Constitutional Problems Under Nationalization

I want to thank Dan for inviting me to join the blog this month. My friends and family also thank him for relieving them of the exclusive burden of hearing my crazy ideas.

One of the major issues confronting the Obama Administration is how to fix the financial system and other industries that are reeling from the Panic of 2008. In several instances, firms that were deemed “too-big-to-fail” were nationalized to prevent a disorderly bankruptcy (Fannie Mae, Freddie Mac, and AIG) and in other cases the specter of nationalization looms (Citigroup, Bank of America, and General Motors). While I certainly hope that these takeovers will be few and brief, there is a real prospect that this will not be the case. And this presents a constitutional problem.

Put simply, there is almost no precedent for direct governmental ownership of private firms. The Populist Party of the 1890s, which is the subject of my next book, campaigned on a platform of nationalization, but that effort failed (or was just way ahead of its time). The Tennessee Valley Authority raised some questions about active state participation in the marketplace, but they were never really resolved. As a result, lawyers may be forced to think about some difficult issues over the next few years without much guidance. Here are some examples:


1. Is a nationalized firm a state actor?

One immediate concern is whether a company like AIG is now a state actor because the taxpayers own 80% of the shares. If not, then what is the standard for state actor status? This matters for employees of these firms, who might be entitled to constitutional protections akin to those held by municipal employees if they, for instance, are fired for exercising their First Amendment rights. It matters for the customers and trading partners of these firms, who may be entitled to some sort of due process protection against actions that harm their property interests. And the state action analysis also bears on the question of whether nationalized firms are shielded from some liabilities by sovereign immunity.

2. Does the United States have a conflict-of-interest under nationalization that is constitutionally suspect?

Suppose that the federal government takes over a single firm in an industry and then enacts policies that give that firm an advantage over its competitors. Absent nationalization, this would not present a problem so long as there was a rational basis for the distinction. Is that still true when the government has a direct ownership stake in the privileged firm? The answer might be yes, or yes if there was no intent to tilt the playing field in favor of the public company, which would provide for some heightened scrutiny over the challenged decision. Or maybe it means that the government has to nationalize all firms in a given industry to insulate its subsequent actions from judicial examination.

3. Are there constitutional limits on lawmaking undertaken through ownership?

The issue of “regulation-by-deal” is getting a lot of attention these days as we grapple with the implications of making policy choices through ad-hoc arrangements with firms that are on the brink of collapse. Less attention has been given to the limits, if any, on what the Executive Branch can do once it owns these firms. For example, if the federal government takes over the “Big Three” (or perhaps they should now be called the “Small Three”) and then mandates that they make nothing but electric cars, is that valid without congressional action? When the Bush Administration took unilateral decisions with respect to wireless surveillance, detainees, and coercive interrogation, that was greeted with howls of protest. But when the President announced on Monday that he can guaranty car warranties on his own authority, there was hardly any discussion. It is not obvious to me that Article Two authorizes the President to “take care” that your deal with GM should be “faithfully executed.”

I do not have the answers to these questions, but they may be coming soon to a court near you.

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3 Responses

  1. A.W. says:

    No precedent? i don’t know what you are talking about.

    There is the post office, state and even federally owned colleges. Fannie Mae and Freddie Mac. The Bank of the United States (back when it existed). As much as I wish the Supremes would come in and save us from this nightmare, i can’t think of any principled constitutional reason to do so.

  2. Carlton Larson says:

    Fascinating post, Gerard, particularly the state action issue. One analogy might be failed banks that are under direct FDIC control; are these state actors? For what it’s worth, my home state of North Dakota has two “socialized” industries, the Bank of North Dakota and the State Mill and Elevator, both of which are businesses wholly owned by the state.

  3. Train rider says:

    I would suppose that many, if not all, of these questions have been addressed by the courts with respect to Amtrak.