separate from the general Asian category.

Is George Zimmerman, charged with murder—and ultimately acquitted by a jury—in the controversial shooting of Trayvon Martin, best described as Hispanic, half-Hispanic, mixed-race, white Hispanic, or something else?7 With a Peruvian mother, assuming he self-identifies as Hispanic, Zimmerman likely qualifies as Hispanic under every extant relevant federal and state law, unless, perhaps, his mother’s ancestors immigrated to Peru from a non-Spanish-speaking country.8 Some government agencies might also question Zimmerman’s Hispanic-ness based on his German-sounding last name and his (arguably) white appearance;9 some agencies would require him to present affirmative evidence that he considers himself, and is considered by others, to be Hispanic.10

Whether Zimmerman could successfully claim African American status based on his mother’s purported partial African ancestry is less clear.11 Federal law suggests that any amount of African ancestry is sufficient to qualify someone as African American,12 but there is recent judicial precedent to the contrary.13 Some states rely on the National Minority Supplier Development Council (“NMSDC”) for racial and ethnic classification, and the NMSDC requires that a person be one-quarter African American to claim that status.14 Federal agencies would likely accept Zimmerman’s claim of African American status based on an affidavit from him, though he would have to affirm that he holds himself out as African American.15 The NMSDC would demand documentation, such as a driver’s license or birth certificate, listing Zimmerman’s race as African American.16 California, meanwhile, would require birth certificates specifying race from either Zimmerman, his parents, or his grandparents, or three letters from certified ethnic organizations attesting to Zimmerman’s group membership.17 There is no official mixed-race status to claim in any jurisdiction, though the Department of Education now has a category in its statistics for children whose parents say the children belong in two or more racial categories.

Was former NAACP official Rachel Dolezal, the offspring of two parents of European origin, pretending to be Black by identifying as an African American woman? Or was it acceptable for her to adopt an African American identity, given that race is a socially constructed concept and she sincerely adopted an African American identity?18 Under federal and the vast majority of state laws, Dolezal’s lack of African ancestry means that she would be classified as white.19 In Massachusetts, however, the fact that she held herself out as a Black woman and others treated her as such would allow her to classify herself as Black in some contexts.20

Was Senator Elizabeth Warren justified in identifying herself as Native American based on family lore that she has Native American ancestry,21 or was she engaging in “ethnic fraud”?22 Under federal law, Warren’s lack of membership in a recognized tribe means that she is not Native American for most purposes.23 Warren also likely does not come within the definition of “Indian” in statutes that don’t require tribal membership.24 For statistical purposes, including for enforcement of antidiscrimination legislation, the government includes individuals with Native American ancestry who “maintain[] cultural identification through . . . community recognition.”25 In some states, family lore plus self-identification is likely enough for the government to recognize someone as Native American.26

Some of Vice President Kamala Harris’s political opponents have questioned her Black identity. 27 Harris, the child of an Indian immigrant mother and a father of mixed-race heritage from Jamaica, has identified as Black her entire adult life (including attending a historically Black university, Howard University), is identified by others as such, and has African ancestry.28 Given those facts, legal authorities throughout the United States would recognize her as Black and/or African American.

The controversies discussed above were debated in the court of public opinion; no courts or regulatory bodies were asked to rule on the ethnic or racial identity of any of these individuals. Most Americans undoubtedly prefer it that way, understandably tending to blanch at the idea of having the government, at any level, dictate the boundaries of ethnic identity.29 Such determinations are reminiscent not only of Nazi Germany’s and South Africa’s racial obsessions,30 but of America’s sordid past.31 Not long ago, Southern states divided mixed-race individuals into categories such as “octoroons” and “quadroons” to determine whether they were “white” or “colored” by law.32 The U.S. government, meanwhile, engaged in pseudoscience and pseudo-anthropology to determine which people from Asia counted as “Asians” and were thus not legally eligible to immigrate to the United States or become naturalized citizens, and which people from Asia were sufficiently “white” or “Caucasian” to be classified as such.33

Despite Americans’ understandable modern squeamishness at official racial categorization, racial and ethnic classifications are ubiquitous in American life. Applying for a job, a mortgage, university admission, citizenship, government contracts, and much more involves checking a box stating whether one is white, Hispanic, Asian, African American, or Native American, among other extant classifications. 34

