American Enterprise Institute

September 12, 2008

[Edited transcript from audio tapes]

8:45 a.m.	Registration and Breakfast
9:00		Panel I: Competitive and Cooperative Federalism
	Panelists:	Malcolm Feeley, University of California, Berkeley, School of Law
		Michael S. Greve, AEI
		Roderick Hills, New York University School of Law
		Ilya Somin, George Mason School of Law
	Moderator:	John Eastman, Chapman University School of Law
10:50		Panel II: Judicial Review of Federalism—A Discussion
	Panelists:	Randy Barnett, Georgetown University Law Center
		Jesse Choper, University of California, Berkeley, School of Law
	Moderator:	Michael S. Greve, AEI
12:30p.m.	Luncheon and Keynote Address
	Speaker:	Judge William Pryor, U.S. Court of Appeals for the Eleventh Circuit
1:30		Panel III: Health Care and the Environment
	Panelists:	Jonathan Adler, Case Western Reserve University School of Law
		James Blumstein, Vanderbilt University Law School
		Thomas P. Miller, AEI
	Moderator:	Ashley Parrish, Kirkland & Ellis LLP
3:15	Adjournment

Proceedings:

Dean Reuter:  I think probably most people in this room recognize that during the Rehnquist Court there was a decided resurgence in federalism but the current state of federalism and the future of federalism is, I think, more at issue.  And that is our topic today.  And fortunately, we have a full day of programming to explore these issues.  We are going to begin this morning with a panel on cooperative versus competitive federalism.  It will be moderated by Dean John Eastman.

And before I briefly introduce him, let me thank our co-sponsors for today’s event.  Obviously our host and co-sponsor, AEI, thank you to them.  And to Ted Frank in particular who worked hard to organize this conference, and Michael Greve who also lent his abilities in organizing this conference.

And our other co-sponsor, Chapman Law School and the moderator of our first panel, as I just mentioned, Dean John Eastman.  Dean Eastman is also chair of the Federalist Society’s Federalism & Separation of Powers Practice Group.  So I’ve gotten to know him and worked with him for several years.  He is the fairly recently installed dean of Chapman Law School, and he’s doing amazing and wonderful things there, designing and implementing new programs in clinics and recruiting professors, having a lot of success at recruiting professors.  In fact, if you have a favorite professor from your old law school and you’ve lost track of him or her, you might want to look for them at Chapman.  So without further -- Dean Eastman.

John Eastman:  Thanks, Dean.  Yeah, we’ve just finished a run of 20 hires this year, which is really extraordinary.  And now people are coming out of the woodwork, sending me additional resumes.  I wish I had another ten slots with the caliber of folks that are coming along.

Anyway, we launched an interesting conference today and it occurs to me, as we kick the first session off, maybe we ask an initial question, is there a future for federalism without getting too partisan?

It struck me when Senator Biden asked the question after Governor Palin’s convention speech.  She didn’t talk about education, she didn’t talk about healthcare, she didn’t talk about a whole series of things that under the old notion of federalism shouldn’t have been talked about in a federal campaign at all.

Many of us in this room will remember the old joke back in 1980, ’81, at the beginning of the Reagan administration, “How come they’re having so much trouble filling the position of cabinet secretary in the Department of Education?  Nobody wanted a part-time, temporary job.”  Are those days completely gone?  Is the future of federalism now more discussions of things at the margins?  There may be a ray of hope coming out of Alaska in this notion of spending cost limits.  But I don’t think they’ve got quite to the principles, underlying principles of federalism.

I want to give you one veto message of a president from some century and a half ago to kind of set the terms  -- just as we think about what the future of federalism might mean and then we’ll launch into the panel.  I’m not going to tell you who this president is because he’s not one of my favorites, but this was particularly good.

“The representatives of the states and of the people feeling a more immediate interest in obtaining money to lighten the burden of their constituents than for the promotion of the more distant objects entrusted to the federal government will naturally incline to obtain means from the federal government for state purposes.  If a question shall arise between appropriation of land or money to carry into effect the objects of the federal government and those of the state’s their feelings will be enlisted in favor of the latter.  This is human nature and hence the necessity of keeping the two governments entirely distinct. 

Besides, it will operate, with equal detriment, to the best interest of the states.  It would remove the most wholesome of all restraints on legislative bodies, that of being obliged to raise money by taxation from their constituents, and would lead to extravagance, if not corruption.  What is obtained easily and without responsibility will be lavishly expended.”

Man, I think that’s a pretty good summary of what the founders thought the purpose of federalism was, this notion of unlimited national government keeping the bulk of powers of government at the more local level where they could be more directly controlled.

Is that still our understanding and is there anything in the future of federalism that might have a chance of recovering some sense of that old?  To discuss these and other questions, in particular, in this first panel, cooperative versus competitive federalism, we have a wonderful panel of guests.  Their bios are in your materials.  I’m not going to go at length other than just give you their name and title and affiliation.

Michael Greve is going to go first and he’s the John G. Searle Scholar here at AEI.  Next up will be Malcolm Feeley, the Claire Sanders Clements Dean's Chair Professor of Law –- the more prestigious these things are, the longer they are, so congratulations on that -- at Boalt Hall at Berkeley.  We all call it Boalt Hall, but they recently changed, I think, for purposes of U.S. news reputation scores.  It’s now the University of California Berkeley Boalt School of Law.  We want to make sure we get that in there.  Okay.  It’s amazing how we’re all driven by those now.

Third up will be Roderick Hills, Rick Hills, the William T. Comfort, III Professor of Law at New York University.  And then finally, playing cleanup will be Ilya Somin who’s an assistant professor of law at George Mason and this semester visiting at the University Of Pennsylvania Law School.  Mike Greve.

Michael Greve:  Thank you, John, and thank you for your paean to James Buchanan.

John Eastman:  [Inaudible]

Michael Greve:  I had to let the air out of the balloon, absolutely.

As an introduction, I’ve been asked to give a somewhat conceptual overview of the terrain here.  I’ve been asked to do this because I’m by nature non-opinionated and in a good position to do this.

There are, basically, I think, two ways of looking at federalism.  One is called advertical perspective, the states versus the national government and how do you strike that balance.  And the other dimension or the other perspective on federalism is what this panel is eventually about; the dimension is competition amongst states versus cooperation or as I prefer to say cartelization amongst states. 

As it happens, I’m inclined to think that the second perspective is actually the right perspective constitutionally speaking.  Now that’s a very complicated argument.  The main purpose of my brief remarks here is to explain how this vertical versus the horizontal perspective, how those differ and what that entails for the role of the courts and with respect to judicial doctrines about federalism.

Start with the vertical states versus the national government perspective, which has been the dominant perspective both in American law and American political science over the past six, seven, eight decades.  So the theory goes that there are two levels of government and they have different powers and when these powers and spheres remain separate we call it “dual federalism” and when they get co-mingled and powers are exercised jointly among levels of government we call it “cooperative federalism.”  And the central question you want to ask yourself in that federalism scheme is what’s the appropriate balance between the two levels, the two constitutionally specified levels of government?  And the second question you want to ask yourself in that framework is, is there any role in that scheme for the United States Supreme Court? 

Notice this protecting federalism and the federal balance translates into protecting states as states.  And that’s true regardless of whether you follow Professor Wexler’s theory that now states have to be left to their own devices in the political process as the Wexlerians and neo-Wexlerians think or whether you side with the critics, including the Rehnquist Court that says, “Yes, the Supreme Court does have a role in protecting states as states.”  Both view, both perspectives view that as the central purpose of federalism.

I confess I can make no constitutional sense of that perspective whatsoever.  The federalism balance is in fact the federalism invention of the New Deal.  The first time that federalism, in our modern sense, appears in any United States’ court opinion comes in 1939.  Needless to say almost, that decision was written by Felix Frankfurter.  The term “federalism balance” shows up three or four years later in another Frankfurter opinion.  I will come back to the significance of that point.

The competitive federalism model runs orthogonal to this vertical states versus nation perspective and it starts with the question what is federalism for, and there are really only two arguments for federalism that one can think of.  One is to reduce the decision costs at the central level and the other is to constrain leviathan, constrain government.  So federalism and so on constrains the central government because it withholds certain areas from its reach.  And it controls and constrains states because of exit and mobility.  If a state over-regulates and overtaxes, people run away and that will create competition amongst states.  That’s why it’s called “competitive federalism.”  Notice there is in that scheme no preconceived balance between the states and the federal government and notice further that that federalism, competitive federalism is not for states as states.  It looks to the fate of citizens and firms, not to the well-being of states.  In fact, to the extent that competitive federalism cares about the fate of the states at all, it wants that fate to be very, very harsh. 

It starts with Madisonian premise.  What are states?  Answer: they are faction-driven governments.  As modern theorists put that same premise, they are surplus-maximizing leviathans.  They want to expropriate their citizens and then hand the money over to their friends, which we now call “interest groups” or in a somewhat more charitable term “stakeholders,” which is really all you need to know about modern government.

