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Second Time as Farce: the Absurdity of the New Anti-CFPB Arguments

posted by Adam Levitin

Karl Marx's famously quipped how historical figures appear twice, "the first time as tragedy, the second time as farce." So too with the legal arguments about the constitutionality of the CFPB's funding: we are firmly in farce territory at this point. 

Nevertheless, over at Ballard Spahr's Consumer Finance Monitor blog my friend Alan Kaplinsky doesn't seem to get the joke and has earnestly taken issue with my criticisms of Hal Scott's claim that the CFPB's funding is unauthorized both by statute and under the Constitution. I find the legal arguments involved here so thin that I wouldn't bother with a second blog post about them, other than that they've found a welcoming audience from some members of Congress (yes, I can hear the remarks from the peanut gallery...).  So let's go through this again.

To quickly review, Scott's statutory argument is that the CFPB's funding comes from the "earnings" of the Federal Reserve System, which have been negative on a net basis (that is income minus expenses) the last couple of years. Accordingly, Scott claims that the CFPB has no claim to any funding from the Federal Reserve System for the last couple of years.  

Scott's constitutional argument is based on the Supreme Court holding last month in CFPB v. CFSA that the CFPB's draw on the Fed is an "appropriation" because the funds would otherwise have gone to Treasury, so it's effectively money drawn on the Treasury. Scott takes this to argue that if the Fed isn't running a surplus that it can remit to Treasury, then it cannot be an appropriation.

So what's wrong with these arguments?

The Statutory Argument

On the statutory reading, the Consumer Financial Protection Act does not define "earnings." The term could, in a vacuum, mean either "net earnings" or "gross earnings"—that is income minus expenses or total income. Given that SCOTUS has instructed us that dictionary=law, it's simple enough to resolve this.  Merriam-Webster's defines "earnings" as: (1) "something (such as wages) earned" or (2) "the balance of revenue after deduction of costs and expenses". The first definition is gross income, while the latter is net income. (Notice what isn't anywhere on the menu:  Alan Kaplinsky's suggestion that "earnings" means earnings minus dividends. I honestly don't know where Alan came up with that particular construct, but it lacks any support.)

It's hardly obvious which meaning Congress intended in a vacuum, but we don't live in a vacuum. Two factors suggest that the term "earnings" has to mean "gross earnings".

First, the Federal Reserve Act refers to "net earnings," which suggests that "earnings" is not the same as "net earnings," and if it isn't the same, it's hard to see what it could be other than "gross earnings."

Second, the anti-absurdity canon of statutory construction militates toward reading the term as "gross earnings." If Hal Scott were correct and the term means "net earnings," then Congress set up a major government agency that can only operate if and when a separate agency is profitable. That's preposterous on its face, and it lacks any support in the legislative history. The only sensible reading of the statute is that earnings means gross earnings. 

The Constitutional Argument

Scott's Appropriations clause argument is actually somewhat misleading. The Supreme Court held that the CFPB's funding was an appropriation and therefore it had to comply with the Appropriations clause. Scott says that because CFPB's funding is not an appropriation in years when the Fed doesn't run a surplus "the agency can't rely on the Appropriations Clause...to justify the legality of its continued operations."

The implication here is that unless the CFPB's funding is an appropriation that it is illegal. But it's hardly obvious that the funding of a government agency must be an appropriation to be legal, as the Appropriations clause is only about money "drawn on the Treasury." In CFPB v. CFSA the parties all agreed that the funding was subject to the Appropriations clause, but if it were not, it's not immediately apparent that it would be illegal. 

In any event, Scott is wrong on whether the funding ceases to be an appropriation when the Fed isn't running a surplus. The Supreme Court explained in CFPB v. CFSA that "Under the Appropriations Clause, an appropriation is simply a law that authorizes expenditures from a specified source of public money for designated purposes." Notice that the appropriation is the authorization, not the actual funds. As I noted in my original blog post on this issue, Congress can authorize spending from a particular source of future revenue, irrespective of whether that future revenue materializes. Alan Kaplinsky has no response to this point that I've seen.

Additionally, it's hardly obvious why one would use fiscal year accounting measures of the Fed's profitability for "appropriations" that can be multiyear or even indefinite (as long as they are not for the army). Alan Kaplinsky suggests that we should not assume that the Fed will ever again operate at a profit. Really? In any case, I don't know why a court would adopt an assumption that would lead to a constitutional problem when the opposite assumption seems just as fair.

Finally, Scott's reading fails on the anti-absurdity canon: ambiguity in the Constitution should not be interpreted to produce an absurd result in which a government agency's funding is legal, but only in years where another agency happens to run a surplus. Simply put, Scott's reading on both the statutory and constitutional issues just is not plausible. 


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