Those seeking information about individuals’ ethnicity typically rely on self-identification and voluntary compliance with general norms regarding such identification.35 As noted, however, legal rules dictate whether someone may claim “minority” status in some contexts. This should not be surprising, given that concrete benefits sometimes accompany one’s identification as a member of a racial or ethnic minority group. In the past, given Jim Crow laws, immigration and naturalization restrictions, and other forms of de jure and de facto race discrimination, it was generally considered beneficial to claim a white identity. Today, while invidious discrimination still presents impediments to minorities, claiming a non-white identity can make one eligible for affirmative action preferences.36 While university affirmative action policies receive far more public attention, there is a strong incentive to claim minority status to be eligible for racial and ethnic preferences that influence the award of hundreds of billions of dollars annually in government contracts.37

This Article addresses two distinct but related issues. This Article first discusses the categories that federal and state governments use to define the “official” racial and ethnic minorities in the United States for data gathering, civil rights enforcement, and affirmative action purposes; the boundaries of those categories; and how those categories came to be. The second issue addressed by this Article is what evidence individuals must provide to demonstrate membership in these categories, and how modern courts and agencies have adjudicated questions of racial or ethnic identity when an individual’s claim to minority status has been contested.

Most Americans take the categories of “African American,” “Native American,” “Asian American,” and “Hispanic” for granted.38 Yet there is no inherent logic to using these categories, nor to their precise scope,39 and the same, for that matter, is true of the category “[w]hite.”40 As a federal judge has pointed out, the categories are not consistent with one another: “one group [African Americans] is defined by race, another [Hispanics] by culture, another [Asians] by country of origin and another [Native Americans] by blood.”41

The Hispanic category generally includes everyone from Spanish immigrants (including people whose first language is Basque or Catalan, but not Spanish) to Cuban Americans of mixed European extraction to Puerto Ricans of mixed African, European, and indigenous heritage to individuals fully descended from indigenous Mexicans.42 Members of the disparate groups that fall into the “Hispanic” or “Latino” category often self-identify as white,43 often feel more connected to the general white population than to other Spanish-language national-origin groups, and sometimes diverge from members of other Hispanic demographic groups in political outlook as much or more than from the general white population.44 Moreover, “census data show substantial differences in levels of income and educational attainment among the national origin groups in which data about ‘Hispanics’ are usually classified.”45 Not all Hispanics, meanwhile, consider themselves to be part of a minority group, and “some who claim minority status for themselves would reject [that status] for . . . others” (for example, they might “reject it for well-educated professionals who immigrate from South American countries” and who are considered white in their home countries).46 People of Portuguese or Brazilian ancestry, who are not of Spanish culture or origin, are nevertheless sometimes defined as Hispanic by legislative or administrative fiat.

The Asian American category includes people descended from wildly disparate national groups,47 who have dissimilar physical features, practice different religions,48 speak different languages, vary dramatically in culture,49 and sometimes have long histories of conflict with one another.50 Various subgroups of Asian Americans have differing levels of average socioeconomic success in the United States51—Indian Americans, for example, on average have significantly higher-than-average incomes and levels of education, while on average the incomes of Hmong and Burmese Americans are well-below the American mean.52 Korean Americans have the highest rate of business formation for any ethnic group in the United States, while Laotians have the lowest.53 The Asian category meanwhile excludes people from the Western part of Asia, such as Muslim Americans of Yemeni origin, who may face discrimination based on skin color (often dark), religion, and Arab ethnicity.54 Only a minority of people in the Asian category identify with the “Asian” or “Asian American” labels.55

Under most federal rules,56 the Native American category includes someone of remote Indian ancestry who has inherited tribal membership, while excluding some people with much closer genetic and cultural connections to the Native American community who are not tribal members.57 The question of whether the category of African American should sometimes be limited to descendants of American slaves or include African and Caribbean immigrants and their descendants is increasingly debated, as is the question of whether multi-racial individuals with a non- Black-identified parent should be included in the African American category.58

Classification rules generally were not made by Congress or state legislatures, where they would have been subject to public discussion and debate, but by administrative agencies. These agencies have used their authority to determine which groups are covered by classification rules, as well as how to prove membership in those groups. The modern history of racial and ethnic categorization by the government is therefore an example of, among other things, administrative constitutionalism,59 with the bureaucracy creating important baseline rules for society with little input from elected officials and negligible public debate.