Competitive federalism’s point is to erode that ability because of the potential of out-migration.  States will therefore consistently loathe and hate and resist competitive federalism.  They will want to create cartels.  To that extent, they will want to lock themselves under a federal umbrella because cartels and political markets confront the same free market problems that cartels and private markets encounter.  That in essence, the cartelization of federalism is the New Deal constitution; contrary to widespread belief the New Deal constitution did not centralize anything at all.  Its programs were cartels at every level.

I’ll give you two examples.  One is the fiscal cooperative federalism programs that we all hold so dear.  Think Medicaid.  These are tax and spend cartels.  And they produce levels of spending and taxation that are in excess of any state’s authentic preferences.  My other example is extraterritorial taxation and regulation.  The competitive rule is crystal clear: states have to tax and regulate their own citizens and not somebody else’s and of course what faction-driven states, leviathans want to do is tax everybody except their own citizens.  And the cartel optimizing-surplus-maximizing rule is an agreement amongst state governments.  I tax your citizens and firms and you exploit my citizens and firms and no one will be the wiser.  Frequently that requires the cooperation of Congress for reasons explained but we now have many, many organizations that do this on their own without congressional intermediation. 

They’re called things like National Association of Insurance Commissioners, Multi-State Tax Commission, National Association of Attorneys General.  These are all organizations for the coordination, that is to say for the coordinated exploitation, of citizens across state lines.

This is what the New Deal meant by federalism balance, cartels at every level.  I’ll give you three doctrinal examples.  I would be happy to talk about these at greater length.  The first is the anti-trust immunity doctrine of Parker versus Brown.  That’s a clear example.  Second one is the doctrine of Erie and Klaxon, which is the choice of law; must in all events, be left to the plaintiff who will then predictably sort herself or himself into the most exploitative jurisdiction.

A third example is the presumption against preemption of Rice versus Santa Fe fame that, to this day, spooks through that area of the law.  All of these doctrines were originally formulated explicitly as compensating adjustments for the demise of enumerated powers.  All are exploitation maximizing rules which I’d be happy to demonstrate at the slightest provocation from anybody in the audience or in the panel.

Now, with these two different models, the vertical model that still dominates the law and the competitive federalism model that I’ve just sketched, what’s the role of the court?  Well, in the vertical, the balanced view, the role of the court is to protect states as states or as the Supreme Court now says in a bizarre word to protect the state’s dignity.  Against that stands Robert Wexler, know the states have to help themselves in the political process.  I confess I have no dog in that fight because the Wexler premise strikes me as so wrong that not even the opposite is true.  The problem isn’t or the question isn’t whether states can defend themselves.  The problem, because they don’t want to do that, the problem is should this court stop states from cartelizing the political system either with congressional help or without them. 

So what the competitive federalism model then recommends to you is the court should view itself as a kind of political anti-trust agency.  You want to let the political market work so long as it will but when intergovernmental conspiracies are afoot you want to crack down.  I have one minute left.  I’ll give you a few examples of how the federalism doctrines shake out under these two different models.  I’ll group them in three groups and I’ll give you examples.  The first group is pro-state doctrines.  That is to say doctrines that flow from this vertical model that happen to have pro-competitive overlaps and rationales.  The clear statement rule falls in that category and the anti-commandeering rule falls in that category. 

The second group of doctrines is pro-competitive doctrines that are now intensely contested.  And I want to add intensely contested especially by self-appointed originalists because they look anti-state.  The dormant commerce clause falls into that category and the doctrine of implied preemption falls into that category. 

And the third and final group of doctrines is doctrines that we would need for competitive federalism but that aren’t even remotely within the contemplation of the court or the legal establishment because they are antithetical to the New Deal constitution and to the New Deal program of cartels at every level. 

I mentioned three examples, three doctrines that you would need or have to reconstruct, meaning full doctrines of extraterritorial jurisdiction.  Horizontal federalism rules that are in fact in the constitution such as the full fifth and credit clause and compact clause but are now explicitly unenforceable, under a binding precedent but decided by the court because they have competitive implications.  And the third example is you will have to rethink the Erie-Klaxon regime.  You have to think that something has to stop the race into plaintiff-friendly states and the implication is that you cannot run American federalism without something like federal common law whether you choose to call it that or not. 

The consideration of those last doctrines, as I said, is a long way off.  I think the crucial federalism battleground over the next decade is in the second group of the dormant commerce clause and implied preemption.  If you want to look at the future of federalism, that’s where you ought to look.  Thank you.

John Eastman:  Okay, Professor Feeley.

Malcolm Feeley:  I’ve been asked to give a talk on democratic theory, what is the nature of democracy.  And so I start out by saying democracy is a system of government that has two political parties with winner-take-all elections.  It has a parliamentary system with the Prime Minister selected from the largest faction in the parliament.  It has two houses of Parliament, one that has aristocratic basis.  Somewhere along the line, someone in the audience, is going to raise her hand and say, “Wait a minute, Feeley; you’re not talking about democracy.  You’re talking about the British political system.”  Well, let me suggest that most discussions of federalism sound a bit like my would-be talk about democracy; that is discussions of federalism are not theoretical but they are anchored in a strong basis of one particular political system.  Now my audience, about the democracy, would say maybe written as a democracy or not, but why don’t you define the characteristics of democracy, the essential features of it and the implications, and then assess the practices in Great Britain or the United States or any other place in light of the theoretical framework that you’ve laid out and defended.

Well, I want to try to do the same thing for federalism in just a few minutes here, and I’m pleased to see that in recent years I’m not alone, or my colleague, Ed Rubin and I are not alone in trying to understand the essential features of federalism.  But we want to divorce it from federalism in any particular setting including the United States. As important as those issues are, we get back to them.  So I want to make some very basic claims about federalism and about the nature of state formation that I think are Government 101 claims that are not particularly controversial.  And then I want to explore some of the implications.  And some of the implications I think are startling and non-obvious.  And so I want to work through those. 

Ed Rubin and I, in our recent book and our articles over the past few years, define federalism in a very straightforward way.  It’s a dictionary definition.  Federalism is a system of government in which there are multiple levels of government and each level has some degree of sovereignty, some degree of economy.  So that’s our understanding of federalism, as I say, dictionary definition, almost.  Secondly, we have a rather, I think, conventional understanding of the nature of state formation. 

A state is formed, at least a successful state, that succeeds and endures over time succeeds because there is identity, a political identity that individuals hold for that territorial unit.  Political identity is different than other sorts of identity –- religious identity, ethnic identity, and so on -- because it’s territorially based, it’s a distinctive feature of identity.  And a successful state is one in which the members of that state have some degree of identity.  How do we know how strong that identity is?  One sort of rough and ready indication is whether people are willing to kill or be killed for it.  That seems to me a good understanding of a strong political identity. 

Federalism complicates that situation because federalism creates dual identities.  And we suggest that federalism emerges when there are in fact conflicts about political identity.  It’s a compromise.  It’s a compromise between those that have an identity with a central government and others, usually subsets, and has to be territorially concentrated although not exclusively subsets that have identity with the strong political identity with another territory.  Federalism then is that unhappy and tragic compromise of those that identify at the central level and those that identify at the local level.  It’s a way of coping.  We suggest that it’s inherently unstable; that it’s likely either to resolve towards a breakup and of course the history of most federalisms is one of a breakup and demise or resolve towards a unitary government.  But our point is that these two identities are in conflict with one another and are hence unstable. 

Our argument is, when we worked through this, is that the United States is no longer a federal system.  We have one single national political identity.  Very few people, if any, are willing to kill and be killed for the subunit governments in the United States.  Ed grew up in Brooklyn and I grew up in Texas and we have strong senses of identity but I don’t think either of us is willing to kill or be killed for those localities. 

So what we suggest is what looks like federalism in the United States and elsewhere is really a closely allied but nevertheless conceptually distinct form of organization.  It’s decentralization.  But decentralization is a managerial strategy controlled from the center and not federalism.  Federalism is a system in which units have sovereignty within their spheres.  They can do or not do whatever they want.  They can be competitive or they can be slothful.  They can do whatever they want.  That’s what sovereignty, that’s what states rights would mean in any meaningful sense.  Decentralization on the other hand is a strategy to achieve a particular set of goals.  General Motors can decentralize and Buick and Chevrolet motor car companies against each other because it thinks it’s a strategy for maximizing profits.  And it may or may not be.  If it is, we’ll continue.  If it’s not, they might want to reorganize into a different form of organization. 

But what I want to emphasize here is that federalism again grants autonomy or sovereignty to the levels of government, the units of government and they can compete or not compete as they see fit.  So the idea of competitive federalism, cooperative federalism, or picket fence federalism or any of the other sorts of federalism that Michael has outlined here is really something that makes a lot more sense when you’re thinking about a strategy for decentralization and trying to maximize some particular goals.  I want to emphasize that federalism does not have goals.  Federalism is a structural arrangement that allocates powers.  It’s not a managerial strategy that pursues particular goals. 

