One of the traditional roles of government involves the facilitation of voluntary exchange through the enforcement of contracts via the legal system. This involves establishing and enforcing property rights as well as a means for resolving disputes. This system works by providing a remedy in situations in which one party harms another by breaching a contract, fraudulent misrepresentation, or negligence in representation or action.
For most individuals and businesses, real estate and construction contracts are among the most significant of investments. During any construction project, a contractor will obtain myriad permits from the local government, and the project will also go through an accompanying set of required inspections.
The supposed intent of the permit/inspection process is to guarantee that building codes and best construction practices have been met. This diminishes the likelihood that a building will collapse on innocent bystanders/occupants or lead to the widespread outbreak of a fire.
These are all worthwhile objectives, but does the system of governmental permits and inspections actually work to accomplish this?
It does not.
The legal standard of “sovereign immunity”—which is generally granted to local governments, agencies and employees in the United States—is a major culprit of this.
Sovereign immunity legally exempts the government from criminal and civil liability. “The king can do no wrong.”
This legal doctrine effectively removes any remedy that a private citizen or business would have if the local government, or its employee, commits a fraudulent or negligent action. This is important because the permitting and inspection process is often seen as a certification of quality and standard work. However, if a city inspector signs off on a local construction project without even making an appearance at the worksite, and it is later found that obvious code violations are present, neither the inspector nor the city can be held liable for the fraudulent act. The unwitting citizen relied on the government to certify that code and standards were met; the government failed to do its duty yet cannot be held accountable.
This point would be moot if we all believed, and had the evidence to support, that all government inspectors and permit issuers do their due diligence and never commit fraudulent or negligent acts. However, case law points to numerous instances where negligent action on the part of a government (or agent thereof) was established but no remedy was provided because of the sovereign immunity standard. This was the case with the Flint water crisis.
The Solution
Because the standard of sovereign immunity has appeared in the United States through common law, untangling its intricacies involves a detailed knowledge of state-specific case law. Generally, the standard of sovereign immunity is applicable unless the government explicitly waives its immunity. Many governments—but by no means all—have done so, usually by means of statute. To the extent that sovereign immunity applies, it diminishes the incentives for a government and its agents to fulfill the intended functions.
One way to remove the perverse incentives caused by sovereign immunity is to move functions away from the government and towards the private sector. There is no real reason that inspections, which are intended as certifications of quality and standards, need to be undertaken by public employees.
Many industries have well-established means of certifying quality and standards through the private sector.
In fact, higher education (often provided by the public sector) is not accredited (certified) by any governmental agency. Universities and Colleges receive accreditation from private organizations upon proving (through a lengthy and thorough process) the quality of their programs. The different accreditation providers compete with one another to establish the quality of its own certifications. Institutions with a higher respected accreditation are better able to attract students and find employers for their graduates.
The medical profession also uses private certification of quality. Board certification by the American Board of Medical Specialties (ABMS) is a credential in excess of state required licensure. Board certification is verification of a higher standard of care and knowledge of the latest developments within the certified specialty. While medical licensure is a requirement to practice medicine set by the state, certification by the ABMS is voluntary and administered by the medical community.
Rather than have local governments, under the privileged guise of sovereign immunity, engage in permitting and inspection of construction, electrical, plumbing, etc., such activities should be conducted by privately owned and operated certification firms.
Firms with the highest standards and a proven record of excellence will command a premium inspection fee, and the projects earning certification by these firms will demand market premiums. If a for-profit inspection firm is found guilty of committing fraud or neglect, that firm can be held liable both civilly and criminally. Inspection firms with persistently poor performance will be faced with excessive insurance premiums and driven from the marketplace.
Sovereign immunity removes the incentives and recourse needed to ensure quality inspections. By moving the practice of certification to the private sector, consumers will be better served.
Meet the Author
Jeremy Jackson is the director of the Center for the Study of Public Choice and Private Enterprise (PCPE) and an associate professor in the NDSU Department of Agribusiness and Applied Economics. Read his bio.