The Repeal of Chevron Deference Could Boost the Economy and Your Portfolio
In June, the U.S. Supreme Court overturned the four-decade legal precedent known as Chevron Deference. Oddly, it is getting very little media attention, but it could be the single most disruptive Supreme Court decision for the economy in our lifetimes.
Before I get into the downstream economic impact, let me first explain the legal nuances of the 1984 and 2024 court cases regarding Chevron so that you, as a reader, have a better grasp of the gravity of these cases.
In 1984, the Supreme Court handed down a ruling for Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc. which granted extraordinary interpretive and regulatory authority to federal agencies such as the Environmental Protection Agency (EPA). The majority opinion establishes “two questions.” They wrote the following:
When a court reviews an agency's construction of the statute which it administers, it is confronted with two questions. First, always, is the question whether Congress has directly spoken to the precise question at issue. If the intent of Congress is clear, that is the end of the matter; for the court, as well as the agency, must give effect to the unambiguously expressed intent of Congress. If, however, the court determines Congress has not directly addressed the precise question at issue, the court does not simply impose its own construction on the statute, as would be necessary in the absence of an administrative interpretation. Rather, if the statute is silent or ambiguous with respect to the specific issue, the question for the court is whether the agency's answer is based on a permissible construction of the statute. If Congress has explicitly left a gap for the agency to fill, there is an express delegation of authority to the agency to elucidate a specific provision of the statute by regulation. Such legislative regulations are given controlling weight unless they are arbitrary, capricious, or manifestly contrary to the statute. Sometimes the legislative delegation to an agency on a particular question is implicit rather than explicit. In such a case, a court may not substitute its own construction of a statutory provision for a reasonable interpretation made by the administrator of an agency.
Put simply, federal agencies must first determine if Congress was “precise” and “clear” regarding a statute. If the statue was “ambiguous” and if congress has “explicitly left a gap,” then a federal agency may fill that gap with rules. Essentially, this codified the punting of authority to unelected federal bureaucracies and away from the chambers of democratically elected officials. Thus, Congress —and therefore the courts — were deferring to federal administrative agencies, hence Chevron Deference.
This poses two fundamental problems. First, Chevron opens the floodgates to endless amounts of new rules. Second, a federal agency, in my estimation, becomes the judge, jury, and executioner. Many legal scholars view this arrangement as an unconstitutional consolidation of power and a usurpation of the balance of powers between the three branches of government, as set forth in the U.S. Constitution. Congress creates laws, the courts interpret laws, and the Executive Branch (i.e. federal agencies) enforces laws. The repeal of Chevron Deference restores those powers and limits the unwieldy amounts of new rules.
The most recent decision from this June— Loper Bright Enterprises v. Raimondo and Relentless, Inc. v. Department of Commerce — restores the balance of power. The majority opinion states:
Chevron cannot be reconciled with the APA by presuming that statutory ambiguities are implicit delegations to agencies. That presumption does not approximate reality. A statutory ambiguity does not necessarily reflect a congressional intent that an agency, as opposed to a court, resolve the resulting interpretive question. Many or perhaps most statutory ambiguities may be unintentional. And when courts confront statutory ambiguities in cases that do not involve agency interpretations or delegations of authority, they are not somehow relieved of their obligation to independently interpret the statutes. Instead of declaring a particular party’s reading “permissible” in such a case, courts use every tool at their disposal to determine the best reading of the statute and resolve the ambiguity. But in an agency case as in any other, there is a best reading all the same—“the reading the court would have reached” if no agency were involved. Chevron, 467 U. S., at 843, n. 11. It therefore makes no sense to speak of “permissible” interpretation that is not the one the court, after applying all relevant interpretive tools, concludes is best.
Perhaps most fundamentally, Chevron’s presumption is misguided because agencies have no special competence in resolving statutory ambiguities. Courts do. The Framers anticipated that courts would often confront statutory ambiguities and expected that courts would resolve them by exercising independent legal judgment. Chevron gravely erred in concluding that the inquiry is fundamentally different just because an administrative interpretation is in play. The very point of the traditional tools of statutory construction is to resolve statutory ambiguities. That is no less true when the ambiguity is about the scope of an agency’s own power—perhaps the occasion on which abdication in favor of the agency is least appropriate.
In other words, matters of ambiguity in the law are not necessarily “intentional,” and furthermore, when there is ambiguity, it is the role of the courts to resolve those ambiguities — not administrative agencies. The majority opinion makes it clear that the role of administrative agencies is to do their best to interpret the law in good faith and to rely on the courts when laws are unclear. The role of administrative agencies is “unremarkable, yet elemental.”
The majority opinion also notes that, “Chevron cannot be reconciled with the APA:”
Congress in 1946 enacted the APA “as a check upon administrators whose zeal might otherwise have carried them to excesses not contemplated in legislation creating their offices.” Morton Salt, 338 U. S., at 644. The APA prescribes procedures for agency action and delineates the basic contours of judicial review of such action. And it codifies for agency cases the unremarkable, yet elemental proposition reflected by judicial practice dating back to Marbury: that courts decide legal questions by applying their own judgment. As relevant here, the APA specifies that courts, not agencies, will decide “all relevant questions of law” arising on review of agency action, 5 U. S. C.§706 (emphasis added)—even those involving ambiguous laws.
The Administrative Procedure Act (APA) passed by Congress in 1946 makes it undeniably clear that it is the role of the courts not “administrators whose zeal might otherwise have carried them to excesses” to interpret the specific nuances of a law. Furthermore, the courts retain the power to overturn administrative actions if those actions are deemed outside the scope of the law. The role of administrative agencies is to simply execute the laws set forth by congress and to rely on the courts’ interpretive power if ambiguities arise. Chevron clearly ran afoul of the APA.
