Draft: Do not cite without permission
BUSINESS, THE STATES, AND FEDERALISM’S POLITICAL ECONOMY
Michael S. Greve*
The proximate cause of this conference and article is a highly publicized conflict between business and, on the other side, state officials and conservative Congressmen and Senators over a legislative effort to limit federal preemptions of state and local laws. The nasty spat caused consternation among parties who consider themselves political allies, inconvenience for conservative federal legislators who consider themselves friends of both business and states’ rights, and gleeful, if uncomprehending, coverage by the Washington Post. Occurring as it did under a liberal administration, the conflict between business and state and local interests seemed particularly gratuitous to participants and well-meaning observers. Businessmen and governors (at least, conservative, pro-business governors), the thinking goes, share anti-“Big Government” interests and values. Thus, they ought to be able to agree on a whole host of issues and, in particular, on federalism. Surely, their residual disagreements rest upon iron-outable misunderstandings.
Much more is at stake in the dispute than some temporarily entertaining K-Street squabble. Most obviously, mutual respect and understanding are essential to a productive relationship between state governments and corporations. From a broader, non-participant perspective, the state-business relation merits attention because on any given issue, a national coalition of states and business is very difficult to beat. Thus, the possibility that such a coalition might assemble regularly, on federalist ground and across a range of issues, raises the hope that federalism faces a very bright future.
On a wide range of issues that are chiefly a matter of state and local concern, governors and business executives are in fact accustomed to productive, mutually advantageous relations. State officials recognize that the creation of a favorable business climate—through favorable tax and regulatory regimes, an educated labor force, a workable infrastructure, and sensitivity to “quality of life issues” that are of great concern to employees and employers—is foremost their responsibility, not the national government’s. To be sure, not all forms of state competition for business and productive citizens are efficient. Moreover, state officials are often constrained, and their decisions are often entangled with, federal regulatory and funding regimes. Even so, American federalism offers an amazing range of jurisdictional diversity, choice, and competition, and for all the friction created by multiple, overlapping jurisdictions, federalism’s virtues of competition, diversity, and innovation have served us well. On the many issues where diversity and state competition are an asset rather than a hindrance to commerce, both business and the states have powerful incentives to maintain state primacy and to arrange their mutual affairs in a decentralized fashion, one state and industry at a time.
At the national level, however and alas, the comforting picture of a natural, if temporarily confounded and distracted, anti-nationalist coalition between business and states is mistaken. If that coalition existed, the national administrative state as we know it would not: the anti-nationalist coalition would be strong enough to defeat any proposal not to its liking. In fact, such a coalition would quite probably be sufficiently strong to dismantle the national regulatory state. The fact that Leviathan is very much with us (and, quite probably, here to say) should prompt us to contemplate an alternative, more accurate picture.
Such a picture emerges from a broad-brush application of public choice theory to federalism and the political demand for national legislation. Under conditions of a national government that faces few (if any) meaningful constitutional constraints on its authority, the theory predicts, business and the states alike will often demand and lobby for centralized policy intervention. The issues on which the states will act nationalist are not always the same issues on which business will display that orientation. Conflicts between the two constituencies are thus pre-programmed, and their intensity will rise in direct proportion to the degree of unanimity on either side of the divide.
Pro-federalist coalitions between the states and business are not an outright impossibility. Neither, however, do they constitute a normal state of affairs. Rather, they depend on political circumstances and pre-existing institutional arrangements, and the task of forming state-business coalitions should be approached with a sense of realism and awareness for the other side’s tolerance and interests. In that spirit, this Article attempts to sketch some of the conditions and political constellations that are conducive to state-business coalitions on federalist ground.
Before embarking on that program, two preliminary qualifications are in order. First, many of the national federalism issues and policy areas that most concern the states are of little immediate interest to business. (The reverse is not true: virtually every business issue and interest will be of concern to the states.) Education, welfare, and crime control fit this description. Still, business has every reason to be supportive of the states’ devolutionary agenda on these issues—not simply because corporations should and do desire to be good corporate citizens, but also because federalist initiatives in those areas may well spill over into areas where the business community’s interests are directly affected. Some of those interdependencies are economic, as when the sorry state of America’s educational institutions constrains the supply of qualified labor. Others are political. For example, the devolution of welfare policy-making authority to the states long foundered on fears of a “Mississippi effect,” meaning that the states could not be trusted to discharge their public obligation to the poor. Now that the states have proven their detractors wrong on welfare, we may be able to overcome “Mississippi” fears and devolve policy-making authority in areas with tangible, direct effects on business, such as certain environmental issues.
the picture of “the states” and “the business community” as
homogeneous constituencies is a gross oversimplification.
Most national policy issues with federalism implications divide
both the states and business interests among themselves. Still, an explanatory model that starts with the generic
interests of “the states” and “business” helps to explain
when, where, and under what circumstances those constituencies can
expect to agree, and when they must agree to disagree, on federalism
Big Business and Big Government
Once upon a time, big business was as adamantly opposed to the national regulatory state as its present-day reputation would lead one to suspect. The business community resolutely fought the national impositions of the New Deal—not unanimously, but with a remarkable measure of consistency and breadth of support. That era and political constellation, however, ended a good six decades ago.
Constitutional Supreme Court decisions do not fully capture the richness and complexity of the changing relation between business and the national regulatory state, but they provide a useful prism. Most of the constitutional challenges to New Deal legislation were launched by resourceful private corporations; the case names—Steward Machine Co., Panama Refining, Carter Coal, Jones & Laughlin Steel—tell the story. At other times, the corporate community showed its determination by bankrolling constitutional challenges to the New Deal, as when corporate interest prompted the whitest of white show law firms (Cravath, Swaine & Moore) to represent a kosher chicken business in the last great, successful Commerce Clause attack on a federal regulatory statute.