Now, why is it that there is so much confusion between decentralization and federalism?  Part of it, I suggest, is simply a conceptual confusion.  The two are related but it seems to me, if we have terms we ought to breathe meaning into them, as opposed to using them for whatever they want and so we ought to press for conceptual clarity.  That’s what I’m trying to do here. 

A second one is simply carelessness.  The huge literature on fiscal federalism put out by the political economist is simply careless.  It’s not talking about federalism at all.  It’s talking about decentralization.  And in their more reflective moments the economists that write about fiscal federalism recognize this well.  So it’s probably the dean of the field says, “We screwed up and used the wrong term.  We should have used decentralization because we’re really not talking about federalism.” 

There’s still another reason why I think that federalism continues to be used and embraced so widely, and that is nostalgia.  We talk about federalism today, in the 21st century, and it’s a nice way of conjuring up that simpler society of moonlight Magnolias of the 19th century.  It’s a way of conjuring up a warmer and fuzzier life, at least for some people.  I grew up in the segregated south so I don’t remember states rights and federalism as quite filled with moonlight and Magnolia. 

And finally it seems to me that federalism is used as a smokescreen, as a mask, as a device to mask political preferences.  It’s one thing to say I prefer A, B, and C.  I prefer a more competitive state or I prefer a stronger, meaner, leaner state or I prefer a welfare state.  But it’s another thing to say and it adds a bit of heft to say, “It’s not my preferences.”  This is implicit in the age-old structure that we embraced and that our forefathers and our founders wanted, namely federalism. 

So federalism is a way of masking naked policy preferences.  Trying to dress them up in the guise of inevitability; flowing from a structure that we all know and love.  What does this say with respect to policies about federalism?  Certainly not do away with the states, but contrary to Michael, I think the only reasonable position, at least, with respect to American federalism and what to do is the Wexler-Choper idea that the issue of federalism should be non-justiciable. 

One bit of evidence and here’s where I would agree, and be in heated agreement with Michael, is that a bit of evidence to suggest that there is no deep theory and appreciation for federalism, is that all theories of federalism are incoherent.  The old courts –- or the Roosevelt courts understanding of federalism was anchored in an incoherent and rather arbitrary division, and the Rehnquist Court that follows the same way.  There is no coherent theory to what they’re suggesting.  It’s just a bit of indirect evidence to suggest that they’re really not talking about federalism; they’re talking about something else.  And as I say that something else I think is decentralization.

John Eastman:  Professor Hills.

Roderick Hills:  Hi.  You know, I admire Malcolm’s work so much because everyone needs someone to get them fired up in the morning, right?  You know?  And facing consensus and bland agreement is not a way to get up and feel revved.  And since 1994, I ferociously disagreed with Malcolm’s theory of federalism.  And what I want to talk about today is a theory of competition that is directly at odds with Malcolm’s dichotomous definition of what federalism is about. 

In Malcolm’s theory there are two purposes for -- I’m going to call it federalism/decentralization.  Federalism is about protecting ethnic or religious or cultural enclaves from each other.  You know, you have Catholics in Bavaria, you have Protestants in Prussia.  You give them each little bit of territory and let them govern themselves.  Decentralization is simply about managerial efficiency.  Some central guy at General Motors said, “Gee, we’ll have a better parts policy if we decentralized decisions about parts to our individual factories.”  But Malcolm is forgetting, I think, a third theory of federalism.  I’m going to use the word “federalism.”  But if you want to use Herbert, that’s okay -- Herbertism.  And this third theory of federalism is about agency costs.  Now it’s going to be different from Ilya’s theory, which I think he’s going to talk about.  Ilya can talk about state-state competition.  How states compete with each other for a mobile citizenry and thereby avoid rent seeking. 

What I want to talk about is state federal competition, the theory of the Republicans, the country party ideologues of the 18th century, and the Jacksonians.  This theory of agency costs goes something like this: large-scale democracy does not allow voters to monitor elected officials very well, largely for three reasons.  First, large electoral districts tend to be dominated by big money.  Why?  Because labor canvassing, voter to voter, is much more effective in a small district.  In a large district, you need to tap the TV market, the radio market.  The number of people in the district is very hard to communicate with and so the anti-federalists, the federal farmer, Brutus, would say in a large electoral district, the wealthy and the well-connected will dominate.  So we want to keep the electoral district small. 

But the people elected from those districts don’t want to keep electoral districts small.  They’re not like the chairman of General Motors who wants to maximize profits.  They’re like people who have interests different from their shareholders.  And therefore we need a constitutional constraint to keep the electoral district small.  How is that constrained?  We’re going to give a lot of power to units that have small electoral districts. 

The second reason why large-scale democracy leads to agency cost -- and by agency costs I simply mean the difficulty of the principals, the voters to monitor their agents, elected officials.  A heterogeneous issue environment tends to be very hard for voters to monitor.  By heterogonous issues I mean lots and lots of different issues -- gay rights, balanced budget, do we stay in Iraq.  Think of lots of disparate issues that have nothing to do with each other.  The more heterogeneous the environment, the more difficult it is for citizens to assemble a stable majority coalition, more difficult it is for citizens to monitor bills that have lots of unrelated issues in them.  And therefore the anti-federalists say, “If you have a large central government that monitors lots and lots of different issues with lots and lots of heterogamous interests, everything from gay and lesbian rights to, you know, gender equality, to court reform, to what do we do about asbestos to military policy, citizens will be confused.  They will probably suffer from cycling because you tend to get more cycling of issues and manipulation of issues in a heterogeneous issue environment.” 

Third reason why you have lots of agency costs in a large-scale democracy: information tends to be hard to acquire as the ratio of appointed to elected officials favors the former.  A bureaucratic state will tend to be a large-scale state simply because the ratio of elected officials in the federal government, 537, to appointed experts, policy experts will tend to favor the appointed policy experts.  As you diminish the scale of government; the ratio of elected officials to appointed officials tends to favor the latter.  Voters tend to have more control over the latter.  And so if you want to avoid management by a bureaucracy, call it “Lord North Ministry,” call it the Securities and Exchange Commission, you will tend to want to be governed by Mayberry [phonetic] because the ratio of elected officials to appointed officials will tend to favor elected ones. 

Now this is a very simple theory of agency cost that, in any case, to debate this theory of federalism, you need to engage.  You can’t keep talking about the difference between ethnic competition and managerial decentralization.  You need to think about what the shareholders at General Motors might fear from the chairman.  Why might they want to put in the by-laws of the corporation a rule that says, “You must decentralize to the factory manager because we don’t trust you.” 

Now I’ve just used five of my minutes and for the balance of the time I want to suggest that the theory of federalism that prevailed in the United States from roughly 1786 with the debate over the Bank of North America to roughly 1864 with the end of the Tawny Court.  It was largely concerned with precisely this agency cost theory of federalism.  It was about competition between states that are responsive to populist officials and a federal government that was believed to be too bureaucratically dominated and too dominated by what Jackson would call moneyed interest. 

Where does this theory of agency cost come from?  In the 18th century it would be called country party ideology.  It rose out of the landed gentry’s opposition to the national debt, in the Bank of England in 1694 and it continued with the opposition of the South Sea Company in 1720s. 

Here’s how the theory goes: there’s a small financial leads at the metropolitan center, call them the chairman of General Motors.  They tend, this management group, to dominate parliament.  Sure, parliament is ostensively elected but it turns out that parliament have lots of bribes from these private financiers.  These financiers get their money by underwriting public debt.  They have preferred contracts or access to public debt.  They secure support in parliament by giving parliament, literally giving them, securities in their corporation, which is largely a corporation that underwrites public debt.  So this group of financiers, private financiers at the metropolitan center, call it London, Philadelphia, or New York City, will dominate an ostensively elected set of officials, parliament. 

What do we do about them?  Well, somehow we’ve got to get power to that country, would be the expression in 18th century England, or the colonists would say to the Western provinces.  The anti-federalists and later the Republicans were largely concerned with controlling banks, banks that were chartered in Philadelphia and seemed to have control over capital and seemed to have too much power over the national government.  And so the anti-federalist largely got their start opposing the Bank of North America. 

Likewise, the Republicans got their start opposing the Bank of the United States.  Here was their claim -– now, I’m not trying to say that their claim was correct or not.  But here was the claim: these banks are chartered in the capital; they have disproportionate influence over the national legislature.   They have this disproportionate influence because the electoral distinction, which the national legislation electoral are very large and so it’s difficult for someone without a lot of money to compete. 

If we want to control capital, we should devolve power from a government with small electoral districts which are largely governed by people who canvass door to door through labor rather than through money and we shall also devolve a way from financial experts –- call him Alexander Hamilton, call him Robert Morris of the Bank of North America, call him Nicholas Biddle of the Bank of the United States -– because these financial experts are hand in glove with elected officials who aren’t really elected, like Henry Clay.  And so this perhaps paranoid, perhaps accurate view of the national government is the national government suffered from agency cost. 