Part I of this Article addresses the origins and development of modern racial categorizations in the United States. These categories arose from categories used for federal antidiscrimination enforcement and affirmative action policies. The federal government has never provided a coherent or comprehensive explanation for why some minorities are deemed to be “official” minority groups and others are not, or for why the various categories have the precise, and often seemingly arbitrary, boundaries that they do.

As documented in Part I of this Article, the scope and contours of official minority status have arisen from a combination of groups being deemed analogous to African Americans in facing race discrimination; bureaucratic inertia; lobbying campaigns; political calculations by government officials; a failure to anticipate future immigration patterns; and happenstance. It was far from inevitable, for example, that Americans with ancestry in the Indian subcontinent or the Iberian peninsula would gain official minority status, but that Arab, Greek, Iranian, Italian, Jewish, and Polish Americans would not.

Part II discusses state variations on the scope of the standard ethnic categories, in particular in the states’ Minority Business Enterprise (“MBE”) programs. Federal law requires states that accept federal transportation funds—that is, all states—to have rules for certifying firms owned by members of designated minority groups as MBEs. MBEs are eligible for presumptive status as Disadvantaged Business Enterprises (“DBEs”) for federally funded contracts. States are permitted to use federal standards for this purpose, but may also create and enforce their own standards, both for participation in federally funded projects and for state purposes. Various states’ rules diverge from federal law in determining who is deemed African American, Asian, Hispanic, or Native American. For example, unlike under federal law, some states exclude persons with Portuguese and Spanish ancestry from the Hispanic category. Other states delegate authority to the

NMSDC to use its own idiosyncratic standards to certify minority status.

This Article next turns to the question of what evidence individuals must provide to demonstrate membership in these categories. Conventional wisdom is that these categories are a matter of self-definition based on informal norms. For federal purposes, this is largely true. Most federal programs require only a signed affidavit attesting that the petitioner for minority status is a member of the claimed group and holds himself or herself out as such.60

States, however, often require documentation before granting minority status. This documentation requirement can be met by providing an official document listing one’s race, providing letters of support from ethnic organizations, or relying on certification by the NMSDC. Part III of this Article discusses the evidence various states demand to support a claim that a petitioner is a member of a designated group.

Perhaps surprisingly, challenges to the under- or overinclusiveness of a governmental definition of the scope of particular racial or ethnic categories are rare. Part IV of this Article discusses the only four such cases this author found. In the first case, the Eleventh Circuit Court of Appeals held that, judged by the rational basis standard, a city’s Hispanic category was neither over- nor underinclusive for equal protection purposes.61 In the second case, the Second Circuit, also applying the rational basis test, held that it was not unconstitutionally arbitrary for New York State to exclude companies owned by people from Spain from its Hispanic MBE category, even though the federal government includes such companies.62 In the third case, the Seventh Circuit held that it was unconstitutionally overinclusive to include immigrants from Spain and Portugal and their descendants in the Hispanic category in Cook County, Illinois’ MBE Program.63 In the fourth case, the Sixth Circuit held that Ohio’s MBE law was both overinclusive in including groups that had not been victims of longstanding discrimination in Ohio, and underinclusive in not including groups that had been.64

Conventional wisdom is that there has been only one case in which an individual’s claim to minority status has been adjudicated in an affirmative action context. The case involved white firefighter brothers named Malone who claimed African American status based on dubious evidence that they had an African American great-grandmother.65 It turns out, however, that the Malone case is the tip of a (small) iceberg.

Part V of this Article reviews cases in which the minority status of a petitioner seeking MBE status for his or her company has been adjudicated. Most of the cases discussed in Part V involve the question of Hispanic status, the boundaries of which have proved especially vexing to administrators and courts. Part VI of this Article turns from racial categorization in the MBE context to adjudication of claims of minority status by individuals seeking to benefit from affirmative action in employment.66

Part VII of this Article notes the existence of laws governing racial identity that are beyond the scope of this Article, in particular laws defining whom the federal government classifies as being an “Indian.”

This Article concludes by noting that laws dictating ethnic and racial categories were designed primarily to assist African Americans overcome the legacy of slavery, Jim Crow, and discrimination. As the United States has become more demographically diverse, however, African Americans are now a shrinking minority of those officially classified as members of racial and ethnic minority groups.67 Given high rates of interracial marriage among other minority groups68 and the reality that mixed-race and mixed-ethnicity individuals can check whichever box most benefits them in a given circumstance, the percentage of non-African American individuals eligible for minority status for affirmative action purposes will continue to grow, putting increasing strains on the current method of categorization. The Conclusion suggests several ways to handle these strains.

