SHOULD BUSINESS SUPPORT FEDERALISM IN THE AGE OF THE REGULATORY STATE?

Address Delivered to the American Bar Association Section Of Administrative Law and Regulatory Practice

New York, NY
July 8, 2000

Michael S. Greve
Resident Scholar
American Enterprise Institute

The concise question before this panel has a concise answer: it depends. Whether business should support federalism depends, first, on the meaning of “business” and second, on the meaning of “federalism.” The essence of my remarks today is that some businesses should on some (and perhaps many) occasions support a certain brand of federalism--competitive, constitutional federalism. Business’s failure to do so reflects an understandable but nonetheless lamentable lack of imagination.

Business--as in, “the business community”--is, in the ordinary course of political events, a misleading abstraction. Regulatory and policy issues will find different industries or firms on different sides of the fence. Different institutional arrangements will harm or benefit different business sectors. Firms and industries will support or oppose institutional arrangements, depending on the expected benefit to their management and shareholders. Constitutionalists may lament this fact, but they might as well complain about gravity.

As for “federalism,” it is a notoriously amorphous term. For the purposes at hand, it is useful to distinguish “cooperative” New Deal federalism from competitive, constitutional federalism.

New Deal Federalism

New Deal federalism--the federalism we have had for the past six decades--has two salient features, both of which render it very unattractive.

The first and central tenet of New Deal federalism is that there shall be no effective, enforceable limitation on the power of Congress. “Federalism” then means that the states may regulate in the interstices of federal regulation--and, quite often, on top of it. Government thus resembles a shopping mall: several levels of government--federal, state, and local offer to provide regulatory services, and one of them is always open for business. The system contains no institutional check or stopping point.

Second, the states are free--and often encouraged--to form policy cartels that export the costs of state regulation to outsiders. The states serve as “laboratories of democracy,” as they should. But there is altogether too much experimentation, because the guinea pigs (who bear the costs of the experiments) don’t get to vote or, for that matter, even to run. A few examples illustrate the point:

· Under the existing, depression-era regime of sales and use taxes, state and local governments impose tax collection obligations on sellers outside their own jurisdictions.

· Product liability law enables plaintiffs’ lawyers to choose jurisdiction--that is, the forum and the law under which liability lawsuits will be conducted. Each in-state judge and jury will cheerfully expropriate out-of-state defendants.

· In recent years, state and local governments have ganged up with the trial bar to loot disfavored industries, such as tobacco manufacturers. We may expect more such raids, because they pose none of the “free rider” problems that often inhibit the formation of policy cartels. Quite the opposite: a state that fails to join a combined state litigation campaign will simply lose out on its “share” of the loot, without gaining any benefit from non-cooperation. Even attorneys-general who opposed the anti-tobacco campaign on legal and policy grounds were eventually forced to jump on the bandwagon.

If this is federalism, business should oppose it--as should constitutionalists. The regulatory state needs a check or a stopping point. It needs an institutional mechanism to prevent and crack down on policy cartels.

In the nature of things, that check and stopping point can only be the United States Congress. This explains why business reflexively favors national uniformity and the wholesale federal pre-emption of state and local regulation. As one scholar has put it, it is much better to deal with one gorilla than with fifty monkeys on steroids.

Competitive Federalism

Notwithstanding its superficial attraction, national uniformity has its own drawbacks:

· Central, uniform standards and one-size-fits-all “solutions” generate enormous rigidities and inefficiencies.

· The value of uniform laws depends on who gets to write them. As Christopher DeMuth, president of the American Enterprise Institute, puts it, the Chamber of Commerce is perfectly capable of writing a fine product liability reform bill. But if such a bill were to become law, the Chamber will have written five percent of it. Henry Waxman and the trial lawyers will have written the remainder.

· A monopolistic regulator has, by definition, no competing regulator--and therefore no incentive to learn, to innovate, or to improve his regulatory product. The regulatees have nowhere else to go.

Hence, national uniformity is often only a second-best solution. The best solution is often the other kind of federalism--competitive, constitutional federalism.

Competitive federalism’s defining features are diametrically opposed to those that define cooperative, New Deal federalism:

· Competitive federalism implies firm constitutional, judicially enforceable restraints on the power of Congress.

· Competitive federalism implies firm (constitutional or statutory) prohibitions against regulatory “leakage” and state exports of regulatory costs.

Business leaders are familiar and comfortable with a pristine example of competitive federalism: corporate chartering. Far from clamoring for national, uniform legislation in this area, corporations sort themselves into state chartering regimes that best suit their shareholders’ tastes. The principle of corporate law--let corporations choose the domicile state that will govern their legal transactions--has ready applications elsewhere. For example:

· Professor Roberta Romano, who first demonstrated the superiority of state competition over any conceivable national corporate charter law, has since argued that state competition should also govern certain areas of securities regulation, such as registration, disclosure requirements, and fraud provisions.

