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Real Federalism Part 1

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Good afternoon and welcome to this afternoon's lecture. I'm Robert George, Director of the James Madison Program, which is sponsoring today's event as part of our series of lectures on America's founding and future. It's a real pleasure for the Madison Program to host Dr. Michael Greve.

He will speak to us today about real federalism, or the division of powers between states and the federal government. Dr. Greve is one of our nation's leading authorities on this foundational issue of American political thought and constitutional law. Dr. Greve is the John G. Searle Scholar of the American Enterprise Institute, where he directs AEI's Federalism Project and the AEI Liability Project. His research and writings cover American federalism, and its legal, political, and economic dimensions. He's written widely on other issues in constitutional law, and also in administrative law, environmental policy, and civil rights. Dr. Greve is the author of "The Demise of Environmentalism in American Law," "Real Federalism: Why It Matters, How It Could Happen," the subject of his lecture today, and most recently his book "Sell Globally, Tax Locally: Sales Tax Reform for the New Economy." He's also editor with Fred L. Smith of "Environmental Politics: Public Costs, Private Rewards," and editor with Richard Epstein of the University of Chicago of "Competition Laws in Conflict: Antitrust Jurisdiction in the Global Economy," which is forthcoming from the American Enterprise Institute Press. Dr. Greve co-founded, and from 1989 to 2000, directed the Center for Individual Rights, a very notable public interest law firm. He currently serves on the board of directors of the Competitive Enterprise Institute. Please join me in extending a warm welcome to Dr. Michael Greve. [APPLAUSE] Thanks Robbie. My program today is quite simple. First I'll try to persuade you that we have an acute federalism problem in this country, and it has serious and deleterious political and economic consequences. And second I'll try to persuade you that the root of that problem is that our federalism, the one we have, the one that the Supreme Court has definitely tried to revive, is an inversion of our actual constitutional federalism. This kind of Madisonianism with a minus sign.

Madison wanted federalism to constrain interest groups, and our federalism exults and entrenches them. Madison wanted a federalism for citizens, and our federalism is a federalism that only politicians can love. That inversion I'll try to argue was the work of the New Deal, whose political logic is only now playing itself out.

I'm quite confident that I know that that is to our collective misfortune. I'm not at all sure what can be done about it. What is our federalism problem? The common view is to lament the accumulation of power in Washington D.C. to the detriment of the states, and certainly there's a lot to that, despite persistent complaints about federal medelling and overreach. We have since the end of the Reagan Era witnessed the enactment of the Americans with Disabilities Act, the 1990 Clean Air Act Amendment, the 1991 Civil Rights Act, the No Child Left Behind Act in 2001, among countless other statutes, not to mention regulations.

All of these laws entail major impositions on state and local governments, as well as private industries. All of them were enacted under Republican presidents named Bush,

belying any suspicions that this is a vast left wing conspiracy. Now it turns out that federalism is not a zero sum game between Washington and the states, because political power

may accumulate and government may grow at both levels at the same time. And so it has come to pass concurrent with the growth of the federal government over the past two decades. The states have amassed an unprecedented amount of power and authority, and a handful of examples illustrate the trend. Example One. In 1998 one of the biggest single tax increases in American history, estimated at some $250 billion over 25 years, took effect. That tax hike and national tobacco sales tax occurred without the vote of a single federal legislator, or for that matter the vote of any legislator in the country. It was contained in the states' collective settlement of litigation with the nation's largest cigarette producers.

Example Two. Dissatisfied with the progress of Health Care Reform, or the lack thereof in Congress, states have taken measures to control pharmaceutical drug pricing. Almost all of them have sued pharmaceutical firms in multi-state lawsuits, now pending in Carson City and Helena, on state law thieveries from fraud to price fixing to antitrust. The lawsuits are modeled on the 1998 tobacco settlement. Some states are exacting price concessions by threatening to exclude pharmaceutical firms from their markets. Other states are threatening to circumvent federal law, and to purchase their drugs from Canadian suppliers. Federal agencies and of course the pharmaceutical industry itself, have tried to stem this tide to no visible effect to date.