*. University Professor, Antonin Scalia Law School, and Executive Director, Liberty & Law Center; B.A. 1988, Brandeis University; J.D. 1991, Yale Law School. For their comments, suggestions, and research leads, the author thanks Charles Barzun, Roger Clegg, Jonathan Bean, George La Noue, Peter Schuck, Michael Rosman, John Skrentny, and John Sullivan. The author benefited from feedback received at faculty workshops at the Antonin Scalia Law School and Northwestern University School of Law. Emily Yu provided excellent research assistance.

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Bernstein

Age Diversity by Alexander A. Boni-Saenz

August 2021March 2022Southern California Law Review Admin

Article | Anti-Discrimination Law
Age Diversity
by Alexander A. Boni-Saenz*

From Vol. 94, No. 2
94 S. Cal. L. Rev. 303 (2021)

Keywords: Anti-Discrimination Law, Diversity, Civil Rights Law, Public Policy

This Article is the first to examine age diversity in the legal literature, mapping out its descriptive, normative, and legal dimensions. Age diversity is a plural concept, as heterogeneity of age can take many forms in various human institutions. Likewise, the normative rationales for these assorted age diversities are rooted in distinct theoretical foundations, making the case for or against age diversity contextual rather than universal. A host of legal rules play a significant role in regulating age diversity, influencing the presence of different generations in the workplace, judiciary, and Congress. Better understanding the nature and consequences of age diversity allows us to recognize the unique set of costs and benefits it entails and enriches our understanding of other forms of difference. Further, examining the law with an age diversity lens highlights fruitful avenues for legal reform in fields as varied as immigration law, employment law, and the law of juries. In an era of increased intergenerational tension and a rapidly aging population, the time is ripe to evaluate age diversity and the law’s role in shaping it.

* Associate Professor of Law, Chicago-Kent College of Law. abonisae@kentlaw.edu. For helpful questions and comments, I would like to thank Lori Andrews, Susan Appleton, Kathy Baker, Felice Batlan, Naomi Cahn, Sungjoon Cho, Adrienne Davis, Graeme Dinwoodie, Danielle D’Onfro, Dan Epps, John Inazu, Andrew Ingram, Peter Joy, Pauline Kim, Hal Krent, Michelle Layser, Ron Levin, Marty Malin, Nancy Marder, Nancy Morrow-Howell, Greg Reilly, César Rosado, Mark Rosen, Rachel Sachs, Chris Schmidt, Carolyn Shapiro, Peggie Smith, Noah Smith-Drelich, Brian Tamanaha, Karen Tokarz, Andrew Tuch, Deb Widiss, the editors at Southern California Law Review, and workshop participants at the American Association of Law Schools Annual Meeting, Chicago-Kent, the Chicagoland Junior Scholars Conference, and Washington University in St. Louis, where I presented earlier versions of this Article. For valuable research assistance, I would like to thank Jessica Arencibia.

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Boni-Saenz

Genetically Edited Sperm: An Ethical Analysis of the Potential for Modified Humans by Avery Nelson

August 2021March 2022Southern California Law Review Admin

Note | Healthcare & Life Sciences Law
Genetically Edited Sperm: An Ethical Analysis of the Potential for Modified Humans
by Avery Nelson*

From Vol. 94, No. 1
94 S. Cal. L. Rev. 139 (2020)

Keywords: Healthcare & Life Sciences Law, Biotechnology, Public Policy

People have been striving for human “perfection” for as long as human civilization has existed, sometimes with questionable and even catastrophic results.1 The idea of perfecting the human population led to eugenics, the nineteenth and early twentieth-century philosophical movement to “breed better people.”2 Eugenics ultimately laid the framework for forced sterilization laws in a number of countries, including the United States, where lawmakers prohibited certain people from procreating.3 As appalling as forced sterilization was, eugenics took an even darker turn leading up to and during World War II when Nazi Germany murdered millions in the name of creating a superior Aryan race.4 Adolf Hitler did not come up with the concept of genetic purity on his own.5 “In fact, [Hitler] referred to American eugenics in his 1934 book, Mein Kampf.”6 Although eugenics lost momentum after these atrocities,7 the idea of human enhancement has continued. Today, scientific advancements in gene-editing technology offer a new take on human modification.