That pattern ended with two devastating defeats in cases challenging, on Commerce Clause and other grounds, the Fair Labor Standards Act and the Agricultural Adjustment Act. Since that time, federalism challenges to national legislation have been the business of state and local governments, criminal defense lawyers, and public interest law firms. Business-initiated federalism cases in the post-New Deal era have fallen into two broad categories: lawsuits in which business interests insist on federal preemption of state law under federal labor relations, environmental, and health and safety statutes, and lawsuits aimed at curbing the exercise of state taxing and regulatory authority under the dormant Commerce Clause. Both types of cases, of course, serve nationalist rather than federalist objectives.
The conventional story of the collapse of the old constitutional order and of the business community’s nationalist shift is that the economic world became more complex and interdependent. The distinctions that had marked the limits of national power, such as the distinction between “commerce” and “manufacture” and between in-state and interstate commerce, no longer worked. Business came to depend on uniform, harmonizing, national legislation.
Obviously, this conventional account of the matter cannot be dismissed entirely. In particular, it is silly to deny that economic interdependence means that fewer matters of economic consequence are “completely internal” to one state, as Chief Justice Marshall famously defined the state governments’ police powers. While the dilemma of sorting state police power regulation from interstate commerce regulation, in areas where those powers overlap, is at least as old as Cooley v. Board of Wardens, increased economic interdependence means that the tension becomes more pronounced, in a much wider field of action. That alone explains much of the friction between state officials and business interests. State officials will understandably insist that matters affecting the state’s citizens, inside the state’s own territory, be regulated in accordance with the state electorate’s wishes, even if those regulations happen to affect outside parties. Business representatives argue, for equally plausible reasons, that a like insistence by every state government compels corporations to comply with varying, conflicting regulatory standards in fifty jurisdictions, thus producing a thoroughly undesirable balkanization of the American economy.
That said, though, the complexity-and-interdependence story cannot be the whole story. The American states were hardly unconnected autarkies, and American corporations operated across state lines, when corporate America fought the New Deal. (Jones & Laughlin Steel Corporation lost its Commerce Clause case over the National Labor Relations Act because it was a highly integrated multi-state corporation.) The initial interest group demand for national intervention did not come from business but rather from labor and other New Deal constituencies. To this day, we can observe expansive state regulation, and corporate resistance to national intervention, in areas where increased interdependence should long have eviscerated decentralized regulation; corporate chartering comes to mind. Nor can “complexity” and economic integration explain why the allegedly untenable lines between in-state and interstate commerce survived, in dormant Commerce Clause cases, until 1960 and, in a slightly attenuated form, to this day.
Far from being a mere response to economic changes, the corporate about-face in the wake of the New Deal has to do with the demise of what the economic historian Douglass North has called a “credible commitment” to limited government, meaning a set of reliably enforced, consistently observed, constitutional and institutional arrangements that limit the scope of government. Prior to the New Deal, business had reason to hope that constitutional limitations on the national government’s power would be observed. Business much preferred regulation at the state level, which always offered the option of exiting inhospitable jurisdictions, to the prospect of harmonizing, hostile federal legislation that would effectively eliminate competition among the states.
The New Deal, however, wiped out reliable limits to national authority, and that changed the corporate calculus. Under conditions of national omnipotence and omnicompetence, rational business leaders can no longer exclude the possibility of federal legislation on anything. Some of them will therefore fight for national, uniform legislation that would rig the playing field in favor of their own industry or corporation (and against actual or potential competitors) and, moreover, would preclude still-more extensive state regulation.
A contemporary, international comparison illustrates the force of these dynamics. At the 1997 global climate conference in Kyoto, the international business community presented a united front against a global warming treaty. Two short years later, at a follow-up conference in Buenos Aires, that front had crumbled. Some multinational corporations now lobbied for an international agreement. What changed between Kyoto and Buenos Aires was not an increase in real-world complexity and interdependence but rather the political constellation: once-credible impediments to international cooperation no longer seemed reliable.
Once the first enterprise adopts a pro-intervention stance, corporate strategy turns into a collective action problem that will consistently, though not invariably, yield a pro-interventionist outcome. Let ninety-eight of a hundred firms oppose centralized intervention: each must fear that pro-intervention forces will peel off one opponent after another, either by threatening targeted regulation or by extending selective benefits, until they have amassed sufficient force to enact some version of the proposed measure. At that point, the remaining anti-interventionists are left holding the bag, the unenviable objects of a regulation that the defectors will have shaped to their own advantage. Thus, once the credible institutional commitment to non-intervention has collapsed, the dominant strategy for virtually every market participant is to defect from the anti-intervention coalition. Trade associations may occasionally be able to discipline potential defectors, and broad-based industry groups may be able to provide political cover for firms or industries that are particularly vulnerable to interventionist entreaties or threats. Institutional obstacles—such as legislative supermajority requirements—may make pro-intervention coalition-building a cumbersome and expensive undertaking. None of these obstacles, however, changes the basic dynamics.
business calculus dictates an insistence on federal preemption.
National intervention wipes out pro-business regulatory competition
among the states by establishing a uniform “floor” of regulation.
Unless that floor also provides a regulatory ceiling, it will
simply serve as a basis for another round of state regulation.
Put differently: business will view state regulation as
tolerable and even advantageous so long as state experimentation, in a
competitive environment, can run in a pro-regulatory and an
anti-regulatory direction. Federalist
“competition” becomes intolerable, however, when federal
intervention renders non-regulatory state responses impermissible and
suppresses the dynamics that might yield such responses—even while
enhancing the more aggressive state cartel members’ freedom to
experiment with new regulation. Business will and must insist that
federal intervention wipe out all state competition and
States and the Nation
When business attacked national legislation at the dawn of the New Deal, where were the states? The answer, surprising at first sight, is that the states typically lined up in defense of the contested federal statutes. As Justice Robert H. Jackson observed, private corporations carried the “states’ rights plea against the states themselves.“
The states’ position in support of federal intervention is best understood as a response to interest group demands. States at the time were faced with urgent demands for social welfare legislation to ameliorate the harsh effects and dislocations attendant to the growth of corporate capitalism. They often responded competently to those demands; by 1918, for example, all states had adopted prohibitions against child labor, and progressive experiments with social insurance, unemployment insurance, and health and safety regulation became common during the 1920s and 1930s. Those experiments, however, were constrained by economic competition among the states: progressive states faced the threat that business might exit to more hospitable jurisdictions. That constraint—typically, though misleadingly, referred to as a “race to the bottom”—induced progressive states to lobby for the enshrinement of their policy experiments into national legislation.
