Regulation: Spoils Sports

The adiministration's civil-rights agenda: income redistribution

"Fed Finds Disparities in Mortgage Denials," blared a Washington Post headline on October 27. The Post reported that data from the Federal Financial Institutions Examination Council showed that "blacks and Hispanics were nearly twice as likely as whites with similar incomes to be denied credit in 1993."

But the Home Mortgage Disclosure Act data did not include the credit ratings of the individuals surveyed. It didn't consider the applicants' balance sheets—had they accumulated assets when they applied for loans or were they mired in debt? The report merely compared the percentage of loans approved for people of different racial backgrounds who have similar incomes, not why people who were denied loans didn't get them.

To civil-rights advocates, this information appears irrelevant. Even though the number of loans to blacks last year increased by 36 percent, the loans to Hispanics by 25 percent, and the loans to Asians and American Indians by 7 percent, this hardly qualifies as progress for civil-rights activists. Robert L. Gnaizda, general counsel of the San Francisco-based Greenlining Coalition, told The New York Times that some lending institutions "will not go far [in lending to members of racial minorities] until they bear the brunt of more Justice Department suits."

And the administration has proposed new regulations under the Community Reinvestment Act that require banks to offer credit in the communities where they take deposits. The regulations would force banks to record the race and gender of small-business owners who receive loans. Regulators would use this information to make sure that financial institutions are lending money in the proper proportions (that is, by quotas) to targeted groups.

Under the proposed regulations, a business that is a male-female partnership would be considered as male-owned unless the female owns at least 51 percent of the partnership; similarly, a business with equal white-black or white-Latino ownership would be considered white-owned unless the "minority" owner possesses a majority of the business.

It's payback time for civil-rights groups who claim they were stiffed during the Reagan and Bush years. The Clinton administration has filled its anti-discrimination offices with representatives of left-leaning organizations who see race-conscious policies, along with tougher regulations on businesses and individuals, as appropriate ways to redistribute wealth to certain favored groups. Rather than ratchet up tax rates, the Clintonites have discovered that regulations and aggressive law enforcement can also move resources around. In an October 26 Washington Post story, Deval Patrick, head of the Justice Department's civil rights division, defended the administration's aggressive stance by saying, "It's nuts to think that we could reverse the effects of 300 years of deprivation by a few court decisions and a few good statutes."

Of course, the Clinton White House hasn't created its anti-discrimination policy out of whole cloth. It had knowing accomplices in the Bush administration who championed the 1991 Civil Rights Act, which for the first time permits jury trials and lets plaintiffs seek punitive damages (for as much as $300,000) in employment-discrimination suits. Bush was also a key supporter of the Americans with Disabilities Act, a law Minneapolis employment attorney David Duddleston calls "the most significant employment bill since the Civil Rights Act of 1866."

The Equal Employment Opportunity Commission, which pursues private-sector discrimination cases, is flooded with potential lawsuits; the ADA is fueling that surge. At the end of the third quarter of 1994, the EEOC reported 92,396 discrimination charges awaiting investigation, a 31-percent increase over the total at the end of September 1993. The EEOC says implementation of the 1991 Civil Rights Act and the ADA has doubled its inventory of cases pending investigation. The number of pending disability cases has increased by 27 percent, from 10,737 in the third quarter of 1993 to 13,651 at the same time in 1994—the largest increase in number of cases facing the commission.

Even with the Bush legacy, current civil-rights litigation has a decidedly Clintonian spin. Consider:

? The Labor Department is undertaking a high-profile campaign against government contractors that allegedly discriminate. Its criteria for discrimination, however, appear to be creative. For instance, in September the department announced a $6.5-million settlement in a 17-year-old case against Honeywell Inc. Business Week reports that the department used as "evidence" of discrimination against women Honeywell's practice of posting some internal promotions on blue paper.