· The heated debate over e-commerce sales taxes has generated proposals to tax interstate sales (through whatever channel) not, as now, on the basis of the purchaser’s home state but rather the seller’s. State governments would be free to tax interstate sales to their heart’s content--albeit at the salutary risk that overtaxed businesses would move to more hospitable jurisdictions.

These and similar proposals to revitalize competitive federalism in selected policy arenas hold considerable intellectual and--for at least some industries--commercial appeal. They have the added advantage of being broadly consistent with the general thrust of the Supreme Court’s federalism jurisprudence.

The Supreme Court’s Federalism

In a series of decisions dating back to 1995, the United States Supreme Court has begun to resurrect competitive federalism’s first and foremost feature--firm enumerated powers constraints on the Congress. The most recent example of this trend--and, for the time being, its high water mark--is the Court’s May 2000 decision in United States v. Morrison, which held that neither the Commerce Clause nor the Fourteenth Amendment provided Congress with a constitutional basis for enacting a federal tort remedy for “gender-based” violence.

Some legal scholars and legal journalists have mused that the Supreme Court’s renewed emphasis on enumerated powers might eventually endanger the ability of Congress to enact legislation that is necessary to sustain an integrated economy. Once upon a time, such apprehensions had certain plausibility. In the 1920s, many corporate lawyers believed that in light of the Supreme Court’s narrow understanding of the Commerce Clause, federal air traffic regulation would require a constitutional amendment. “Indeed, the bar was so troubled that in 1922 the American Bar Association took the extraordinary step of barring further consideration by its committees of a constitutional amendment [authorizing congressional aviation regulation], lest they inadvertently create constitutional doubts that would delay or deter the enactment of clarifying state or federal legislation.”

It is absurd, though, that the modern Supreme Court’s federalism should prompt comparable fears. U.S. v. Morrison rests on a distinction between economic conduct, which falls squarely under the Commerce Clause, and non-economic conduct, which is beyond the purview of federal regulation. This understanding gives Congress all the room in the world to grease the wheels of corporate capitalism (and to commit all manner of mischief in the process).

Non-economic, local affairs are, post-Morrison, beyond the scope of congressional regulation. Business should celebrate that fact. Case in point: in its upcoming term, the Supreme Court will decide whether the federal government may regulate local wetlands that are connected to interstate “commerce” only by the occasional presence of migratory birds. The answer to that question will be “no.” Business has nothing to lose, and much to gain, from such constraints on national environmental regulation.

Transition Problems

The real problem with competitive, constitutional federalism--for business, and for the Supreme Court--is a transition problem. The legal doctrines and institutional arrangements of the regulatory state are a tangle, and judicial attempts to straighten out one doctrinal mess may easily cause havoc elsewhere.

The Supreme Court’s 1999 term provides a splendid example: in Geier v. American Honda Motor Co., the Court determined that certain federal airbag regulations pre-empted--that is, barred--state liability suits that are predicated on the manufacturers’ failure to install airbags in a portion of the car fleet. The federal statute under which the regulations were issued indicated no explicit congressional intent to pre-empt such lawsuits, and in fact contained a “savings clause” to preserve them.

Neither the Supremacy Clause nor any other part of the Constitution provides a sound basis for this decision. Moreover, Geier is in tension, if not in open conflict, with the Supreme Court’s federalism jurisprudence. Like the entire edifice of New Deal jurisprudence, pre-emption law at work in Geier rests on the dogmatic premise that the will of Congress shall prevail. (If that will isn’t entirely clear, the courts will, as the Supreme Court did in Geier, supply an expansive interpretation of what Congress could have intended.) Precisely that premise, however, has been banished from the Supreme Court’s recent federalism decisions. If the conservative Justices who routinely reject the Congress-shall-prevail premise in federalism cases endorsed that premise in Geier, that is because they could not stomach the idea of committing the American automobile industry to the tender mercies of the trial bar. Sooner or later, though, something will have to give.

My friends in the corporate legal community aren’t exactly thrilled with my views on the pre-emption issue. The real problem, however, isn’t pre-emption but tort law. Suppose we had a competitive federalist tort regime--e.g., such that manufacturers and other prospective defendants could agree with their customers, through contract and ex ante, where product liability law suits will be litigated: there’d be no need to stamp one’s foot for national uniformity and strained pre-emption doctrines.

Think!

Geier illustrates the desirability, and probably the urgency, of fixing some pieces of the competitive federalism puzzle politically and legislatively--before legitimate business concerns get caught up in the sweep of the Supreme Court’s emerging federalism doctrines. There is no grandiose federalism vision or formula that business could or should endorse. There are, however, many policy areas where business could and should reconsider its reflexive support for centralization and national uniformity. Policy competition and jurisdictional choice merit a serious look.