What was the solution?  Devolution to those individual factories within the system, the states, because the theory was that they’d be much more responsive to lay people.  Jackson’s hostility to federal power, to what he called the monster bank, was largely driven by this vision of federalism that the states could control financial interest, the national government couldn’t and wouldn’t. 

Now the most important points you need to understand about country party ideology are three-fold in nature.  First of all, the federal constitution’s division of powers is largely a way to control the division -– a struggle between economic classes.  Jackson would call it: one economic class. The producer, namely small firms, family-owned firms, and farmers, and the other economic class are capitalists, managers of large-scale national capital.  And he thought that the states would be more responsive to the producers.  That’s point number one.  Until you understand that this class struggle between social classes and not struggle between ethnic and religious groups that drives American federalism you won’t understand American federalism.  You’ll confuse it with the kind of federalism they have in India where they use federalism to protect ethnic or religious groups. 

Second point, federalism can’t be mirrored administrative decentralization because federal officials cannot be trusted to decentralize optimally.  It’s a political economy story, right?  If you say to the central Wiseman center, “Make sure you decentralize just right.”  They’ll say, “Sure, buddy.”  But they’ll make sure that their national agencies have much more power than they ought to have because they find it easy to contest challengers to incumbency in a large-scale republic.  They don’t like to devolve power to the states. 

Third, this is going to be the most controversial in this crowd.  It will be my last point.  Federalism is not about limited government.  Jackson was not in favor of limited government, and the hard money Jacksonians weren’t in favor of it.  After the crash of 1837, the Van Burenites and the hard money Jacksonians advocated what?  State ownership of banks.  That’s why they didn’t like the Bank of the United States.  They also wanted state ownership of canals.  They also wanted heavy, heavy taxation of private corporations.  They were wild-eyed populists.  You want to know what the Jacksonian looks like?  Ralph Nader.  It’s the theory of agency cost.  It’s a theory about perhaps inefficient populists to democracy.  It might not be a theory we want to adopt.  If you want a theory in action, look at preemption struggles today between the FDA and common law tort or between state banking authorities and the Office of the Comptroller.  Those are where Jacksonian democracy or country party ideology is being played out and it’s that ideology that was the original understanding of our federal compact and nothing more.

John Eastman:  Professor Somin.

Ilya Somin:  Thank you.  I hope everyone can hear me.  Over the years, I’ve disagreed in various ways with all three of the previous preceding speakers, but rather than tediously go through those disagreements, I think I want to talk about one aspect of competitive federalism that, to my mind, its benefits have not been sufficiently appreciated, even in the recent, more sophisticated academic debate over federalism that my co-panelists so ably represent, and that is the benefit of voting with your feet.  When you vote with your feet, that means that, for instance, I live in the state of Virginia by -- if the state of Virginia provides poor public services or too much taxes or is otherwise flawed in various ways, I have the option of moving to another state, another jurisdiction where my preferences are better met, the public services might be better, perhaps the taxes are lower, and so on.

 Now in a series of influential works, Malcolm Feeley has argued that, you know, we’re no longer willing to kill for federalism.  We no longer have a strong sense of identity as Virginians.  Perhaps even we don’t have a strong sense of identity as Virginians, perhaps, we don’t even have a strong sense of identity as Texans, for those people who live in that state, although some might contest that, and therefore, I suggest that benefits of federalism are not going to be that significant in society where we think of ourselves Americans first rather than Texans or Virginians or Pennsylvanians or what-not. 

My perspective is almost exactly the opposite that the benefits of federalism might well be greater if we don’t have a strong sense of identity with our states because lacking that sense of identity, we’re more willing to leave, we’re more willing to say, “You know what, I don’t care about Virginia.  I don’t like it here.  They have bad policies.  And so I’m just going to go somewhere else,” in a way that Robert E. Lee probably would not have done because he, in some ways, at least, thought of himself as a Virginian first and American second.

And these benefits from voting with your feet are greater if there is decentralization and competition between states.  It is when states are in competition with each other for people and for capital that they have incentives to adopt policies that will meet the preferences of the people who might potentially migrate and therefore improve things and enable foot-voting to work more effectively than it might otherwise. 

Now among the benefits of competition are better policy, policy that more effectively meets the preferences of people and also potentially, experimentation.  Obviously, state governments, when they compete with each other have an incentive to make innovations that will attract migrants, will attract investors, and so forth.  Now many people say, “Well, really this only helps the rich, after all, only the big corporations, you know, the moneyed interest that Rick was just talking about only these guys can really benefit from competition, not the down-trodden people.”  Perhaps Andrew Jackson was wrong to think that decentralization and federalism would benefit the people. 

The modern perspective is we need a strong central government to do that.  I think this is at most only partially correct and then to the contrary, historically, often it is in fact the poor and down-trodden who have benefited most from interstate migration and voting with your feet.  Perhaps the most important and successful example of voting with your feet in all of American history was the movement of blacks from the south during the Jim Crow era to the northern and western states that, while far from perfect, had less oppressive policies towards African Americans than southern states did. 

Millions of these people who were down-trodden, oppressed, poorly educated nonetheless were able to make the decision to move to the north, and most of them became far better off as a result.  And there are many other similar examples of poor, discriminated against, and otherwise oppressed people improving their lot by voting with their feet both in the United States and also in other federal systems.  Indeed in some ways the poor can more easily benefit from foot-voting than the wealthy.  It is the one kind of thing that foot-voting can’t help you with is when the state or local government is somehow oppressing or exploiting immobile assets.   

So for instance, if they’re targeting your land or your factory or something else that can’t be moved then you’re kind of out of lack.  Foot-voting won’t help you and of course, almost by definition, the poor and the oppressed are unlikely to own very much in the way of expensive, immobile assets.  If they were factory owners or big land owners, they wouldn’t be poor.  So therefore foot-voting, in many ways, is even more beneficial for them than for the owners of capital or big land owners or the Robert E. Lee’s of the world with their estates.  Rather, it’s more for the poor, blacks who left the south and moved to Chicago, for example, to improve their lives. 

Now there’s a second way in which foot-voting’s benefits are greater than it’s, perhaps, perceived in addition to the fact that they’re particularly beneficial to the poor and the oppressed.  And that is that when you engage in foot-voting as opposed to conventional ballot box voting you have much better incentives to acquire and use information about the different options before you.  When you vote at the ballot box, you suffer from what economists call “rational ignorance.”  That is that there’s almost no chance, in most elections, that your individual vote will actually swing the outcome.  In the presidential election it’s about a 1 in 100 million chance.  Even in the local election it’s 1 and several thousand perhaps, at best, if you’re very lucky.  Now that means that if your only incentive to acquire political information is to be a better voter to make sure the right candidate wins, that’s not much of an incentive at all.  You’ll flip the channel away from CNN and start watching reality TV because that’s more interesting and, you know, has more benefit for you and that’s exactly what most people do. 

Decades of survey research show that most people have little or no political knowledge.  They don’t even know basic things such as, often, which party controls Congress, what’s the difference between liberalism and conservatism.  The most important and biggest new government program over the last 40 years was Bush’s prescription drug Medicare plan.  Seventy percent of the public didn’t even know that this program had been adopted by Congress, much less whether it was a good idea or not. 

One advantage of foot-voting over ballot box voting is that there isn’t this kind of rationale ignorance.  That is that when you decide to move from one state to another or one city to another, your decision is decisive.  You don’t cast your ballot in an election with thousands of other people and the majority will decide whether I move from Virginia to Pennsylvania or not rather I get to decide that with myself or if you’re married, you know, at worst your vote is one out of two in your family even --

John Eastman:  You’ve been married long enough --

Ilya Somin:  Okay.  Well, I haven’t been married at all. [Laughter]  Fine.  Worse maybe, you know, maybe have a very domineering spouse so they get two votes for your one or something.  Still your relative influence in the process is much greater than it is in the presidential election and therefore your incentive to acquire information is much stronger.  Not only do you have more of an incentive to acquire information, but you also have more of an incentive to use that information in a rational way. 

Numerous studies show not just that most voters don’t know much about politics, they also show that most voters are very biased in the way that they evaluate the information.  They tend to undervalue any information that makes their preferred candidate or their party look bad and overvalue any information that’s the opposite.  Consider the way democrats reacted to the various charge against Sarah Palin just recently, with the way that Republicans reacted.  The one side many ways overstated the significance of those charges.  The other side said, “No, there can’t possibly be any problem here, like, you know, don’t look in this direction.”  And that’s a pretty typical way that people react to new political information and it’s perfectly rational in the context of political ignorance because, after all, I don’t have much incentive to try to evaluate that information in a logical, unbiased way because, hey, the significance of my vote is pretty unimportant anyway. 

When people make a decision on where they’re going to move, where they’re going to live, they have much more incentive to be rational, much more incentive to try to fight their own biases.  Certainly they’re not going to be perfect.  They’re going to make mistakes.  But there’s less chance that they will than in an electoral situation.  And this is a major advantage of foot-voting over ballot box voting that I think is often overlooked and that is not sufficiently considered in the existing literature, except of course articles that I’ve written.  You have to toot your own horn sometimes in these academic conferences. 