One critique of the overturn of Chevron is that subject matter experts will no longer provide proper guidance. For instance, a nuclear power expert in the EPA is best suited to guide that industry on matters of safety. The argument is that a group of legal scholars in black robes lack sufficient knowledge to provide the necessary guidance. Fair point, but this is untrue. Subject matter experts will not lose their ability to shape rules; rather, they will enter a new balanced forum. These experts — whose opinions are indeed important — will become expert witnesses in judicial proceedings. While they will no longer be able to act unilaterally within their respective agencies, their opinions will be utilized during court cases when ambiguities arise.
Another critique is that there will no longer be any corporate accountability. That isn’t even relevant. Laws will not vanish, but the forum to adjudicate such laws will return to its proper home, the courts. The regulators aren’t going anywhere, but their unchecked authority will be properly directed. Furthermore, there is nothing stopping a society’s desire to pursue corporate accountability. If it is the will of the people in a democratic republic such as ours, Congress can act. Besides, that is how the Framers of the Constitution envisioned it.
The repeal of Chevron doesn’t just put a check on regulators inside administrative agencies, it also puts a check on the entire Executive Branch, namely the president. The president’s power to issue dictates via executive orders without congressional support will also be stunted. Again, the three branches of government will be forced to cooperate further.
One final critique I came across in an article is that certain industries such as Wall Street banks will not be properly regulated. For instance, what if deregulation promotes risk taking by banks and financial institutions which leads to another financial crisis? Isn’t preventing another financial crisis critical for economic growth? The fundamental flaw in this reasoning is the presumption that regulators have the proper incentives to enforce effective rules. The idea that regulators are not driven by political motives is misguided.
For instance, a careful examination of the 2008/09 Financial Crisis demonstrates that the regulators actually blew hot dry wind on the forest fire of financial risk taking by pressuring banks to underwrite subprime mortgages. Regulators didn’t just fail to regulate the banks properly, they actually crafted rules that exacerbated the problem. The presence of regulators, and therefore regulations, does not necessarily lead to economic stability.
Now what does all of this have to do with the economy, financial markets, and your portfolio? A lot, actually.
The administrative state has caused onerous and costly regulations to spike over the last four decades; costs which have weighed heavily on the U.S. economy. According to a study by the Competitive Enterprise Institute, they estimate $1.939 trillion of annual costs (7.4 percent of U.S. gross domestic product) due to regulatory compliance and economic intervention. The study notes, “If it were a country, U.S. regulation would be the world’s ninth-largest economy (not counting the United States itself), ranking behind Canada and ahead of South Korea.” Lastly, “Regulatory costs stand at nearly two-thirds the level of corporate pretax profits of $3.138 trillion (which have surged from $2.18 trillion). They greatly exceed estimated corporate income tax revenues of $382 billion.” Such burdens drastically stunt economic growth.
The sheer volume of rules pouring from the administrative state dwarfs those laws being passed by Congress. According to the Federal Register, the daily depository of rules and regulations, there were 3,018 new rules added by the Biden administration in 2023. That added 90,402 pages of regulations to the books, the second highest count in history. Compare that to just 27 laws passed by Congress and signed into law in the same year. The Biden administration is no exception, every administration going back to George H.W. Bush in 1989 added 3,000 to 5,000 new regulations every year. This amounted to millions of pages of new regulations in that timespan. The repeal of Chevron should reduce the amount of pages added to the Federal Register each year.
The obvious benefit to the economy is that we will likely experience far fewer regulations. The administrative state will be stunted in their ability to craft endless rules for private industry under the pretense of ambiguities in the law. And if those agencies start crafting rules far beyond the reasonable scope of the law, businesses will now have greater incentive to challenge such onerous rules in the courts.
Also, the incentives are now in place for Congress to start writing much clearer laws because their efficacy will only go as far as the courts’ capacity to interpret said laws. Congress can no longer rely on administrative agencies to do their bidding.
Lastly, entrepreneurial uncertainty is another financial burden that is near impossible to quantify but is indeed a cost. Private enterprise often balks at the sight of new regulation and thus is hampered in their otherwise productive activities. For instance — and I am not here to weigh in on the merits of the rule — when the Department of Labor unilaterally pushed through the “Fiduciary Standard” on my industry back in 2016, many financial firms froze in place and even cancelled certain investment products (such as front-loaded mutual funds) on their platform. Eventually, this rule was vacated by the U.S. Circuit Courts, but the damage was already done. This loss of productivity could not be undone.
Entrepreneurial uncertainty is often studied by economists, and many believe it was a major contributor to the depth and duration of the Great Depression which, not coincidentally, coincides with the New Deal era of the burgeoning administrative state. For instance, entrepreneurs will slow down productive behaviors (such as hiring) when they do not know how to adjust to a new rule. Uncertainty around new rules can shutter an economy. The repeal of Chevron will reign in these rules which drive uncertainty.
If the effects of this decision unfold as I predict, the private sector will likely see fewer rules, current rules will be challenged with greater frequency, and the courts will likely step in sooner to provide clarity to the business community. Ceteris paribus, this spells economic growth. If the economy grows, the stock market grows. If the stock market grows and you are a diversified equity investor, your portfolio will likely follow suit. This is good news.
*While many wealth advisors and industry experts use AI to generate market commentary, my research is an organic and authentic byproduct of my training as an economist and wealth advisor. The words and thoughts on this blog are solely mine, and they have not been artificially generated by AI such as Chat GPT.
Written by: Drew Benson, CFP®, AAMS™
President & Founder, Benson Wealth Management, LLC & Senior Wealth Advisor, RJFS
Any opinions are those of Drew Benson and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice.