July 18, 2017

The Question of Balance

In 25 years of covering public policy for five different market-oriented institutions, I have encountered few issues that have been as intellectually challenging to me—or have led to more fights with colleagues—as federalism and federal-state preemption. What, exactly, makes federalism and jurisdictional issues so contentious, especially among liberty-minded intellectuals?

In my 1999 book, The Delicate Balance: Federalism, Interstate Commerce, and Economic Freedom in the Technological Age, I discussed that question and explored the divisions that have long existed among conservative and libertarian legal theorists and political scientists regarding these issues. These scholars are divided over the nature and extent of state “police powers” as well as the proper scope of the Commerce Clause and other provisions of the US Constitution (namely, the 9th, 10th, and 14th Amendments). Free-market scholars are also torn about how activist the courts should be in checking the power of legislatures and regulatory agencies, with some favoring “judicial restraint” but others preferring “principled judicial engagement.” Finally, they sometimes disagree about the importance of stare decisis (i.e., deference to past court decisions) when considering future policy.

By contrast, free-market economists tend to be more unified in thinking about federalism issues because when efficiency is the name of the game, every jurisdictional border looks like a restraint on trade! Accordingly, economists often favor preemption of state and local barriers to competition and innovation—so much so that many of them will even endorse the use of federal regulatory instruments, like antitrust laws or federal agency regulatory directives, to check the power of lower units of government.

I am sympathetic to that efficiency-driven impulse, especially at a time when the Internet and digital technologies make it easier than ever for goods, services, and information to transcend borders. Moreover, a large body of economic evidence has documented how traditional state and local occupational licensing rules and other regulations continue to hold back new innovations and prevent average citizens from making a living or enjoying the goods and services they desire. Such efficiency-crushing and competition-killing parochial regulations rightly prompt calls by economists for reform, possibly even through some sort of federal preemption.

But we still need some limiting principles here. After all, free-market economists also understand that preemption can go too far when it results in the expansion of federal powers aimed at controlling all human activities, no matter how isolated. No case better exemplifies such grotesque federal overreach than Wickard v. Filburn (1942), in which the Supreme Court found that the federal government’s regulatory reach under the Second Agricultural Adjustment Act of 1938 extended all the way down to the wheat a farmer grew on his property for personal consumption and which was never intended to enter the stream of interstate (or even intrastate) commerce.

Following Wickard and a host of other New Deal decisions, the floodgates were opened and federal encroachment on any and all traditional state and local activities was considered fair game, regardless of the original constitutional limitations on the federal government. Free-marketeers loathe such federal overreach on the grounds that it is not liberty enhancing. Yet they still regularly call for preemptions where they see the potential for efficiency or liberty gains.

The problem is that what most free-market economists desire—a clean form of deregulatory preemption that seeks to regulate the flow of interstate commerce by making it “regular” or free of artificial constraints—is only rarely achievable. All too often, well-intentioned efforts to preempt on efficiency grounds end up augmenting the power of federal agencies in the process. In other words, we win a little freedom in the short term (through the preemption of misguided state or local policies) only to lose it later (via potentially more onerous federal rules and taxes).

For example, we’ve spent decades preempting state and local governments on telecommunications policy, environmental rules, and food and drug issues. Much of it was done in the name of efficiency or harmonization, and it all probably made a certain amount of sense. But in the process we got the FCC, the EPA, the FDA, and volumes of federal red tape on all those fronts. I am still not sure that the tradeoff was worth it, considering the massive costs those agencies impose on innovation.

Some will still make the case that one big set of inefficient federal rules is probably preferable to a patchwork of 50 or more state and local rules. That calculus depends largely on context and circumstances, of course. That logic also denies the potential for a state patchwork to create beneficial forms of policy competition in which the so-called laboratories of democracy offer potentially more liberty-enhancing jurisdictional arrangements.

Ironically, therefore, when it comes to calls for preemption, free-market economists might be falling prey to the same sort of “nirvana fallacy” they often decry in other contexts. They are willing to dispense with what Harvard philosopher Robert Nozick once called a “utopia of utopias” model of decentralized governance and instead roll the dice on one big, beautifully free national marketplace.

Alas, that nirvana seems more elusive than ever. Most efforts to preempt remain muddied by all sort of regulatory baggage, and federal agencies and budgets just continue to swell without constraint. We should never forget that, at root, preemption represents the aggregation of power in a centralized fashion, and preempting without simultaneously growing the size of the federal government often proves enormously challenging. When Jefferson penned the Declaration of Independence and complained about how a distant government had “erected a multitude of New Offices, and sent hither swarms of Officers to harass our people and eat out their substance,” he could never have imagined that America’s federal government could grow to become the massive force of centralized power that it is today, eating the substance of almost every citizen, community, and corporation.

Thus, we probably need a more sophisticated analysis than just “is it efficient?” as the baseline of our preemption decisions. We need a multi-factor test that takes many different issues and values into account. In my 1999 book, I offered an eight-part framework that attempted to strike a balance between the competing values of decentralization and harmonization.

Economists would probably appreciate my focus on network externalities and substantial interstate spillovers as foundational to preemption considerations. But I also stressed the need to get serious about what legitimately constitutes “interstate” commerce relative to the many other activities that do not count as such. And while endorsing efforts to breathe new life into 14th Amendment–related economic liberty claims, I also argued that we must accept that states and localities will continue to exercise many legitimate “police power” functions that their citizens demand in order to tailor government policies to the desires of their communities. Striking this balance is, as I concluded in my book, a horribly messy and unsatisfying endeavor. “[T]he world of federalism is painted not in black and white, but rather in shades of gray,” I noted then. “Simply put, clear-cut solutions to jurisdictional disputes and federalism questions are not always evident or even possible.”

And so my frustration with federalism issues continues today. And here we are, still trying to figure out sensible standards and tests for how to strike this balance. I hope my Mercatus colleagues can come up with more satisfactory solutions than I have after a quarter-century of wresting with this topic.