Now this conference is supposed to be about the future of federalism.  In fact I’m the guy guilty of inventing that title so I should note that foot-voting might be even better in the future than it was in the past.  One way that might be even better is that the cost of moving are lower.  Obviously in the age when poor blacks were migrating from the south to the north 100 years ago or 50 years ago it was much more costly to move from, say, South Carolina to New York than it is today. 

Second way is that we have the Internet; we have lots of sources of information to make it easier to acquire knowledge about what’s going on in other states.  And so that also makes foot-voting better.  Now what are some of the implications of the benefits of foot-voting for the structure of federalism?  Well, I think Michael Greve touched on some of these.  One important one is that we want to prevent cartelization among the states.  We want states to compete with each other so that foot-voters will have more and better options.  And that may also mean limiting federal government interventions that facilitate cartelization in all the different ways that Michael has described in his talk and in his book. 

A second implication is that we may want to limit federal grants to state governments.  Obviously the big incentive for states to compete is that they want money, right?  They want taxpayers to come in or at least not to flee.  However if the states can instead get their money from the federal sugar-daddy, sort of, you know, welfare payment for states, welfare dependency for states, then their incentive to compete becomes less, and their incentive to offer good options to foot-voters is also diminished.  And so we want to get the states off welfare, at least as much as possible, if we want to engage in redistribution at the federal level, which by the way I’m not completely opposed to.  It should be redistribution to individual citizens rather than redistribution to state governments.  If we want to help the poor perhaps give them various federal grants and programs, but don’t give money to the states.  That way the states will have an incentive to compete in ways that benefit both the poor and the rich.  And if we want to provide for the poor with redistributing programs we can do that in other ways.  So I think I’ll end at this point and I really look forward to everyone’s comments and questions.  Thank you.

John Eastman:  Very good.  All right.  Let’s go back down the row and if you have any rebuttal points and then we’ll open it up for questions to the audience.

Michael Greve:  Brother Hills has 98 percent of this stuff exactly right.  This is a hugely important point where Rick started and I side with him in his criticism of Malcolm.  There are really two principles of politics loose in the world.  And one is identity politics or what Hegel called “The Struggle for Recognition.”  And the other is raw interest which is the stuff of modern bourgeois society.  America is in many, many ways the most modern country on the planet.  It is purely about interest and that includes its federalism. 

If there is one principle behind American federalism and the way states are designed and drawn -- I mean, of course the first 13 were in existence but the way the others were drawn is we must not have ethnically, religiously, linguistically identifiable states.  We must not.  We’d rather draw the state lines anywhere than along those lines.  Several states had to wait for a very, very long time -– Oklahoma and Alaska are two examples -– before being admitted because they still were ethnically identifiable.  They are ethnically identifiable entities on American territories, we call those places reservations.  And states are not reservations.  So the principle of American federalism is just that: interest.  It is or as Rick calls it -- and he’s right about that too -- social class. 

I would add one complication to his account and that is this.  I have a somewhat less charitable view of Jacksonian democracy.  The bank issue at the time throughout the antebellum era was entangled with two other issues.  One was the tariff and the other one was the question of internal improvements.  What do those three issues: the bank, internal improvements, and the tariff, have in common?  Answer: they ran along sectional lines.  What might that sectional line have been?  Answer: slavery.  What this is about is -- what complicates Rick’s story greatly is the force, the brutal force and of sectionalism in American politics, which did not disappear with slavery.  It continued throughout the post-Civil War era, throughout the progressive era.  It is, in some ways, still enforced today. 

What is the one dimension or what’s the principal dimension along which you can’t easily cartelize states?  Even Congress can’t cartelize states.  The Supreme Court tries.  Answer: these moral issues, the death penalty, abortion, gay rights, and so forth.  And if you look at the map where those states –- I mean, what that is actually about is what the Supreme Court is after in those decisions from [indiscernible] to all of these decisions is to end sovereign exceptionalism in American politics.  That is what that part is about. 

The rest of it, as I said, I think Rick has exactly right, in particular his analogy between the earlier dates and the modern Naderite version.  The book that most pristinely embodies public citizens and Ralph Nader’s version of federalism is called Empowering Government.  You will hear more about that brilliant book later.  That is that version of federalism.  The countermodel to that is my federalism which I call “real federalism.”  That is competitive federalism and I assure you it means a whole lot less government.  So, Rick has the exact analysis, exactly right.  He’s just chosen the wrong side in this debate.

John Eastman:  Professor Feeley?

Malcolm Feeley:  Yes.  I listened to Michael and Rick and it seem to me that they illustrate the point I wanted to make about my would-be lecture on democracy or as I started talking about Great Britain and rather than democratic theory.  That is they so conflated the idea of federalism with the history of the United States that is hard to tell where one ends and the other begins.  They are conflated together, and it seems to me, it would be useful to have a conceptually distinct understanding of federalism and then reflect on it as it applies to a particular state, say, the United States. 

Ilya sounded very good.  It sounded terrific.  It sounds familiar.  And I would urge you all to read the Tiebout article where he’s talking about competition, but interestingly enough he’s talking about competition among municipalities.  Everything that Ilya says may or may not make sense, but it has very little to do with federalism and of course the classic article from which it springs is talking about walking with your feet, moving from Fairfax County to Montgomery County or somewhere else within this –- the same state here [indiscernible] and not too much to do with federalism.

John Eastman:  And we still have an identity out in California.

Malcolm Feeley:  Excuse me.

John Eastman:  Lots of different identities.  Professor Hills.

Roderick Hills:  Yeah.  Two points.  Quick.  One is the idea that reduction in scale of government, in size -- and by size I mean the population that it governs -– will reduce agency cost is not indigenous to the United States.  It is not unique to the United States.  It’s an abstract theory of federalism that started in England, incidentally, but it’s also existing in Italy, the Green Party pushes it in Germany.  They are big favor –- believe it or not the environmentalists in Germany love decentralization.  Italian Communists love decentralization and they love it for this abstract reason: they believe that agency costs, power of the people will be greater when you reduce the size of electoral districts.  That’s not confusing federalism with U.S. federalism.  That’s coming up with a general theory that has been especially prominent in antebellum United States. 

Second point, I don’t think that Ilya’s theory of voting with your feet, which I hardly endorse -- and I don’t want to identify myself with Jacksonian or anti-federalism, I simply want to throw it out there -- is a perfectly consistent coherent theory of federalism that would require constitutional protection.  But I want to point out that Ilya’s argument about voting with your feet works with states as well.  And indeed it’s rich in economic literature starting with Untz and Schwan (?)[indiscernible] that talks about state competition protecting both economic efficiency and to a certain extent avoidance of rent seeking, you know, unspeakably corrupt redistribution of wealth.  So I don’t think it’s the case that the two build hypothesis which is true, worked with local expenditures, doesn’t work with states.  But I’m not an economist won’t get into that much in detail. 

I just want to end and point out that even if every census tracked in the United States were demographically identical, there would still be reasons to protect federalism with constitutional rules, reasons that are not unique to the United States.  We go to this abstract theory that it’s easier to control the managers if the number of shareholders is smaller.  Now, I don’t know if I agree with that theory.  It would take a lot of empirical evidence to verify it.  But it is a theory of constitutional federalism, not managerial decentralization that transcends you as borders as one that everybody in this room needs to take seriously if they care about federalism.

John Eastman:  Professor Somin.

Ilya Somin:  Yeah.  So I mean, Malcolm asked what is a good question, well, are you actually advocating federalism or merely decentralization?  Well, part of my answer is maybe I don’t care that much.  I care more about the result than the words.  So if I lose the terminological debate but win the substance debate, I can still be reasonably happy, I think, or at least, you know, as happy as academics will probably get.  However, I do think there is an important non-terminological point here which is, that Malcolm has said in his writing that decentralization is simply a decision made by the central government saying we believe it will be more efficient or more useful to have some autonomy in the local or state governments.  But that autonomy can be taken away at anytime if the federal government later decides otherwise. 

So we can certainly imagine a Congress or a benevolent dictator perhaps even John Eastman or James Buchanan saying, “You know, I like the idea of decentralization so I’ll set up the Tiebout model.”  However, in real world federalism or real world decentralization, for reasons that Rick points out, that probably won’t be a stable situation because the central government, if left to its own devices, will have very strong incentives to undermine the autonomy of the subunits or alternatively to help them engage in cartelization, something that the subunits themselves would want.  So we need a sphere of autonomy for state governments and perhaps for local governments as well for a system of competitive federalism to work effectively. 

Now the Tiebout model has been mentioned.  It’s true; I think part of my argument is based on the Tiebout model.  I would note however two things.  One is Tiebout explicitly did not include competition in his theory.  He just –- and his is a model of people moving around, voting with their feet, among essentially, randomly selected qualities that make decisions on how they structured their public services for reasons unrelated to competition.  And secondly, Tiebout did not address the issue of information use and acquisition.  That’s something that I think until recently has largely not been included in debate. 