Example Three. The tobacco argument has since become the template for state activism and a lot of other areas in a series of high profile investigations. State regulators led by New York State AG Eliot Spitzer have taken on vast sectors of the nation's financial industries, from brokers firms to mutual funds. Mr. Spitzer has emphasized that his investigations aim to impose nation wide, industry wide conduct remedies, as distinct from the imposition of fines on individual bad actors. The state regulators explicit and stated objective fear is the national regulation of industries that are perceived to be operating without adequate government supervision. Now I could go on to give you other examples. The states' antitrust prosecution of Microsoft, for example, which continued even after the national government had decided to settle the case. Or I could point you to a splendid article in Governing Magazine, a fine magazine for federalism aficionados, on California's ongoing successful attempts to legislate for the nation and indeed many nations other than ours, solutions on global warming policy, private data protection, internet taxation, and restitution for victims of the Nazi Regime. The fact is this. Even as the national government has assumed and often exercises the power to regulate the mud puddles in your backyard as a federally protected wetlands, states like California, which demonstratively cannot govern even themselves, claim and exercise the power to regulate the United States stock market and the global economy. Now in a primitive sense, this unprecedented expansion of state power to regulate beyond their territorial boundaries is of course federalism. It's something the states do, but I submit that it is not constitutional federalism, it is as I said an inversion. And to see that point, I start at the beginning, the founding. Start with the basic question. Why union beyond the Articles of Confederation?

The first and most obvious answer is to provide for the common good, for the common defense against European enemies and against hostile combinations among sister states. No state on its own could provide for its own defense against either of these threats. And so defense and all that goes with it, from diplomacy to raising money for armies, is a public good, with both respect to citizens and with respect to states, and it has to be provided on a national scale. And that is why the Constitution entrusts those tasks exclusively to the federal government. There's a second argument for the Union, which is commerce, or commercial and economic. States and their citizens can trade to mutual advantage, but it's not a given or a certainty that they should be able to do so. State borders became, may become tariff walls. Economic competition may deteriorate into economic warfare, and sooner or later into actual warfare. Bilateral agreements among states may of course improve trade relations, but they're highly unstable, and they're unlikely to come about when states bargain against an uncertain base line. So for example, as Hamilton explained, New York may insist on its right to tax imports, including goods destined for New Jersey. But New Jersey will insist with equal right on remaining free from such burdens. And under those circumstances the better part of wisdom is to lock states into a lasting arrangement that protects competition and comparative advantage. To that end the Constitution forbids some protection of state practices, such as tariffs and duties. It bars discrimination, state discrimination against citizens of another state. And it entrusts the national government with what economists now call a monitoring function. That is the power to police state infractions against economic, against the competitive ground rules. That's the purpose of the Congressional power to regulate commerce among the several states. The third argument for the Union is the most subtle, profound, and distinctly Madisonian. An extended republic, Madison explained in Federalist No. 10 is conducive to liberty. The reason why that is so is that it inhibits faction and partial legislation, which was the founders' term for what we now call interest group transfers. The argument, of course, is sufficiently famous to bear translation into the vernacular. Within the states, Madison argued, even with an enlarged state like Virginia, citizens will be forever at the mercy of factions, which was Madison's term of art for what we now call piggish interests. And an extended sphere, and an extended republic, diminishes that danger. Force the pigs to play on a continental scale, and they'll persistently bump into a larger number of pigs of different sizes and with different colored snouts. Measures adverse to common interest will come about only if the animals manage to march off in the same direction. Such concerted action will be difficult because the factions will find out that positive transaction costs can ruin the best of days. Now tellingly, in outlining that argument in Federalist Ten, Madison makes virtually no mention of the states or federalism. And that suggests the tension between the central argument of Federalist Ten and the first two arguments for the Union, that is the public good's argument and the competitive advantage argument. Those two arguments suggest the delegation of specific, limited, and enumerated powers to the national government from the states. But the argument about extending the sphere of Republican government pushes far beyond that point of delegating specified, limited powers.

