Recent Supreme Court rulings, including — but not limited to — the overturn of the so-called Chevron deference doctrine, could result in the largest pushback on federal regulations since the Reagan administration, according to J.P. Morgan Asset Management’s Michael Cembalest, chairman of market and investment strategy.
In a new “Eye on the Market” analysis titled “The Supreme Court vs. the regulatory state,” Cembalest added that the deregulatory fervor may be emboldened if Republicans retake Congress in the fall.
“GOP control may enable Trump to sign into law ‘deregulatory’ legislation which would be harder for a future administration to reverse,” he said.“A GOP-controlled Congress could also use the Congressional Review Act to reject recently promulgated regulations by the Biden administration and prohibit adoption of substantially similar rules.”
Cembalest noted that the pushback would be a continuation of what happened during Trump’s first administration, when “the pace of regulation slowed due to executive orders, guidance documents, regulation freezes, and litigation abeyances.”
President Biden reversed much of Trump’s deregulatory moves, sometimes using the same approach to dismantle them as Trump had used, he noted.
But the world has changed. For decades, the so-called Chevron deference ruling allowed U.S. federal agencies the right to interpret vague or ambiguous federal laws. Then last month the Supreme Court struck it down. Cembalest quoted the majority opinion written by Chief Justice Roberts saying that agencies “have no special competence in resolving statutory ambiguities while courts do.”
Cembalest noted that agencies would no doubt disagree: “Ouch! If someone said I had no special competence for my job, I would be pretty offended.”
He noted that the decision had far-reaching implications. Environmental, labor and financial regulations like those enacted by the Securities and Exchange Commission could be easier for Republican judges and the conservative-dominated Supreme Court to strike down. “A wave of litigation may now challenge government regulations, at times before deliberately selected courts/judges, and with limited deference to agency opinions,” he said.
To push back against the Supreme Court ruling, Congress could explicitly grant agencies the power to resolve statutory ambiguities and fill in statutory gaps, he noted.
But Cembalest appeared skeptical. “Even bipartisan legislation may now be harder to pass since Congress will have to add much greater specificity in its bills, rather than leaving such work to agencies, he said. “Many bills that Congress intends to put in front of Biden before his term ends could be affected.”
The ruling is a backlash against the gradual expansion of the regulatory regime over the last three decades. He said regulatory outlays have doubled in real terms since the 1970s and under Biden, the number of “economically significant” rules spiked to their highest level ever.
The J.P. Morgan executive does not make the case for — or against — deregulation. “Regulation is in the eye of the beholder,” he said.
“On the anecdotal front, there are plenty of examples of regulatory overreach,” he said, mentioning a 2017 New York Times article citing “regulatory fatigue” regarding thousands of regulations on New York apple orchards and offering former Sen. George McGovern’s admission that “frivolous claims and high fees” caused his business to fail.
“It’s tempting to be outraged by these burdens on small and large businesses and the drag on productivity,” Cembalest said. But he added a caveat: “That is, unless you: live near a toxic train derailment whose impacts spread to 16 states; become severely ill due to forever chemicals in food or water; end up sick after swimming in U.S. rivers, streams, lakes, and ponds, half of which are classified as impaired due to farm pollution; or end up dead due to regulatory failures to control pharmaceutical company promotion of opioid use.”
He also mentioned a number of issues that agencies have handled for years that may now go to the courts. For example, the ruling could “impact the current large partnership enforcement initiative,” of the Internal Revenue Service “and may lead to renewed challenges to partnership anti-abuse rules.”
Other recent Supreme Court decisions could add to the deregulatory fervor. For example, he noted that the Court held that the statute of limitations for bringing pre-enforcement challenges to a federal regulation now will start at the time a business is adversely affected by the regulation, rather than when the regulation was first adopted.
In another decision, the Supreme Court ruled that individuals or companies facings civil fines and penalties levied by federal agencies, including the SEC, will now be granted the option of a jury trial in federal court.
