The End of Economic Freedom (Part IV)

If a person’s civil rights are violated by the government, the Court will uphold a penalty in the form of compensation (Owen v. City of Independence Missouri). Another example is the internment of Japanese Americans during WWII. The United States would later say that policy was wrong and the government would pay family descendants for damages. However, if your economic or property rights are violated, the government usually contests these cases by saying it owes nothing. A lot is riding on the St. Tammany Frog case the Court will hear this term. In this case, the government wants to confiscate a portion of a person’s property without just compensation to turn it into a frog habitat. Unfortunately, the frog habitat they want to build is for a species of frog that has been extinct from that area for 50 years. What’s worse, to build the habitat the government seeks to chop down trees and maintain the area by burning brush each year. Obviously, the government is exploiting the owner. This is outright extortion. Consider how the Liberal Court has elevated “privacy rights” that has led to “sexual” privacy rights as well as abortion. But the same Court cannot explain why they disparage rights enumerated in the Bill of Rights such as property rights. As Clarence Thomas noted in his Kelo dissent: privacy rights in the home are protected, but unfortunately the home is not a protected property right.

The Court’s changing interpretation of the Contracts Clause has had a huge effect on how government regulates monopolies. The Contract Clause protects (minority) lenders against breach of contract by borrowers (majorities) to repay loans. In other words, any laws which abolish debts would be unconstitutional. The Founders added the Contract Clause in a response to Shays Rebellion where those facing foreclosure took up arms to fight local governments and lenders in Massachusetts. The Founding principles outlined in the Contracts Clause can be found in the famous case Fletcher v. Peck (1810) delivered by Chief Justice Marshall. However, by the 20th Century courts view of the Contract Clause had changed for the worse. In New York, rent control ordinances were put in place to void contractual leases between renter and landlord. In effect, renters were granted below market value rents at the expense of the landlord. This was beginning of the philosophy where “contracts are made subject to the exercise of the power of the state.” Initially the government changed private contracts under cases of extreme emergencies such as in Blaisdell v. Home Building and Loan Company (1933). The Court provided that the state could alter contracts (in this case a lease) for the public good when facing an emergency such as the Great Depression. But the Court would routinely use the Blaisdell precedent to change a variety of private contracts even when there was no emergency of any sort. The Contract’s Clause saw a brief revival in the 1970s (United States Trust Company v. New Jersey and Allied Structural Steel v. Spannaus) but it did not last long. For instance, many municipalities would place wording in contracts with vendors such as they had to adhere to any future laws and statutes. Hence, municipalities could merely change laws to force vendors to adhere to economic regulations which voided previous agreements. The Contract Clause and Ex Post Facto Laws were written to prevent exactly this type of government interference. Under these types of contractual interpretations by the Court, it was easy for government to not only control so called monopolies (lawful companies seen as evil because they are big) but any company. Consider Munn v. Illinois in 1876. In this case, the government changed a rent contract between farmers and owners of silos to store grain. The government decreased the rent silo owners could charge farmers to store grain. Farmers and silo owners were not monopolies, but yet the Court upheld regulatory price control and voided a perfectly good contract. Munn was followed with extensive government contract interference and ticket price control regulation for railroad monopolies. Although Munn declared that government regulation was only acceptable if it affected the public interest, that would change in Nebbia v. New York (1934). In Nebbia the Supreme Court held any regulation that was “rationally related to a legitimate government interest” was Constitutional. In Nebbia the Court upheld a New York law that made it illegal to sell a quart of milk for less than nine cents. The purpose may have been noble: to protect small manufacturers, but this law was flawed for many reasons. First the law had the opposite effect because it stifled competition, efficiency, and innovation in the market place. Secondly, during the Great Depression this law forced the average household to spend more on milk.

The rational basis test used in Nebbia has been used by courts to decide cases ever since this ruling. There are many issues with the rational basis test. First, it places the burden of proof on those fighting the government regulation. This would be analogous to courts holding defendants as guilty until proven innocent. This would place the burden on defendants to prove their innocence. Secondly, judges can make up and invent any rational reason to uphold a law that where not even introduced in the case. Finally, the courts have never defined what a legitimate government interest is or was. For these reasons, courts using rational basis tests very rarely strike down any law or statute. In 1938, the Court put a few restrictions on the rational basis test in United States v. Carolene Products. For instance, a state law affecting minorities, voting rights, and speech would face higher scrutiny. But many fundamental rights such as property, economic freedom, and religious rights faced a rational basis test. For instance, in Cleburne (1985) and Romer (1996) the Court held state laws did not pass the rational basis test because minority groups such as the mentally ill or the gay community would not benefit from the laws. But the Court fails to protect other minorities such as the economic rights for small business owners the same way. In essence, the Court promotes monopolies and less competition by failing to protect economic rights.