All else equal, Madison seems to be saying an extended Republic offers refuge from the ravages of factional politics, to the extent that imperfect human institutions can accomplish that. So on that assumption, why should the states, which are the hotbeds of faction, retain any kind of autonomy in any policy arena? And at the Philadelphia Convention, pre Federalist Papers, Madison in fact pushed the argument to that extreme. States, he said, were persistently enacting laws to exploit, expropriate, and otherwise menace citizens all across the continent. Better relief laws and the rage for paper money were Madison's favorite examples. One in all these, and this is a quote, these rival and spiteful measures were dictated by mistaken views of interest. That is to say by factional politics. And Madison proposed to fix that central problem right then and there, in Philadelphia. Three times at the convention, Madison pushed for the adoption of a comprehensive negative. That is a requirement of federal pre-approval of all state legislation in all cases whatsoever.

No state law of any description argued with the persistence bordering on obstinacy, should go into effect without the approval of the federal legislature. Nothing but this draconian measure would break the violence of faction. Now as we know, the convention rejected Madison's negative, and it did so because it viewed it as impracticable, unnecessary, and excessively nationalistic. Sure the delegates conceded some state legislation might well encroach on the rights of the Union. All the rights of sister states and of their citizens. But these instances would be rare compared to the great mass of state legislation and the negative in all cases would be massive overkill. It would hardly do, George Mason observed, to obtain congressional consent every time a state wishes to build a bridge inside its own territory. Besides, Governor Morris remarked, a negative would disgust all the states. None of them, John Rutledge agreed, would ever agree to be bound hand in foot in this manner. So what did they do? Well instead of the Madisonian negative, the convention adopted a two pronged solution.

First, state legislation that might offend the rights of the Union, may be set aside either by Congress, in the exercise of its enumerated powers, or by the courts, in the course of deciding cases and controversies arising under the Constitution. That's the core meaning of the Supremacy Clause, which declares the Constitution and laws made in pursuance thereof, the supreme law of the land. Anything in the Constitution or laws of the State, to the contrary not withstanding. Second, and this is important, with respect to state laws that are practically certain to violate the rightful interests of the Union and of sister states, the Convention in fact did adopt Madison's proposal. The requirement for Congressional consent, and in some instances an outright prohibition on state legislation. So no state may enact a law impairing the obligation of contract, such as data relief laws. No state may issue paper money or enter into treaties with foreign nations or other states. Nor may any state impose duties of tarnish, levy duties on imports and exports, enter into compacts or maintain standing armies without the consent of the Congress. This is Madison's negative in a specified range of applications. What is that range? Well almost uniformly the constitutional prohibitions bar state laws that spill over state borders. That threaten to impose costs on citizens in other states. In arguing for general negative and across the board negative, Madison had consistently adduced these very laws, but mainly are symptoms of the general malady which is factional politics. The delegates in Philadelphia either missed Madison's broader point or else they deliberately left the problem of state level factions to another day. Either way they confine the constitutional negative to factionalism's outward projections. The inter-state externalities as economists now say. But even while the connection rejected Madison's broader proposal, it paid him quite a compliment. And here's why. A faction and interest group that seeks to enact a partial law to its own advantage in a state, must do so on somebody else's back. There's no free lunch. The losers in these endeavors, for their part, tend to do one of those two things. They either try to vote the bums out of office or they vote with their feet. And to avoid these responses factions will persistently seek to impose the costs of their schemes on individuals who can neither vote nor escape.