Gene editing is a group of technologies that enable scientists to change an individual’s DNA.8 Genetic material can be added, removed, or altered at particular locations in the genome.9 One such gene-editing technique is the revolutionary technology called CRISPR-Cas9, short for “clustered regularly interspaced short palindromic repeats” and CRISPR-associated protein 9,10 which was discovered in 2012.11 In 2013, groups of scientists led by Feng Zhang and George Church used CRISPR to edit human cell cultures for the first time.12 By 2015, Chinese scientist Puping Liang used CRISPR to edit the genes in human tripronuclear zygotes.13 CRISPR has generated much excitement in the scientific community because it is faster and cheaper, as well as more accurate and more efficient than any other existing method to genetically alter DNA.14 This is of particular interest in the prevention and treatment of diseases, because CRISPR has the potential to correct mutations associated with single-gene diseases such as cystic fibrosis, sickle-cell anemia, and hemophilia, as well as complex diseases such as cancer, heart disease, and HIV infection.15

However, CRISPR has rekindled debates about the numerous social, ethical, and policy concerns of genetic manipulation.16 These concerns become even more complicated with germline gene editing, which results in changes in sperm, eggs, or embryos that will be passed on to the next generation.17 Critics of germline editing worry about the potential for “designer babies,” children whose traits, including eye color, height, and even athletic ability, are modified by gene editors at the request of their parent-consumers.18 Genetically modified babies remained speculative until November 2018, when Chinese scientist Dr. He Jankui announced that he had created the world’s first “CRISPR babies,” twin girls named Lulu and Nana.19

To conduct his experiment, Dr. He recruited couples in which the men had HIV infection and the women did not.20 After creating embryos by fertilizing the eggs with the sperm, Dr. He used CRISPR to edit the embryos and disable a gene that helps HIV enter healthy cells, for the purpose of giving the twin girls resistance to HIV.21 Notably, however, “Dr. He admitted that the edit was not successful in one of the embryos, and it is unclear whether it was completely or even partially successful in the other.”22 Dr. He’s experiment generated an outpouring of criticism and hand-wringing from scientists and bioethicists around the world, who labeled him a “rogue” scientist23 whose unethical experiment was “amateurish” and “unconscionable.”24 The safety risks and long-term effects of Dr. He’s experiment will remain a mystery for years to come, meaning the twins will likely be studied for the rest of their lives.25 Although Lulu and Nana brought bioethical considerations of gene editing to the forefront, researchers are still striving to advance CRISPR technology, with one of the most recent developments occurring right now in New York City.26

Currently, reproductive biologists at Weill Cornell Medicine are making the first attempt at genetically editing the DNA in human sperm using CRISPR.27 The controversial research is aimed at preventing genetic disorders that are passed down from men, including certain forms of male infertility.28 The researchers are beginning with a gene that increases the risk of breast, ovarian, prostate and other cancers.29 Because DNA is packed very tightly inside the head of each sperm, it is difficult to insert the microscopic CRISPR tool.30 To overcome this challenge, the Cornell scientists electrically shock the sperm with the goal that the shock will cause the cells to loosen up for a moment so that CRISPR can get inside.31 June Wang, a lab technician conducting the experiments at Cornell, admits that “[i]t’s kind of a weird concept” but states that “it works pretty well.”32

Although the experiments are still underway and are not yet successful, the research raises many of the same hopes—and fears—as editing the genes in human embryos.33 Nevertheless, the researchers defend their work.34 Gianpiero Palermo, who runs the lab where the experiment is being conducted, states, “I think it’s important from the scientific point of view to investigate in an ethical manner to be able to learn if it’s possible.”35 Palermo went on to say, “If we can wipe out a particular gene, it would be incredible.”36 However, Françoise Baylis, a bioethicist at Dalhousie University in Canada who is advising the World Health Organization, expresses the view that editing DNA in sperm raises the same troubling questions as editing DNA in embryos.37 In addition to safety concerns for resulting babies and future generations in the event that the genetically edited sperm is used, there are profound ethical and social concerns about conducting the research in the first place.38 As bioethicist Ben Hurlbut put it,

There’s reason to worry about undertaking the research before we’ve asked the question properly whether we would ever actually want to use those techniques . . . . Once those techniques are developed, it becomes much harder to govern them. If you’ve done the hard work of developing the recipe, someone else can bake the cake.39