? The Federal Communications Commission implemented minority set-asides for the auction of a new category of wireless telephone and data-service licenses. While federal agencies have previously used set-asides only in those instances where past discrimination existed, here the FCC is allocating licenses for entirely new technologies on racial grounds. FCC Chairman Reed Hundt has said these set-asides are "not affirmative action but affirmative opportunity."

? On September 6, the Justice Department reversed its position in the case of Sharon Taxman, a white New Jersey high-school business teacher who was laid off so that an equally qualified black teacher could keep her job. School officials in Piscataway had previously decided such layoffs by drawing lots; in this case, officials admit Taxman was fired solely because of her race. The Bush administration represented Taxman, who won her discrimination case in U.S. District Court. On appeal, Clinton's Justice Department has filed a brief for the school board, saying employers can use affirmative-action programs to promote members of racial minorities ahead of equally qualified whites.

? Business are starting to notice the effects of the Family and Medical Leave Act, which George Bush opposed and Clinton proudly signed into law. When combined with the ADA, says attorney Duddleston, the family-leave act "is a phenomenal problem for employers." Employers have traditionally been able to demote or fire workers who were consistently absent from their jobs. Duddleston, a partner in the firm of Mackall, Crounse & Moore, says chronically absent workers now use the FMLA to claim that family illnesses have caused them to develop mental disorders that require time away from the job; these workers then sue if their employers try to penalize them.

Perhaps the most breathtaking civil-rights enforcement affects financial services. Along with the proposed CRA regulations, the Justice and Treasury departments are pursuing banks and other financial institutions that are allegedly violating fair-lending practices. Justice has already sanctioned banks in Mississippi, New England, South Dakota, Georgia, and Maryland for supposedly discriminating against members of racial minorities. Barnett Bank, Florida's largest, is under investigation.

But there's little evidence that systematic discrimination is taking place. In the Maryland case, Chevy Chase Savings Bank was forced to cough up $140 million to African Americans by, for example, offering below-market-rate loans to minorities and placing ads in black-owned newspapers. Justice showed no evidence that Chevy Chase, the largest thrift in the D.C. area, had denied loans to individuals because of their race. Rather, Chevy Chase hadn't opened new branches in predominantly black neighborhoods. The bank had been operating branches in African-American neighborhoods, but that didn't satisfy civil-rights enforcers: Either those branches had been acquired in a merger or the neighborhoods in which these branches operated had been predominantly white when the branches opened.

Two governors of the Federal Reserve System have criticized the proposed CRA regulations, saying financial institutions will make risky loans to women or racial minorities so that they can avoid discrimination lawsuits. Fed Governor Lawrence Lindsey considers the regulations a blatant power grab by political micromanagers in Congress and the White House. He has recently encouraged public comments, presumably critical, of the regulations. And Governor John LaWare told the Dow Jones News Service, "I feel very uneasy about the de facto allocation of credit and banking resources by administrative fiat."

It isn't necessary for the Clinton team to sue employers en masse to guarantee that money and jobs flow to members of favored groups: A few high-profile cases will do. Companies shy away from the glare of publicity in discrimination cases, even if they are blameless. And when a firm faces a discrimination charge, says Stephen A. Bokat, general counsel for the U.S. Chamber of Commerce, managers "are faced with a Hobson's Choice: spend a fortune to defend yourself, having a jury which isn't sympathetic to business decide the case, or settle."

Though the 104th Congress will presumably look askance at even tougher business regulations, the administration's civil-rights team can still cause plenty of mischief for business operators. Karen Kerrigan, president of the Small Business Survival Committee, says civil-rights advocates and union leaders can use their contacts with sympathetic government officials to push tougher regulations without the help of Congress. Reich, for instance, has cultivated contacts with feminist groups who want to implement comparable worth.

In the long run, however, Kerrigan predicts these backroom deals between activists and regulators will backfire. She notes a growing sentiment among business operators that "government has overstepped its boundaries. Employers and average citizens have recognized this and have called a halt to new legislation." Stopping new laws may well slow down hyperactive regulators. A more daunting task will be rolling back the regulatory apparatus that's already in place.

Rick Henderson is Washington editor of REASON.