Brigham Daniels (BYU), When Agencies Go Nuclear: A Game Theoretic Approach to the Biggest Sticks in an Agency’s Arsenal, 80 Geo. Wash. L. Rev. 442 (2010):
A regulatory agency’s arsenal often contains multiple weapons. Occasionally, however, an agency has the power to completely obliterate its regulatory targets or to make major waves in society by using a “regulatory nuke.” A regulatory nuke is a tool with two primary characteristics. First, it packs power sufficient to profoundly impact individual regulatory targets or significantly affect important aspects of society or the economy. Second, from the perspective of the regulatory agency, it is politically unavailable in all but the most extreme situations. They are found in many corners of the federal bureaucracy. This Article illustrates that even when individual regulatory nukes get our attention, we often think about these weapons in unproductive ways. Typically, regulatory nukes are approached in a bipolar way. On the one hand, they may be seen as regulatory anomalies with little relevance to most regulated entities. On the other hand, particularly if an agency has launched its regulatory nuke, the launch becomes part of agency lore and the story is of the destruction left in its wake.
Drawing on the Nobel Prize–winning game theory developed by Thomas Schelling, this Article moves beyond the dud/mushroom cloud dichotomy and recasts the regulatory nuke as an important factor that influences the calculus of regulation. This analysis suggests that agencies often get mileage out of regulatory nukes by pointing their weapons rather than firing them: the power of the tool is often leverage in regulatory diplomacy—for threats, posturing, and coercion. Although this Article is based on game theory, it also provides a wealth of examples that work to illustrate the real-world importance of the theory to many aspects of the administrative state. …
[T]he IRS has trouble leveraging its ability to revoke a nonprofit organization’s tax-exempt status: it has the option to do nothing or to revoke, but in large part, between those extremes, the IRS’s hands are tied. By taking steps smaller than launching a regulatory nuke along the path of enforcement, an agency is able to show that it means business even when it comes to regulatory nukes. …
Consider a regulatory nuke that is quite familiar to the average American—the prospect of prison time for tax evasion. In 2009, the IRS received nearly 140 million tax returns and only recommended that the Justice Department prosecute 1269 for tax or tax-related crimes. This represents fewer than 1 recommendation for every 100,000 returns submitted. Additionally, it seems unlikely that the Justice Department would pursue each recommended case. Interestingly, the IRS only examined approximately one percent of the returns filed in detail. The IRS does not need to use direct threats to convince most Americans that paying federal taxes is necessary. Although the story of the citizen who failed to pay taxes and ended up in prison might get media coverage and capture the public’s attention, the much more common story of compliance is less exciting. “Citizen Pays Taxes” is a terrible headline. With mushroom clouds on the horizon in this example and many like it, we overlook the story that defines the vast majority of potential regulatory targets and rather focus on the story of the exception. …
[T]wo agencies have suffered in recent years due to their inability to launch regulatory nukes. The first is the IRS. As mentioned earlier, one of the regulatory nukes the IRS possesses is the ability to strip a charitable organization of its nonprofit status in the event that the organization endorses a political candidate. The IRS’s inability to follow through with threats has emboldened churches to challenge the IRS by publicly endorsing candidates in what the churches deemed “Pulpit Freedom Sunday” and then sending copies of their sermons endorsing candidates to the IRS. As of yet, the IRS has not responded to these provocations, which only highlights the IRS’s unwillingness to enforce all the more.
In informal conversation, we often hear people comparing an agency’s power to aspects of war: big guns, arsenals, war chests, weapons, and triggers, just to name a few. When an agency resorts to an extraordinary means that ordinarily is politically unavailable, we might say that the agency dropped the bomb, or that it went nuclear. Analyzed through the lens of game theory, we see that this analogy is not only apt but also holds untapped insights into agency powers. This theoretical lens suggests, and real-world examples confirm, that the way an agency leverages its regulatory nukes is more nuanced than might be expected. As the Peacekeeper Missile’s name implies, successful leveraging of nukes, including regulatory nukes, can result in compliance that negates the need to launch the weapon. Regulatory nukes often are misunderstood and underestimated by legal scholars and practitioners. Remedying this misconception is important if we are to understand the regulatory nuke’s true force, and if those inside and outside of agencies are to understand how the regulatory nuke game is played. Even in the rare event that an agency goes nuclear, we should not be so blinded by the light of the explosion that we fail to see the more important story of threats and compliance that hides in the shadows.