The willingness of researchers to develop human uses of CRISPR demonstrates the pressing need to regulate such advancements and, in particular, its possible use to genetically edit human sperm. Part I of this Note will provide a scientific background necessary to understand genetically edited sperm, including a brief history of relevant scientific advancements, a discussion of CRISPR-Cas9 technology, and an explanation of somatic cells and germline cells. Part II will analyze various ethical considerations regarding editing human sperm, including safety concerns, informed consent issues, the debate between treatment and enhancement, and the potential for new forms of social inequality. Part III will discuss the most applicable regulations in the United States under the Food and Drug Administration and National Institutes of Health, and ultimately conclude that as it stands, the law is unprepared for the development of genetically edited sperm. Part IV will propose a resolution to address these concerns, including a federal licensing regime, a call for public engagement, and regulations to mitigate equality and accessibility concerns if sperm editing is commercialized.

* Senior Editor, Southern California Law Review, Volume 94; J.D. Candidate 2021, University of Southern California Gould School of Law; B.S. Finance 2017, University of Florida. I thank my family, friends, and the fantastic editors of the Southern California Law Review for their support and guidance throughout the publication process.

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Nelson

Walling Out: Rules and Standards in the Beach Access Context by Timothy M. Mulvaney

August 2021March 2022Southern California Law Review Admin

Article | State Law
Walling Out: Rules and Standards in the Beach Access Context
by Timothy M. Mulvaney*

From Vol. 94, No. 1
93 S. Cal. L. Rev. 1 (2020)

Keywords: State Law, Beach Access, Public Policy

The overwhelming majority of U.S. states facially allocate exclusionary rights and access privileges to beaches by categorically deciding whom to wall in and whom to wall out. In the conventional terms of the longstanding debate surrounding the design of legal directives, such “rules” are considered substantively determinant ex ante and, in application, analogically transparent across similarly situated cases. Only a small number of jurisdictions have adopted “standards” in the beach access context, which—again, on the conventional account—sacrifice both determinacy and transparency for the ability to accommodate ex post the complexities of individual cases. This Article contends that beach access policy illustrates the familiar limitations of this conventional rules-versus- standards account in two elucidating ways. First, the implementation of contemporary beach access law suggests that the gap between rules and standards with respect to the virtue of determinacy is not nearly as wide as the conventional account allows. In short, beach access rules are not and cannot in actuality be divorced from context, while beach access standards take shape through applications that reveal core archetypes. Second, while beach access rules reflect the virtue of transparency in the sense that they minimize some forms of arbitrariness, standards offer their own, robust version of transparency, which is grounded in promoting dialogue and demanding accountability. The Article offers these contentions not to press the view that standards are necessarily superior to rules en masse, but, instead, to prompt reflection on the nearly uniform and seemingly impulsive rule fetishism that has held sway in the beach access context.

*. Professor of Law and Associate Dean for Faculty Research, Texas A&M University School of Law. Thank you to Gregory Alexander, Vanessa Casado Pérez, Hanoch Dagan, Nestor Davidson, Eric Freyfogle, John Lovett, Nadav Shoked, Joseph Singer, Laura Underkuffler, Brian Weeks, and Katrina Wyman for commenting on earlier drafts of this Article, and to Cole Watson for diligent research assistance. Thanks, too, to Donna, Eugene, Patrick, Jacob, and Blake Mulvaney, Ashley, Tristan, and Ryan Hedrick, Christopher, Arthur, and Amy McCann, Kevin Tray, Michael and Robert Lowe, Paul D’Elia, Edward, Mary, and Allison Norcia, Andrew Martin, Bryan Wallach, Mark Lindquist, Doug Forken, Ryan Morra, Eleanor Hish, David Manzo, James Courtney, Christopher Lilien, Robert Leichte, Chris Seiler, Marc Buttacovoli, Mary Spanburgh, Anthony Casale, Matthew Smith, Maria Dunlap, Benjamin Greer, Craig Irrgang, Maikel O’Hanlon, Matthew Duffy, John Bramlette, Richard Billings, Kevin Gregory, Matthew Popowsky, Michael Newshell, Ashley Reichelman, Michael Hazlet, and Brian Gardner, and the many others along the way who participated in and contributed to the Habitat Paddle to Build project that served as inspiration for this Article. I benefitted from the opportunity to present various iterations and components of this manuscript at Cornell Law School, Harvard Law School, Maastricht University, the University of Cambridge, the University of Edinburgh, and the University of Michigan Law School.

Mulvaney