I guess the very last point that I would mention is several people have aver the fact that we don’t have much in the way of ethnic federalism in the United States, that is states that are enclaves for one particular ethnic group, which is the majority in the state and the minority in the national government.  That’s actually not entirely true.  We do have the state of Utah which was set up for the specific purpose of providing a refuge for Mormons, not an ethnic group, to be sure but a religious group that have been oppressed by both the national and other state governments.  But for the most part it is true; very few of our states who are identified were particular ethnic groups. 

I think in many ways that’s a good thing for competitive federalism because it means that people can more easily and more effectively vote with their feet and we don’t have the kind of situation like in India or even worse in Iraq where many people feel they have to stay in the state which is identified with their ethnic group and can’t move somewhere else.  To me that is actually a good thing about American federalism, something that we’re lucky to have and in many ways actually strengthens the case for decentralization and for competition, even perhaps with reference to Mormons in Utah who today can and do move to other states because fortunately prejudice against them has declined.

John Eastman:  Okay.  Let’s open it to questions from the audience.  I suspect there may be one or two?  Yes.

Male Voice [speaking away from the microphone]:  I’ve read this [inaudible] first time I realized that the article [inaudible] and it was striking that people [inaudible].  And it you really looked at that debate that went on there was a tremendous compromise [inaudible] and therefore the founding fathers did the best they could.  At that time they probably didn’t think [indiscernible] three weeks to get to Washington [inaudible] that we would never have ports and airplanes to get around [inaudible words]

All I am saying is that inter-scholarships with us should likely reach out and understand that the country has grown [indiscernible] problems we’ve had most of them --

John Eastman:  Well, let me try and summarize that real quickly.  Don’t you have to begin in your discussion with looking at the differences between what things are like in 1787 and now, does that require that we look at this differently.  Yeah.  Go ahead, Rick.

Roderick Hills:  Yeah.  I’d go farther than Bill Coleman [phonetic].  I would say the federalists -– I mean, by the Federalist Party, not the Federalist Society, hated states.  The Federalist Party, those who were pushing the U.S. constitution loathed states and Madison himself, who later changed his mind, would have abolished them.  Hamilton at one point simply said, “Let’s just make them convenient subdivisions of the national government.”  Hamilton was a Malcolmite, right?  Administrative decentralization.  All the provisions in the constitution that protect the states are there despite the founding fathers if you assume the Federalist Party. 

What were the main founding fathers?  It’s the rear-guard action, was fought by people like Millinkin Smith [phonetic] in New York, William Findley [phonetic] -- by the way, anybody know these names?  Of course not, right?  They’re the losers of history.  But they won enough.  What did they win?  They won the Bill of Rights.  They also kept an enumeration of powers.  And Madison, at the beginning of the Philadelphia Conference says we can’t have an enumeration of powers.  No one can enumerate the powers the national government will need.  But nevertheless the committee on detail threw in an enumeration of powers.  All of those things are in there because of the anti-federalists, and they tended to be anti-bank, anti-commerce, anti-capitalism, anti-big city, largely live in the western reaches of Pennsylvania, Western Massachusetts, and Western New York, and later cropped up, almost identical rhetoric as Jacksonian democrats. 

Now the question is, what about today?  I mean, If the states were pernicious from a nationalist point of view in 1789, boy, they are even more trouble today!  Darn right!  If the populist attitude of the anti-federalist tends to be hostile to economic efficiency, tends to want loot local corporations in Creek County, Oklahoma, tends to be deeply suspicious of national unity, what do you get in return for these inefficiencies?  Well, you get juries that tend to be very representative, you get a certain kind of populist politics, and you get redistribution of locational rents to local people who don’t have power at the national level.  You like that?  You’ll love U.S. federalism.  You don’t?  Well, you should go the Malcolm Feeley way.

Ilya Somin:  If so, one small point, I would also put in a plug for George Mason, the guy that the school that I teach at is named after, was one of the people who helped limit federal power in the 1780’s.  Now I agree with much of what Rick just said that the states can serve as a check on federal power.  However, that’s only true if there is a system of competitive rather than cooperative federalism because in a system of cooperative federalism, the federal government can give money to the states, which by the way, many of these populists, at least in more recent years, were perfectly happy with and they can give money to the state to get them to do things that they want to establish cartels and so on.

So, only if we limit not only federal power generally but also the federal government’s ability to transfer money to states can we have some of the benefits that I was talking about or at least can we have them more fully.  And this also, to some extent, is a difference between my position and that of the European left-of-center federalists that Rick and others were referring to, the Italian Communists and others.  These guys, they do like decentralization in many ways.  But they like it so long as the central government parcels out money to the state and local government to pay for the programs that they want to do.  By contrast, I would argue that the state government should raise all or most of their money through taxing their own citizens and having to compete in the market for potential taxpayers.  And if we want to engage in redistribution, that may be fine, but do it at the federal level by giving money to the poor and needy individuals directly rather than by handing out checks to state governments.

John Eastman:  Let’s wait to get the microphone back there.  Back here, yes.

Dennis Coyle:  Thank you.  Dennis Coyle from Catholic University and adjunct AEI.  Hi, Malcolm.  And the question for Ilya, the usual response to the idea that voting with your feet would be good for the poor is the race to the bottom, that the service they would want would be undersupplied by the states in a competitive environment.  Is that not a problem?  Or if it is, I hear you suggesting that the answer might be to have, essentially, the federalization of all welfare so payments sent directly from the national government to the individual and then they could move where they wanted.  And if indeed that’s your answer, are you prepared to accept an appointment in the Obama Administration?

Ilya Somin:  It’s a good question and I would say that both of the suggestions that you made are, in fact, part of my answer.  One answer is that I wouldn’t expect the race to bottom to happen with respect to any group that can provide more in revenue and economic growth to a state than they take out in taxes and relatively poor people do in fact contribute to economic growth as workers, as consumers, in various other ways so long as they are in the workforce.  And in fact, historically, states have wanted to attract poor and unskilled labor in many ways.  And so to, do that, they have to provide services and other benefits that these people would want.

Now there is a subset of people who I think would be much smaller than perhaps those who really would serve in the Obama Administration believe, who perhaps, because of severe handicaps or other conditions, maybe are just incapable of supporting themselves.  And for those people, yes, I think some federally sponsored redistribution would be desirable.  However, I think in a successful competitive economy and one with competitive federalism and voting with your feet, those people would be a relatively small fraction of the population. 

So by all means, I’ll do redistribution to them, perhaps, for most of the rest of the population, they will be better served by competitive markets in voting with your feet, including the poor, who historically have benefitted enormously from interstate mobility, and I would argue more so than the wealthy, and could benefit even more if we had greater competition and less dependency of state governments on federal funding.

Michael S. Greve:  Just to add something to that, I share Ilya’s preference for if you want to have -- well, a step back, one of my intellectual and political heroes, Senator Moynihan, was a harsh critic of the cooperative federalism programs that we have.  And he used to say, “If we want to redistribute money, I have an idea.  Let’s redistribute money.”  And what he meant was directly from the government that is best equipped to do that, namely the national government, to individuals so that Social Security, for example, would be a model program of that.

The horror is, programs like Medicaid, education where the money sloshes through states and goes to places rather than individuals, that’s so, for all sorts of reasons.  What I want to add to this is why is it then that Social Security or what we now call Social Security is the only nationalized program, I mean, redistributive program in the United States with states out of the equation?  And the principal reason is that cooperative federalism, that is the giving of transfers to state and local governments, is a response to the weakness of redistributional coalitions in the United States at the national level.  That’s right. 

If you ran these, if you put the political system to the test, do you want to keep this local?  Either you can have it at the national level or you can have it at the state and local level, but not in this cooperative fashion.  You would not get it at all.  What cooperation allows is -- what cooperation and fiscal transfers allow is to disguise the amount of money that goes into the system.  This is, just to add one more wrinkle to that, I do think that courts in that sector have a role, not in terms of limiting the reach of the spending clause, I think Congress can spend whatever it wants to and give the money to whoever it wants to, but in terms of superintending the terms of the bargains, because while these cooperative programs may or may not have -- may produce coordination gains, the loss of transparency, the loss of accountability is not only a given, it is the intended result.  And that is precisely why you need some outside force, some outside monitoring agency, meaning the Supreme Court, to superintend them [inaudible] state.  That’s the true and correct competitive justification of the Clear Statement Rule and its corollaries.

Ilya Somin:  Just one very quick point, Social Security is actually not the only program that just gives money to individuals, but there’s also the Earned Income Tax Credit, which, unlike Social Security, most of the money actually does go to the poor, whereas with Social Security, most of the money goes to the distinctly non-poor elderly.  And if I had to pick a model for how redistribution should operate, it would be something like the Earned Income Tax Credit, a central government program where the money is actually transferred directly to the poor with the minimum involvement either by the state governments or by federal bureaucracies and experts of the sort that Rick was criticizing in his populist comments.  So we can have something like the Earned Income Tax Credit and at the same time also have competitive federalism where the states have to compete for taxpayers and revenue through a foot voting market.