The historical experience just sketched illustrates the analysis of modern public choice theory, which interprets federal (unfunded) mandates, not as a sign of rampant federal overreach but rather as a response to the weakness of pro-regulatory, “distributional” coalitions in American politics. Institutional and social obstacles—the separation of powers, bicameralism, the sheer diversity of regional, social, ethnic, and economic interests in a vast country—make it difficult for distributional coalitions to obtain favorable legislation at the federal level. Precisely because the country is so diverse, however, such coalitions are often able to obtain such legislation in a few states. Having done so, they continue to press their case in the national arena. The service-providing states have an incentive to support the demand for national intervention—in part, because the federal government may agree to defray a portion of the cost; in part because harmonizing national legislation will prevent a possible exodus of taxpayers and businesses who must pay for, but do not benefit from, the service provided by the state. While still too weak to obtain a fully funded federal mandate, the pro-service coalition—now including the service-providing states—will often be able to obtain a mandate that hides a portion of the regulatory and tax costs in state and local budgets.
For several reasons, less regulation-minded states will often accede to demands for federal intervention, instead of insisting on their competitive advantage. For one thing, interest groups with sufficient clout to obtain progressive legislation in some states usually have some influence in the others, which proportionally weakens the hold-out states’ resolve in resisting new impositions. Second, many federal statutes contain some federal financing, thus dissipating pro-competition states’ incentive to resist national legislation. (Taxpayers, after all, would have to pay a proportionate share of the federal program even if their state should fail to participate.) Third, states face the same “credible commitment” problem that confronts the business community. Pro-intervention forces know how to draw selected states to their side. Anti-regulation states have to assume that the interventionists will eventually prevail. They have to assume, moreover, that once the interventionists have assembled a sufficient majority, they will shape the law to their own advantage and to the remaining holdouts’ detriment. For states as for business interests, defection to the pro-regulation camp becomes the dominant strategy.
The structure of state lobbying for federal intervention is analogous to that of private cartel arrangements. Cartel members seek to limit competition (on some margin, along some dimension)—without, however, surrendering their independent existence and ability to serve customers. In the same way, states will insist on retaining autonomy under federal, competition-restricting statutes. Originally pro-interventionist states will be reluctant to surrender control over a program that they would administer even without federal intervention; originally anti-interventionist states will insist on discretion in administering yet another federal mandate. Like the business community’s insistence on preemptive federal legislation (or none at all), the states’ insistence of a maximum of regulatory autonomy in implementing and administering federal statutes will tend to be unanimous.
States will also tend to oppose federal preemption. Let an intervention-minded state mandate a week of paid family leave per year for private employees, and let that be the extent to which the state can accommodate the political demand for 52 weeks paid leave time without losing industry to neighboring states. Once the one-week requirement has become a national (non-preemptive) rule, the state is in a position to open a new round of regulation and to mandate another week. Anti-interventionist states have little incentive to lobby for preemption: why rob a proto-socialist neighbor of the freedom to place itself at a competitive disadvantage (however temporary)?
The states’ opposition to preemption, unlike their insistence on administrative autonomy, is not a matter of existential, institutional interest. For state governors, federal preemption is usually unpleasant but, as a rule, less intrusive and frustrating than federal micro-management and mandates that entail the expenditure of state funds. The primary forces against preemption are the distributional coalitions and private interests that demanded the state and, subsequently, federal intervention in the first instance: preemptive legislation would deprive those interests of their access points in state capitols and courthouses. (The coalition of trial lawyers and car safety advocates, for instance, holds a very dim view of preemption under national automobile safety laws and regulations.) This constellation implies, though, that governors can take a pro-preemption stance only at the risk of alienating potent political constituencies. Unlike the opposing, preemption-demanding business forces, those constituencies will be able to appeal to the governors’ natural political instinct to preserve the states’ autonomy and self-governance. Thus, the interest group dynamics that drive the state demand for federal intervention also generate a general state disposition against federal preemption.
Business and the States
The preceding analysis suggests two preliminary conclusions. First, the much-publicized conflict over preemption is unavoidable, and irreconcilable. If the public choice analysis just sketched fails to persuade, the simple fact of unanimity on both sides of the preemption divide should do the job. An issue that has the states sing in unison is unlikely to reflect an accidental, changeable policy preference; it is bound to be an issue that affects their basic institutional operation, identity, and integrity as states. So, too, on the business side. Compromises on this or that individual preemption issue may be possible, but they are unlikely to be stable. Business and the states may be able to find some general formula for agreement—say, to the effect that federal statutes should not “needlessly” preempt state law. But the universe of actual agreements encompassed by such a formula is an empty set.
That conclusion may sound distinctly unpleasant. The search for common ground among states and business, however, ought to start with the recognition that the “other side’s” firm position on preemption reflects, not intransigence, bad faith, or cynicism about constitutional precepts but rather a necessary institutional commitment. That being so, it is unrealistic to expect that the states will be swayed by learned disquisitions about the true scope of the Supremacy Clause or business, by impassioned appeals to “states’ rights.” The better part of wisdom is to agree to disagree—to expect fights over this contested constitutional territory, and to look for common ground elsewhere.
The second, more cheerful conclusion is that there would be substantially more room for agreement between business and state officials, on federalism grounds, if it were possible to re-establish a credible commitment to limited, national government in selected areas. By definition, such a commitment cannot be re-created in the legislative arena: congressional inaction, even for a long period of time, is mere forbearance, not a guarantee. The credibility must come from a constitutional rule that forbids federal interference.
The Supreme Court’s decisions in United States v. Lopez and United States v. Morrison hold the promise of such a rule. The cases hold that congressional Commerce Clause legislation must be addressed to economic conduct (or conduct that is linked directly and substantially to economic transactions), “economic” meaning something like the voluntary exchange of (legal) goods and services across state lines. That emerging Commerce Clause doctrine re-imposes only a limited constraint on the power of Congress. Even so, it opens up the possibility of state-business cooperation on challenges to federal programs and statutes that are perceived as impositions by business and states alike. Casual observation suggests that both sides have so far failed to explore the full potential for cooperation at this front.
This year’s Supreme Court decision in Solid Waste Association of Northern Cook County v. U.S. Army Corps of Engineers (SWANCC) suggests the possibilities. The case, a successful challenge to the federal government’s claimed authority to regulate isolated waters and wetlands, was initiated by a local government agency. Business groups and filed briefs in support of the plaintiff-agency, as did some local governments.
SWANCC was decided on modest statutory grounds, rather than constitutional grounds, and the practical sweep of the decision is not entirely clear. To the extent that the decision exempts local waters and wetlands from federal regimentation, however, it represents a big step forward. Neither business nor state and local governments have a discernible interest in federal involvement in decisions affecting purely local water and land uses. There is no reason to believe that state and local wetlands decisions are less likely than federal agencies to strike an appropriate balance between environmental and economic concerns; in fact, a decentralized regime is more likely to reflect local values and interests. Legal standards and administrative practices will differ from state to state, and perhaps from county to county; Minnesota and Virginia are bound to place a higher premium on bogs, marshes, and waterfowl than, say, Nevada. Such diversity, however, is an ecological and an economic virtue.
Some of the business amicus briefs in SWANCC forcefully present these arguments, along with a coherent legal theory that built on the Supreme Court’s Commerce Clause precedents. Arguably, and by way of illustrating the value of such briefs, some business amici articulated a slightly more forceful and ambitious federalism theory than the petitioners’ own brief—whose authors, of course, were duty-bound to their clients to limit their argument for the purpose of winning the case.
Other business amici, however and alas, presented a more diffident posture, including a brief in the form of a paean to the national regulatory state—a mortal God to whom, under that immortal God, we owe our collective welfare and which is justly called perfect save for the little wetlands wart that happened to attract the Court’s scrutiny. The same reluctance to press federalism arguments shows more clearly in Gibbs v. Babbitt, a case with political dynamics and substantive issues strikingly similar to SWANCC (which was decided while the Gibbs petition was pending). In Gibbs, two North Carolina counties and private land owners asked the United States Supreme Court to review a ruling by a divided appellate court that sustained, against a Commerce Clause challenge, certain federal regulations under the Endangered Species Act. As in SWANCC, then, local government agencies attacked national environmental regulations that impose substantial costs on governments and business. No business interest, however, supported the petition for certiorari, and only a single state (Alabama) did so. The U.S. Supreme Court eventually denied certiorari.
It is of course an open question whether more extensive support from business (and for that matter the states) might have persuaded the Justices to hear the case. Still, the lack of a business amicus investment in a closely watched case suggests a reluctance to explore federalism-enhancing opportunities. To be sure: considering the Supreme Court’s close division in federalism cases, it may well have been wise to offer the Justices narrow grounds for a pro-federalism decision and to assure them that SWANCC did not foreshadow a frontal attack on the regulatory state. Gibbs, for its part, may have been a step too far, too fast, for both legal and esthetic reasons. Tactical judgments in this or that individual case, however, should not be confused with a general assessment of the lay of the federalist land.
The states have shown a similar reluctance to occupy the common enumerated powers ground. In United States v. Morrison, attorneys general representing thirty-five states plus Puerto Rico actually took the opposite position and argued that a federal tort remedy for “gender-based” sexual violence was a perfectly legitimate exercise of congressional power under the Commerce Clause and the Fourteenth Amendment. Alabama alone took the pro-federalist position. Prudential reasons may account for the state officials’ position (although one is hard pressed to conceive of such reasons). Again, though, case-specific tactics should be distinguished from the states’ broader, strategic interest in the general run of cases.
might object that the enumerated powers territory where business and
the states share common interests is pitifully small.
I would quarrel with that description; federal interference
with local land use decisions, for instance, strikes me as quite
pervasive and enumerated powers limitations on such interferences, as
potentially quite consequential.
At any rate, it is important to recognize that the enumerated
powers ground is common because
it is limited. A Commerce
Clause jurisprudence sufficiently robust to threaten, say, the Fair
Labor Standards Act would again expose the states to competition that
they have fought hard to suppress; it would also threaten federal
preemptive statutes that are backed by enormous business investments.
A judicial return to such a jurisprudence, however, is not even
a remote possibility. That
being so, business and the states can safely explore the more limited,
but still sizeable ground.
More Common Ground: Entitlements and Mandates
Many, perhaps most of the federal statutes that concern—and distress—states and local governments take the form of federal mandates—a handful funded in their entirety by the national government; others in part; still others, not at all. Resistance to these mandates provides fertile ground for cooperation among business and state and local officials.
This is not to suggest that business and the states will unanimously and jointly fight all or even most federal mandates. If that were true, few such mandates would have made it onto the statute books, and existing mandates would have a short shelf life. As noted, most federal “mandates,” including unfunded mandates, are a response to state and interest group demand. State officials will often find it politically difficult to demand the abolition of existing mandates. Since any such effort involves massive coordination problem with sister-states and local governments, the states’ default position is to insist on more generous federal funding and more flexibility in administering the mandates. Similarly, segments of the business community may embrace federal mandates that confer benefits on an industry (such as government contractors) or compel the states to regulate a competing industry, thus raising rivals’ costs.
Even so, the political economy of federal mandates is structurally hospitable, in litigation and, in some instances, in the legislative arena, to business-state coalitions on federalist ground. As a general rule, business has no reason to play the mandates game, for the simple reason that states have an incentive to consider business interests even without federal intervention. While labor and other interest groups that demand economic redistribution must insist on federal intervention as a means of trumping state competition, states need not be encouraged, far less told, to compete for productive businesses. (There is no federal mandate for high-tech tax credits because the states will offer such incentives without federal prompting.)
States, for their part and for reasons mentioned, will consistently, adamantly, and unanimously demand flexibility in administering federal mandates; the enthusiasm with which they have embraced the “devolution” agenda provides impressive evidence. To be sure, the mere devolution of administrative responsibility falls short of a “real,” competitive federalism that would permit states to determine the goals and objectives of regulation, not merely the means through which those goals are to be pursued. Even so, devolution may constitute a step toward federalism. It marks a territory where the states’ interest in retaining quasi-sovereign authority and the business interest in efficiency are congruent.
Federal mandates can be enforced directly by the federal government--through funding denials or the threat thereof; through conditional federal preemption, or the threat thereof; through lawsuits against state and local governments; and through intragovernmental bargaining. Mandates may also be enforced by private parties, however, typically under statutory entitlements, “implied” private rights of action, or Section 1983. Public and private enforcement devices are not mutually exclusive; in fact, most important federal statutes combine both mechanisms.
the private enforcement of statutory entitlements is not normally
thought of as a federal “mandate,” state and local officials need
no reminder that this is the true nature of such entitlements. When
the average mayor or governor thinks of “commandeering,” what
comes to his mind is not the rare direct federal intervention of the
sort at issue in New York
and Printz but rather a
private lawsuit under Section 1983.
In that light, and since the reform of direct federal mandates
is the subject of a separate article and panel discussion at this
conference, I turn directly to the
private enforcement of federal mandates. In this area, opportunities
for state-business coalitions are particularly plentiful—and
particularly underexplored. Two
examples—one from the litigation context, one
legislative—illustrate the point.
Litigation. In one of this year’s most significant federalism cases, Alexander v. Sandoval, the U.S. Supreme Court determined that Title VI of the Civil Rights Act does not create an implied right of action for private litigants to sue recipients of federal funds for “disparate impact” violations. The case arose over Alabama’s “English Only” requirements for driver’s license tests. That issue seems far removed from business concerns. So, perhaps, does the broader issue over the scope of private rights of action under Title VI—until one realizes that the “federally funded” entities covered by the act include environmental permitting agencies at the state and local level. As interpreted by an earlier administration (and by one federal court), Title VI effectively requires affirmative action in industrial siting. Alexander v. Sandoval has rendered that requirement, if indeed it is still sustainable, unenforceable by private litigants.
Alexander v. Sandoval is of a piece with the Supreme Court’s long-standing effort to extend the states’ sovereign immunity under the Eleventh Amendment and to curtail private rights of action, principally against state and local governments, under federal statutes. While the Supreme Court is rapidly running out of statutes that might lend themselves to a further extension of its Eleventh Amendment jurisprudence, the statutory cases have by no means run their course. It seems entirely possible, for example, that the Supreme Court may overrule its erroneous 1980 decision in Maine v. Thibotout, the fons et origo of its modern Section 1983 jurisprudence.
The curtailment of privately enforced entitlements has affected the day-to-day practice of federalism far more deeply and pervasively than the Court’s “sexier,” but necessarily rarer, constitutional interventions. Grossly oversimplifying a rich and sophisticated literature, statutory entitlements are the cornerstone of unholy nationalist coalitions of interest groups, bureaucrats, and congressional committees. Put simply, an individual entitlement to, say, a “reasonable accommodation” for the disabled is Congress’s way of satisfying a constituency demand without being held responsible for the costs. After all, it will be the National Council for the Blind and some federal district judge, rather than Congress, that forced Braille requirements on local libraries. Federal agencies charged with implementing statutory mandates will welcome court-enforced mandates as a means of expanding their bureaucratic empires; local governments will complain about woefully underfunded federal mandates; advocacy groups, about the government’s gross dereliction in enforcing the law. The constituencies’ congressional patrons will then leverage the unison demands to obtain additional funds, thus setting off another round of shadow-boxing (at a higher level of spending).
The curtailment of statutory entitlements cracks those entrenched coalitions and changes the administration of federal programs from a rigid, litigation-driven regime to a more flexible bargaining process between state and federal officials. While advocacy groups still have a place at the table, they are no longer able to instrumentalize the federal judiciary as an agenda-setting institution.
advantages that business, the states, and federalism stand to reap
from a transition from judicial enforcement to intergovernmental
bargaining as the principal means of implementing federal mandates are
too obvious to require elaboration.
To be sure, many of the legal cases that would tend to advance
this objective will involve programs and entitlements of no immediate
concern to business. As Alexander
illustrates, however, a large number of entitlement programs are of
direct consequence, not only to state and local but also to business
entitlement reform through litigation provides a fertile field for
Legislation. Prominent among private entitlement provisions that adversely affect state and business interests are the citizen suit provisions that are contained in every major federal environmental statute. Such suits purportedly enhance citizen participation and prod more aggressive agency enforcement. The lofty claim that these effects will improve the environment, however, is unsupported by a single systematic study. In fact, there are good theoretical reasons to suspect that private law enforcement will often harm the environment, and the empirical evidence, while inconclusive, tends to support that hypothesis. Scholars with pronounced ecological sympathies have been compelled to conclude that citizen suit provisions “are part and parcel of a largely unsuccessful system of command-and-control regulation.” Former Secretary of the Interior Bruce Babbitt, an official unlikely to be suspected of shilling for corporate polluters, has bitterly complained about the flood of environmental citizen suits that has effectively eviscerated the enforcement of the Endangered Species Act.
Opposition to citizen suits should unite business and the states—not only because such suits may be brought against both private and public entities alleged to be in violation of the law under which the suit is commenced, but also, and more importantly, because enforcement actions against public entities will affect private business, and vice versa. Citizen suits against government entities may prompt more aggressive government regulation and enforcement, with predictable consequences for business. Conversely, a citizen suit campaigns against private industry by a horde of “self-appointed mini-EPAs” effectively deprive the states of their enforcement discretion and authority.
Citizen suit provisions have for three decades remained immune from serious attacks in the legislative arena, and it may seem absurd that state officials or corporate lobbies should ask Congress to take an axe to so sacred a cow. Three considerations, however, render state-business campaign against this exceedingly odd policy instrument a plausible prospect.
First, attempts to curb citizen suits by raising constitutional objections in individual cases—a plausible and partially successful strategy throughout the 1980s and 1990s—has been effectively foreclosed by the U.S. Supreme Court’s 2000 decision in Friends of the Earth v. Laidlaw. Thus, reform must come, if it is to come at all, through congressional legislation.
Second, we are witnessing increased (and increasingly broad) disenchantment with centralized command-and-control regulation and, correspondingly, greater interest in devolving authority over environmental policy and enforcement to the states. Serious devolution, however, is fundamentally inconsistent with broad-based citizen suit enforcement. No state and no regulated business can have confidence in the state’s policy and enforcement choices so long as those decisions can be second-guessed by any malcontent with access to the environmental lobbies’ brief bank.
Third, at least one precedent suggests that state officials possess the courage and foresight to question supposedly sacrosanct entitlements. The central provision of the much-heralded 1996 welfare reform act was the repeal of an individual entitlement to welfare. That provision was enacted at the specific demand of state officials and in the face of shrill opposition by the welfare rights lobby. Individual welfare entitlements, state officials argued, would mean that the speed and direction of welfare reform would continue to be determined by the Children’s Defense Fund, thus rendering any real devolution and reform illusory. That argument proved correct—and successful. If courageous governors are prepared to look Marion Wright Edelman in the eye, why should they not be willing to confront the environmental lobby—especially if that initiative were supported by a broad coalition of states and businesses?
From a public policy perspective, the enhanced state discretion attendant to the repeal of federal entitlements may entail a certain policy slippage. The 1996 welfare reform contained not only a welfare-to-work objective—where the states have made real progress—but also statutory goals for a reduction of out-of-wedlock births and the formation of stable families. It would be too much to say that the states have failed at these tasks, for the fact is that they haven’t tried. Devolution, moreover, tends to be accompanied by a massive infusion of cash into service-providing constituencies. The welfare lobby was not squeezed out of welfare policy; it was bought out, as the decline of direct welfare assistance coincided with an enormous expansion of per-case expenditures on childcare, job training, substance abuse counseling, and other services.
would predict a comparable pattern in the wake of a repeal of
environmental entitlements—a shift from litigation-driven
implementation towards more discretionary enforcement and bargaining
between state and federal officials, with a convoy of states moving
towards consensual, balanced environmental objectives.
Those trends would like be coupled with state indifference to
whatever esoteric objectives Congress may pile onto a serious
environmental devolution (along with federally funded wind farms
administered by the Natural Resources Defense Council).
That price, however, is well worth paying for a more sensible,
flexible environmental regime that is attuned to local needs and
Litigation And Legislation. The preceding analysis suggests, and the record confirms, that litigation may provide a more promising field than legislation for collaborative anti-entitlement efforts. Legislative efforts involve coordination problems and high transaction costs. Litigation does not. In fact, a single courageous state may advance anti-entitlement arguments and strategies without the assistance of sister-states (or for that matter business), as Alabama has done in advancing Eleventh Amendment immunity defenses against private suits for damages under federal statutes. The dynamics of federal litigation may induce a single state to invoke constitutional and statutory defenses even when states, collectively, would be reluctant to invoke comparable arguments in a political debate over prospective legislation. For example, it is much easier to argue that federal law confers no private right of action to enforce mandates concerning the state collection of child support payments than to oppose such a mandate in the first instance. A state’s failure to raise jurisdictional defenses (such as lack of standing of failure to state a cause of action) may induce, and by all rights should induce, federal judges to examine the availability of such defenses sua sponte, perhaps with the assistance of suitable amici. In a recent, particularly dramatic case, a defendant-state (Michigan) failed to raise jurisdictional defenses to private claim for entitlements pursuant to 42 U.S.C. 1983 and, subsequently, failed to respond adequately to the district court’s request for briefing on those issues. The district court “invited and accepted the participation of the Michigan Municipal League as amicus curiae to address the issues raised by the court.” Based on the League’s briefs, the court proceeded to find that there is no private entitlement to, of all things, Medicaid benefits—a decision that should demonstrate the potential of a litigation-centered anti-entitlement strategy.
In most instances, favorable judicial entitlement decisions can be reversed by Congress. For example, a judicial decision to the effect that Congress failed to provide for a private right of action, with sufficient clarity and in the text of the statute, still leaves Congress with a means of redress. For that reason, litigation cannot be the exclusive focus of an anti-entitlement strategy for federalism. The “clear statement” rule and similar rules of construction, however, shift the legislative equilibrium point in a federalism-friendly direction and compel Congress to speak clearly on a question—the imposition of mandates on the states—on which it would much prefer to mumble, the better to procure a legislative compromise that allows lawmakers to avoid full responsibility for the adverse consequences of their action. While these obstacles are not insurmountable, the prevention of legislative overrides--where legislative inertia and the courts’ prestige facilitate the attainment of federalism objectives—provides perhaps the most fruitful and promising opportunities for advancing an anti-entitlement agenda. Business and the states have every incentive to unite behind that agenda.
as a Second-Best
By its very nature, federalism is a constitutional regime that generates, and in a sense celebrates, second-best solutions. Since federalism allows for diversity among the states, some states will invariably deviate from every interest group’s ideal, uniform national rule or standard. Thus, the federalist approach will rarely be anyone’s first-best solution; it will at most be an acceptable alternative to the worst scenario, which is a uniform national law imposed by a rival, competing interest.
In the national political process, federalism can often, for some period of time, “win” by default: a failure to reach an accommodation among national interest groups will leave a pre-existing federalist policy or legal regime in place. So, for example, business easily defeated Naderite initiatives for a national corporate chartering statute, which left the existing, highly efficient state-based chartering process in place. Only rarely, however, will federalist policies come about by design and explicit agreement.
Every economic interest group functions on the principle of rent collection. If an interest group is sufficiently strong to have its way in Washington, D.C., the rent-maximizing strategy usually is to enact a uniform, preemptive national statute to the group’s liking. If two interest group coalitions are more evenly matched, each side will insist on “its” preferred uniform, national legislation. The likely compromise is a preemptive national statute that incorporates some of each side’s demands. Even if both sides would benefit from a federalist compromise that committed the issue to the care of the states, a nationalist result may occur—either as a result of coordination problems (neither side wanting to make a federalist move that could be interpreted as weakness), or because of agency problems that separate the interests of national lobbying organizations from their members. For example, environmentalists and regulated industries alike may prefer the “certainty” of absurdly bureaucratic, spottily enforced federal permitting standards for stationary sources to the unpredictability of a federalist world—even when that world can be shown to benefit the environment and industry interests.
An analysis of the incentives faced by federal legislators yields substantially the same result. Legislators are more open to a nationalist compromise than to a federalist compromise. The latter would disperse not only policy authority but also rent collection: if standards are set in Albany and Richmond rather than Washington, D.C., then that is where the campaign contributions will flow.
Nonetheless, certain circumstances may produce federalist solutions. While some such solutions may emerge without the states’ active support, most seem to require it. To my knowledge, no general theory explains the (possible) emergence of federalist, second-best compromises. That being so, I limit the analysis to a brief, highly speculative discussion of three examples.
All Pain, No Gain. In 1996, Congress enacted the Defense of Marriage Act (“DOMA”), which provides in relevant part that states need not recognize same-sex marriages recognized in other states. DOMA is a model of nationally re-enforced federalism: instead of scrambling for a national, uniform compromise on homosexual marriage, Congress effectively compartmentalized the policy debate along state lines. The statute was enacted over the opposition of religious conservatives and homosexual rights advocates, both of whom insisted on a national “solution” consonant with their respective objectives.
DOMA’s federalist compromise came to pass because the majority of federal legislators were happy to wash their hands of the issue. Whatever rents might be had from an effort to fashion a national compromise would be dwarfed by the risk of being painted as a closet homophobe or an enemy of traditional family values (and quite possibly both).
a variety of reasons, it is difficult to envision an economic DOMA
equivalent that might yield a federalist outcome.
Most obviously, economic issues are by definition “about”
money, thus inviting lobbyists and legislators to split the difference
instead of compartmentalizing irreconcilable differences.
It is at least conceivable, however, that “economic” issues
with profound moral implications might yield comparable outcomes.
The regulation of consumer privacy on the internet might be an
minimizing the formable obstacles to a sensible federalist compromise
on that issue (that is, a compromise that would forestall federal
substantive legislation without, at the same time, compelling service
providers to comply with conflicting regulations in fifty state
such a compromise might become acceptable if and when the alternatives
of full federal preemption or unbounded state sovereignty were to
appear altogether unpalatable to states and business.
Disaster Relief. Federal standards may inflict such exorbitant costs as to exceed the perceived benefits of uniformity (for business) and protection from competition (for the states). Under such circumstances, business may come to believe that state regulation will be more reasonable in most (though not all) states. Most states, for their part, may come to believe that they will be better off under a federalist regime, even if their own competitive position vis-à-vis sister states might deteriorate.
The clean-up of low-risk abandoned waste sites, or so-called “brownfields,” provides an example of these dynamics. Most states concluded over a decade ago that the federal regulation of “Superfund” sites produces more harm than good. Superfund site remediation is measured in geological time, and the appearance of a site on the National Priorities List deters potential investors. Widespread failure to clean up and invest in old industrial brownfield sites, most of them located in urban areas, has driven business development to outlying “greenfield” sites, thus impeding urban re-development and exacerbating suburban sprawl.
Confronted with that reality, state and local governments went ahead and cleaned up some 40,000 brownfields on their own, without federal intervention. In contrast to the punitive, litigation-driven federal regime, state clean-up efforts have been based on liability protection for investors, flexible and risk-based clean-up standards, and tax incentives. Predictably, business (with the possible exception of the waste management industry) has been strongly supportive of the states’ efforts.
Due to the horrendous failure of the federal statute and the states’ remarkable progress in cleaning abandoned waste sites, the political debate shifted almost a decade ago from reforming a federal statute that is quite probably beyond repair to protecting an actual experiment with environmental federalism. State and local brownfields development did not “devolve” from Washington, D.C. Rather, it developed independently in the interstices of federal regulation. The federal government’s principal ambition since 1994 has been to get a piece of the regulatory action and, more important, to claim credit for successful state and local experimentation that stands as an embarrassment to the federal authorities. The states’ principal objective has been to protect their policies from federal second-guessing and interference. The potential for such interference is very real; for instance, state and local efforts to attract investors and developers may be thwarted so long as the U.S. Environmental Protection Agency reserves the right under federal law to re-open a cleaned-up site and to impose additional remediation requirements. Thus, reform efforts at the federal level focus on enhancing the states’ ability to provide private parties with finality and to de-link brownfield clean-up entirely from the federal Superfund regulation. State and local governments’ initiatives to that effect merit firm business support.
