Working Paper No. 11-46:
Economic Uncertainty, the Courts, and the Rule of Law

Author(s):

Todd Zywicki

Date Posted: November 2011

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Abstract:

Should judges protect private property rights and constitutional rights as vigilantly in times of crisis as in ordinary times? Conventional wisdom holds that crises justify suspending the rule of law and allow government discretion to address the crises. I argue that this lesson of past economic crises as well as the most recent crisis is that we should uphold the rule of law with special rigor in times of economic crisis because the temptations for politicians to misuse their powers during times of crisis are especially great. During crises, judges must be particularly vigilant in protecting private property and constitutional structure.

Crisis often is invoked to rationalize both governmental discretion and waiver of the rule of law.  But as the financial crisis and its aftermath reveal, it is precisely during times of crisis that it is most important to tie the hands of government with the bonds of the rule of law. First, in times of economic crisis there is a special need for government behavior to be predictable and rule-bound to encourage investment and economic recovery in a period of uncertainty. Second, adherence to the rule of law in the face of crisis is important to restrain politicians from using the crisis to pursue their own self-interest or unleashing rent seeking by special interest groups - both of which dampen economic recovery and long-term economic growth. Third, the government’s seizure of discretion creates a ratchet effect whereby the discretion and exceptions to the rule of law made during the crisis ossify and never return to pre-crisis levels. Fourth, the dynamics of short-term interventions tend to invite moral hazard that can be exploited by powerful special interest groups.