Roderick Hills:  Can I just say one thing?  Just so I could wave a pitchfork and be a populist.  I come from New York City.  There, redistributive coalitions are strong but mobility constrains our ability to give money to the poor.  We’re willing but we’re not able.  At the United States, mobility does not constrain effort.  It’s hard to migrate to the United States to escape taxation.  But redistribution coalitions are weak.  They’re able but they’re not willing.  If you think redistributive coalitions, a.k.a. the poor, are weak in Congress because of agency costs, not because there’s not a lot of them, but simply because they can’t organize in large constituencies, this is a tragedy.  It means that there’s no level of government that can help the poor because the nation is not willing, although it is able, and the states, where the poor are legitimately strong by their numbers, are willing but they’re not able.  So that’s something to worry about if you are on the left.

Female Voice:  Insurance was indirectly mentioned early on.  And I’d like to know what your opinions might be about the fact that it seems to me that it’s just a matter of time until the one significant thing that the states seem to still regulate that’s important in our economy is insurance.  And would you have an opinion about whether or not it’s just a matter of time for practically anything if it comes to the attention of the Congress or to the Supreme Court and eventually it becomes federalized for whatever reason and very little will eventually be left to the states?

Malcolm Feeley:  There is certainly no question that the national government could regulate insurance.  There’s no sphere of activity that the national government can’t regulate.  That’s why what goes on at the states goes on at the sufferance of the national government.

Michael S. Greve:  There will be some additional federal involvement.  I have no idea which form it will take, and what form it will take is enormously important.  Insurance regulation could stay at the state level except take different -- take place on very different shores of law and federalism principles, namely those of corporate law.  And lots of quirks in -- or you could have, yet, a different model which is being advocated, my colleague Peter Wallison here, gave an optional federal charter for insurance so that the insurers could either operate under a federal charter or under a state charter that would roughly resemble the system we have in the banking sector.

I don’t have particularly high hopes for either of these proposals, and the reasons why I don’t is that after a Supreme Court decision in the 1860’s that said insurance isn’t interstate commerce, the insurers mobilized both in the courts and they mobilized in Congress and said, “Please, please, please give us an optional federal charter.”  They started that campaign in the 1870’s, a hundred and thirty, forty years later, they’re still at it.  I wish them the best of luck but I don’t have very high hopes.

The other point I want to stress here is there is a little piece of this, of the proposal or the de facto competition scheme I just outlined in Senator McCain’s platform, and that is what used to be the Shadegg Bill, that is to say let people purchase health insurance across state lines.  I am vehemently in favor of that.  The estimates are that you could insure 12 million people.  That’s a third of the uninsured or upwards of 25 percent of the uninsured out there in that single stroke, if that were permitted.  Will that ever happen?  No way, no how.  A: the Democrats are resolutely against it, and B: most of the Republicans are resolutely against it because what keeps it is that Republican constituencies, chiropractors, Blue Cross, Blue Shield, on and on, they’re all entrenched in these state systems.  They don’t want to lose that.  They don’t want to be exposed to competition.  So the thing is a brilliant idea.  Everybody agrees that that’s the one thing that would do most and most quickly to insure the uninsured.  But there’s no way it’s ever going to happen.  If that continues, there’s going to be discontinued stalemate between state regulation that we have and at some point, maybe wholesale nationalization under some preemptive scheme because -- along ERISA lines because this cannot continue.

Roderick Hills:  I just have to say one thing because I think insurance is a triumph or a tragedy, depending upon whether you are a Jacksonian.  And the Karen-Ferguson Act was largely responsive to the State Association of Insurance Commisioners or I should say the Association of State Insurance Commisioners, and that has proved remarkably durable.  Look at your Insurance Exception in ERISA for instance.  Every time anybody tries to get rid of Insurance Exceptions that give insurance to the states, a coalition of the state insurance commissioners and personal injury lawyers, the state trial bar, get together and fight it off.  They are classic Jacksonian constituencies.  They tend to be locally elected.  They tend to have their power at the local constituencies, juries, small electoral districts, states judges who are elected, and they win.  And I suspect that they will continue to win.

If there’s going to be nationalization, it’ll either be through federal judicial insurance construction of ERISA to be far more preemptive and construe the ERISA Insurance Exception very narrowly, but it won’t be through national legislation.  Whether you think that’s a good thing or a bad thing depends upon whether you think that small businesses, small gentry, the landed gentry, are to get their piece of the action.  Of course, the Jacksonians thought that was great.  A lot of other people don’t.

Ilya Somin:  Just one small point, this sort of debate over insurance illustrates a great aspect of how state governments don’t necessarily want competition.  In this instance, most state governments do not want outside insurers to be able to compete with the ones who are already ensconced within the state.  And so for a system of foot voting and competition to work, there does have to be restrictions not only on the power of the central government but also on the power of the state governments to exclude outside competitors for their businesses and other interest groups.

Randy Barnett, who is in our audience, has written an excellent article on how the original purpose of the Commerce Clause was to enable Congress to break down state trade barriers that states had set up.  And this, to some extent, is a modern example of the kind of thing that the Commerce Clause is supposed to get rid of, but perhaps, the Founding Fathers underestimated the power of some of these protectionist interests at the state level and their ability to find creative ways to defend against competition.

So this is a great example of how advocating decentralization and competition is not the same thing as advocating giving state governments what they want because much of what they want is to protect their locally powerful interest groups and to establish a cartel system where like our insurance companies can have their protected market here and, you guys, insurance companies can have their own sort of system over there.  And that’s great from a state government point of view.  It’s not so great from the point of view of individual citizens who want cheaper and better health insurance or from the standpoint of pursuing a set-up of a more competitive version of federalism.

John Eastman:  Let’s see over here.  Where’s our microphone?  She’s coming.

Brian Galle:  Hi, Brian Galle, Florida State University College of Law and this year, Georgetown.  So it seems to me that there’s an imperfect fit between the theories that we’ve heard from both Rick and Ilya and the fact that we have fixed state borders.  All right, so you might say that for both of them, what we want is a theory not of either a maximal or a minimal agency cost and maximal competition but optimal agency cost, optimal competition.  But we have a republic, not a democracy, so obviously, we’re not trying to minimize agency costs.  And Ilya, in his short presentation, couldn’t mention all the downsides to competition.  Like the fact that if there’s interstate competition, it’s hard to have policy competition at times because you can’t get the funding that you want.  There are deadweight losses to relocation, right?

So in both of those areas, there are tradeoffs between the goal that you want and some of the downsides and this means that sometimes, the regions of competition that you want may be bigger than states are, and sometimes, they may be smaller than states are and unfortunately, the subdivisions smaller than states are under the political control of states, right?  So what you want are sort of floating boundaries because all the factors that go into making competition or agency cost optimal are going to change over time.  But we don’t have fluid borders.  We have fixed state borders which lead us with imperfect competition and imperfect agency cost most of the time.  So how does one reconcile those two explanations for why there should be state autonomy with the fact that state autonomy doesn’t actually get you the results that you want?

Ilya Somin:  I think there’s a difference between saying it doesn’t get you those results at all and saying that it doesn’t get them as perfectly as I might want.  And to some extent, you’re right.  It would be better if we had less fixed boundaries.  And indeed, there are economists, like Bruno Frey, who have argued for overlapping boundaries for different sorts of government functions.  In an ideal world, I would agree with Frey’s proposal and I wish we had it.  In a non-ideal world, we have either competition between jurisdictions with fixed boundaries or we have to rely on ballot box voting at the central level.  And I would suggest that the latter is worse in most ways, even though the former is far from perfect.  And I didn’t mean to suggest that it was anywhere close to perfect.

Now you also made a couple more specific points.  You say well, maybe states can’t raise the revenue that they need to provide the services.  My answer simply is that if the services are attractive to taxpayers, then they can attract the taxpayers they need to provide them.  And so if on the other hand the services, they can’t attract those taxpayers, that’s a sign that maybe those services aren’t really worth it, that maybe they shouldn’t be provided.

Now it’s true, I think also, that the optimal scale for provision of certain services is different from the scale of our states.  However, states that want to attract in capital and labor for competition will have some incentive to readjust their local and municipal boundaries to make them more optimal.  In the long run, I do actually think that some of our states are too big and therefore, we might benefit perhaps, I know this will be shocking to Malcolm, but we might benefit from breaking up California or Texas or some of the other bigger states.  So I’m not wedded to our existing boundaries or I think that they are optimal.  I do think, however, that a lot of good competition can take place within them and that we have to compare imperfect alternatives.  And I think an imperfect system of competitive federalism can still be significantly better than an imperfect system of either cooperative federalism or a unitary state.