Logjam. Business-state cooperation on pro-federalism legislation may be possible on a set of issues that satisfy two conditions: (1) demonstrable inability of business to overcome interest group opposition to uniform, preemptive federal legislation; and (2) a demonstrable inability on the part of the states to overcome a prisoners’ dilemma that pushes states to adopt more stringent regulation than any of them would adopt on their own volition. The inability to achieve the desired national outcome may induce business to settle for the second-best, decentralized solution. The states’ support for that solution may break the national logjam.
Products liability law, for a conspicuous example, may satisfy these conditions. Under current choice-of-law rules, each state has an incentive to expropriate out-of-state corporations to benefit in-state plaintiffs. Restrictive liability doctrines would simply preclude domestic citizens from obtaining “their fair share,” while still compelling them to pay, in the form of higher product prices, for damages and product changes that result from liability verdicts in other jurisdictions. Corporate lobbying to arrest this race towards escalating liability verdicts through a national products liability law have proven unavailing for over two decades. Many states have recognized that exorbitant liability verdicts deter productive investment, to no intelligible social purpose; even so, state-level reform efforts have been halting and often ineffectual, quite possibly because one state’s unilateral declaration of a truce at the front of ever-escalating liability doctrines would simply enable other states to capture the rewards.
jurists and economists have argued for federal choice-of-law rules on
products liability matters that would enable states to choose
liability rules in accordance with their own citizens’ risk
preferences, while enabling business to tailor product prices in
accordance with liability risks incurred in various jurisdictions. While the precise
contours of such rules are open to some debate,
the decisive obstacle to their adoption lies in the difficulty of
persuading states and business of settling for a second-best solution.
Business groups are understandably reluctant to accept that two
decades’ worth of time, money, and effort spent on attaining
national tort reform may be best viewed as sunk costs.
The states, for their part, will be reluctant to embark on a
venture that promises few discrete, tangible benefits for individual
states and, moreover, a high risk of offending potent political
constituencies, such as trial lawyers. Still, a federalist products
liability reform that would enhance economic efficiency and the
states’ autonomy to fashion liability regimes in accordance with
their own citizens’ preferences would produce substantial benefits
for manufacturers and for the vast majority of states. In that light,
the idea merits exploration.
An attempt to develop a positive account of business-state coalitions on federalism—beyond an impressionistic survey of pending issues that might attract support from both sides—confronts the fact that federalism’s political economy is poorly researched, and still more poorly understood. Political science treats federalism as little more than the study of intergovernmental relations. Economists and public finance theorists have developed sophisticated models of efficient federalist structures—without, alas, paying more than passing attention to the conditions that might sustain or, as the case may be, restore such structures. Legal scholars have concentrated on federalism’s technicalities or else, on its constitutional history, origins, values, and meaning. For all its erudition, most of that scholarship seems strangely disconnected from modern-day, real-life concerns. As one of the few pioneers on federalism’s political economy has observed, we need a lot less meaning. We need a lot more models.
The bare-bones model sketched in this Article captures only the most basic elements of the state-business relation and federalism. The model does not account for logrolling. It does not account for differences between state and local governments (which greatly complicate the picture). It does not account, except in passing, for agency problems that might induce national business and state lobbies to act at variance with individual members’ interests. Most fatefully, the model treats “business” and “the states” as homogeneous actors, thus screening out the countless issues that divide both groups and, in the process, create opportunities for state-business coalitions that may foster, as well as impede, federalism.
It seems unlikely, however, that a more refined theory and a fuller account would invalidate the basic assessment that on many federalism-related issues, the interests of business and the states are antagonistic. Business and the states represent different federalism values: the states, state sovereignty and autonomy; business, efficiency and competition. Both sets of values are at odds with the notion of an omnipotent national government, but they are also at odds with each other. It is possible, in principle, to sacrifice a bit of efficiency for more state sovereignty (or vice versa), without making the system as a whole any more or less “federalist.” Unlike an investor club, however, whose members are indifferent to portfolios with identical risk levels, state governments and corporations are acutely sensitive to the composition of the federalism portfolio, and they will fiercely contest an adverse move along the frontier.
States and business are thus well advised to explore moves that push the federalism frontier outward by advancing both state sovereignty and the efficient operation of national markets and regulatory institutions. In attempting to show that some such moves are possible, I have undoubtedly failed to exhaust the full range of possibilities. That shortcoming bodes well for federalism.
The controversial portion of
the Federalism Accountability Act, S-1214, provided that “no
federal statute or federal rule enacted or promulgated after the
effective date of the Act would be construed to preempt state or
local law unless the statute or rule explicitly states that such
preemption was intended or unless there is a direct conflict
between such statute or rule and state or local law” (from the
Committee on Governmental Affairs’ Report on The Federalism
Accountability Act of 1999, available at http://www.senate.gov/~gov_affairs/s1214_report.htm)
(accessed June, 2001).
 Throughout this Article, “state (government)” refers to state and local governments. The usage is simply a matter of brevity and convenience; it is not meant to suggest that local interests are either unimportant or necessarily congruent with those of state governments.
 See, e.g., National Governors’ Association, state strategies for the new economy (2000).
 State competition through tariffs and protectionist measures, for instance, is clearly inefficient, which is why the Constitution prohibits it. The constitutional framework does permit some forms of inefficient competition--e.g., state attempts to attract business through selective tax breaks and exemptions, which most economists view as substantially less efficient than competition through the creation of a favorable macro-climate for business formation and investment. The case for tolerating inefficient state industrial policies rests on the proposition that the costs will be paid by each state’s own citizens; thus, the process is subject to political discipline. Moreover, one cannot easily enjoin inefficient state favoritism without also enjoining highly efficient forms of competition. Thus, the competitive regime is bound to be less inefficient than the alternative of a wholly centralized system.