In other words, the citizens of other states. To put that differently, factionalism systematically pushes across state borders. And if you can arrest state legislation at the borders, you can curb factional politics on the decisive margin. One may reasonably doubt, as Madison did doubt, that this constitutional law and aspiration is proportionate to the menace of factional politics. But I think one cannot seriously doubt that it is the constitutional law and aspiration. The logic I've just tried to sketch explains why our Constitution in contrast to virtually all modern federal Constitution contains no states rights. There's no list of functions or powers that are explicitly reserved to the states. The Constitution only contains a list of things that states may not do. All of which, as I've just explained, fall under the heading of state aggression, or inter-state aggression. If that's true, what then remains of federalism? And the answer I think is that the Constitution mobilizes federalism to tackle the government monopoly problem, to a far greater extent than the national government, states must compete for productive citizens and for productive businesses. And this competitive pressure of exit will discipline interest group politics

in which voice meaning, principally voting, will never do. The national government must of course provide public goods that the states cannot provide on their own, as in the case of scale problems, as in for example defense, or in the case of coordination problems, such as the regulation of network industries, first railroads then other industries. Beyond that the national government must also protect and preserve the competitive ground rules of the game. But that is pretty much all that the national government must and ought to do on all other matters we can let and should let the states compete. This competitive vision of federalism naturally flows from two premises that were central to Madison's thinking. I'll call the first premise the citizen's perspective. The second premise is the central role of interscope theory to an understanding of federalism and its political economy. These are, I think, the critical premises of Constitutional federalism, and as I'll go on to argue, they're precisely the premises that the New Deal has inverted. I'll start with what I've just called the citizen's perspective. When Madison thinks and writes about federalism and government in general he starts with the citizen's welfare as the basic criterion of sensible, institutional arrangements. He refers to the happiness of the people of America, or the real welfare of the great body of the people. Could one start with anything else? Yeah well one could, as the unfortunate phrase of states rights suggests, one could start with the states considered and their collective political capacity, as the founding, as the building blocks of federalism. In the formative period of political unions, that is quite a natural abuse of for example, we ask ourselves whether this or that arrangement for the European Union is good for Germany or Britain. Existing from individual constituencies within those countries, or for that matter for European citizens, assuming that such persons exist. But this state centered view was not Madison's perspective. It was the Anti-Federalist perspective, and Madison invade against it with great vehemence. The central passages appear in Federalist Paper No. 45. The preceding papers had shown that the powers transferred to the federal government were altogether necessary and proper. In No. 45 and 46 report to show that the states will have nothing to fear from the federal government, principally because the affections of the people will always run towards states. That contention of course has proven false. And there are good reasons to doubt that Madison actually believed it at the time. But it is in any event not where he begins the argument. He begins rather with a full scale assault on the Anti-Federalist states' rights premise. If the powers transferred to the federal government are indeed necessary he asks in this string of quotes. Is it not preposterous to urge as an objection to the government without which the objects of the Union cannot be attained? That such a government may deregate from the importance of the governments of the individual states? The preposterous of that states rights perspective is its real world disconnect. And again I quote. Was the American Revolution affected? Was the American Confederacy formed? Was the precious blood of thousands spilled in the hard earned substance of millions lavished? Not that the people of America should enjoy peace, liberty, and safety, but that the governments of individual states that at particular municipal establishments might enjoy a certain extent of power and be arrayed with certain dignities and attributes of sovereignty? Without missing a beat Madison then moves on to the third rhetorical question. Now he's accusing Patrick Henry and his cohorts of closet royalism. We have heard of the impious doctrine in the old world. That the people were made for kings. Not kings for the people. Is the same doctrine to be revived in the new, in another shape? That the solid happiness of the people is to be sacrificed to the views of political institutions of a different form? And he continues, now in the affirmative. It is too early for politicians to presume on our forgetting that the public good, the real welfare of the great body of the people, is the supreme object to be pursued. And that no form of government whatever has any other value than is maybe fitted for the attainment of this object. That's the citizens' perspective in a single sentence. The second premise. Interest group theory. As I've already explained, Madison's account of faction was central to his constitutional thinking, but a few additional words on the subject are in order. Foremost, he thinks factions are unequivocally bad. The word typically appears in conjunction with words such as mischief, violence, strife. But factions and factional politics are also unavoidable under free government, and the point of a constitution is to restrain factions. through exacting rule and arrangements. Remember Madison's

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Duration: 23 minutes and 59 seconds
Country: United States
Language: English
Director: Central Washington University
Views: 154
Posted by: atrctech on Dec 30, 2011

Real Federalism Part 1
Transcribed by Gianna

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