Malcolm Feeley:  Yes, I do ask that question because the real growth industry in government over the past 100 years has been special districts and interstate compacts.  In fact, we’re not a government of 50 or 51 units.  We’re a government of tens of thousands of units, many of which are local, within states and others cross state boundaries in order to capture the catchment areas that you suggest.  This is the modern process of decentralization.

John Eastman:  And I’ll add to that, having experienced the overlapping districts in California, the theory was that the overlapping district would be a substitute for the old generic property tax base and it ends up becoming simply an add-on.  So you still pay the same tax rates that you used to and then you pay your utility rate and then you pay your electric rate which is different than the gas rate and you pay your school district and your roads and the park district and the school textbook district.  We have all these things, all in addition to the old and it doesn’t work.  It just adds more and more layers of government.

Roderick Hills:  I wanted to strongly disagree with Ilya on the agency cost.  Rigid unchangeable boundaries reduce agency cost.  You can’t gerrymander the Senate.  The House of Rep -- why is it now -- here’s something really funny.  For those who like the Founding Fathers, the Founding Fathers thought the Senate would be the stable force of long-term incumbents.  The House would be very populist.  Why is it that the average House member serves longer than your senator?  Because the House members gerrymander their boundaries so they can’t be challenged.  They’re all safe districts.  You can’t gerrymander the Senate.  So the Illinois District is unbelievably unstable, right?  It’s got all kinds of people in it.  You don’t have a safe district.

If you could gerrymander the states so you could control their partisan composition, then the incumbency rate in the Senate would skyrocket.  If you like competitive elections, you like rigid boundaries, or at least ones that can’t be changed by a politician.

Michael S. Greve:  Let me just quickly add to that.  Rick has mentioned one argument, one very powerful argument for stable jurisdictional boundaries.  There are other arguments.  There are in this literature, I think, two traditions.  One is the efficiency Tiebout literature, right?  I won’t qualify it other than to clarify that that is not the tradition I work in.  I’m not interested in efficiency.  I don’t believe the Tiebout models for the most part for reasons that I’d be happy to explain but would bore 90 percent of the audience.  What I believe in is a political theory of jurisdictional competition.  Its goal is not to produce efficiency but to limit exploitation.

Grover Norquist, an activist in this town, likes to say, “We want to make governments small enough until we can drown it in a bathtub.”  I don’t think we’ll ever get there and that’s not my agenda.  But I do think that the American political process is now so productive of interest group and political exploitation that you seriously have to think about any mechanism, any constitutional mechanism, that promises to limit that process.  The federalism I sketched, I think, has some of that potential.  That is what I’m after.  Whether that makes government more efficient in some sense that economists would recognize, I truly have no idea.

John Eastman:  Michael, you should join with me on limiting the spending cost, as well, then.  Okay, next question over here.

Keith Neilson:  My name is Keith Neilson.  I’m from the Campaign to Defend the Right to a Secret Ballot, Dr. Keith Neilson, if you wish.  None of the speakers have mentioned what I would say would be the main question in discussing the nature of the American Constitution, which is the fact that the American Constitution was modeled on the Roman Republic, not on Athenian Democracy, point one.  And point two, that there is evidence that there was actually a conspiracy to prevent a serious discussion of Athenian Democracy at the Constitutional Convention.  And that would be the main question.  I mean, it affects everything that has occurred since.  When, for example, we examine the so-called populist Andrew Jackson and discovered that he was, in fact, a Masonic Grand Master and that he came into being at the same time that the Anti-American Anti-Masonic Party waged a decade-long struggle against secret factions in the American Republic, as the last speaker pointed out when he said republic, not a democracy.  But none of the speakers have addressed that main question and it’s one which affects everything else.

John Eastman:  Anyone want to take that up?

Roderick Hills:  I’m just a lunatic fan of the Anti-Masonic Party.  I think they’re just absolutely hilarious and they actually succeed in the 1850’s and ’40s in electing some very interesting candidates.  One of them, a major anti-Mason, was Seward, the governor of New York.  That’s all I have to say.  They’re really keen.

John Eastman:  Okay, down here.  Where’s our microphone?  Get back here and then I’m going to go back there and then we’ll go to you for the last question.

Kyle Barbieri:  Hi, Kyle Barbieri, Georgia Perimeter College.  I have a question, and I hope you could provide some clarity for this.  On the constitutionality of the redistribution of funds, and specifically in the area of education and maybe welfare and healthcare, I guess that Congress is getting this power from the General Welfare Clause of Article I Section 8 Clause 1.  And if that’s the case, I want your opinion because if understood Madison correctly in the federalist papers, he addresses the concerns of anti-federalists that this General Welfare Clause will provide a sweeping power to the federal government to use against the states.  And he said, if I understood it correctly, that “nothing is more common to start off with a general expression then going to the particulars.”

And so I think what he’s meaning is that the Tax and Spend Power under the General Welfare Clause will be provided or would be in relation to the following enumeration of powers.  That they can tax and spend on those following remaining enumeration powers two through 18 but not maybe to get out of -- into education and other state functions.  So I just wanted to know your feelings on that or your thoughts on that.

Ilya Somin:  Yes.  I’ve actually written an entire article about this question where I argue that federal grants to state governments, at least many of them, probably are unconstitutional.  It’s in the Georgetown Law Journal in 2002, if you happen to be interested.  I’m not going to go through my whole argument here, but I will say merely that if you look at the General Welfare Clause, it says that Congress can tax to “provide for the common defense and general welfare and pay the debt to the United States.”

Now general welfare simply means anything that Congress thinks might be in the interest of the country and that it would be superfluous to also provide them the power to pay for the common defense and the debt to the United States because after all, obviously, the common defense and the debts can reasonably be thought of as in the interest of the country as a whole.  So that suggested the word general welfare has a much narrower definition, one that does not encompass all of defense and paying the debts and so on.  And therefore, some further series of arguments that I make in the article, it suggested many, if not all, grants that go to particular states from the federal government, in fact, are not in accordance with the tax and original meaning of the Constitution.

Now whether we can change that back after 70 or 80 years of massive federal grant to state governments, certainly, I don’t think that the Supreme Court is going to strike it down.  So all I think we can hope for is sort of incremental movement in a direction of making the states less dependent on federal funding and therefore, have more incentives for competition.  But I do think that the tax that the Constitution strongly suggests that it’s not the case that the general welfare just means anything and everything that Congress might want to do.  And John Eastman also has written some --

John Eastman:  General meant national, not local.

Ilya Somin:  -- on this as well.

John Eastman:  That’s what I meant.  [inaudible]

Michael S. Greve:  I think this is wrong.  I believe that the general welfare language is a restriction or a limitation on the power to tax, not on the power to spend.  The power to spend is an inherent authority of Congress.  Just as our inherent executive powers or our inherent legislative powers, this is the most important one.  How does that fit into the larger constitutional architecture?  Answer: the Spending Clause does not have to -- or the Spending Power, sorry -- the Spending Power does not have to be limited because it is not an exercise of the Supremacy Power or is not pursuant to the Supremacy Clause.

When a state rejects the money, nothing follows and the federal government stays just as powerless in that area as it was before.  The course of effects or the obligating effects of the federal funds follow from the state’s acceptance of the funds, not from the Supremacy Clause or anything like that.  The Supreme Court has put this in the formula of saying that federal grants are in the nature of a contract.  That’s Pennhurst vs. Halderman, 457 U.S. 1 Page 16, I believe.

John Eastman:  We need to hold another day on the Spending Clause.  But I’ve got two more questions, one on the back and then one here, and then we are out of time for this panel.

Brian Walsh:  Thanks.  Brian Walsh from the Heritage Foundation and I want to direct my question primarily to Professor Feeley.  One of the things, if I understand your argument correctly, and I’m kind of hopeful about it because I think you said that federalism is a theory of allocation of power among multiple sovereigns, which a number of us, friends and allies, think that that is a limitation on some of the abuses of civil liberties concerns that we have, friends that we have on the left and the right.  But at the same time, I think one of the things that many of us would like to see is a decoupling, a decoupling between federalism as a theory of limitation of power, and on the other hand, where it often is very quickly discarded as just a way of accomplishing a state’s rights, i.e. slavery, Jim Crow, et cetera.

So my question is if that is the characterization of what federalism is and how it should operate, which is just an allocation of power among sovereigns, we would think that would be amoral and that there would be benefits to it as well.  So in addition to what we saw on the Jim Crow era, et cetera, what are the benefits that accrue to the United States and to United States citizens under the federalism when we had more of a federalist system, where there were truly multiple sovereigns?  And as a suggestion, a place to start, one of the places we’re looking at is in crime and the enormous federal prison population, for example.  So as that starting point, I’d be very interested in hearing what the benefits are of the federalist system and what they have been to the Americans in the past?

Malcolm Feeley:  Yes, the benefits in the past, I think, have been that it has given expression to a sense of identity.  I do have a quite different theory.  I don’t think nations are formed by calculating people, rationally figuring out how they maximize their benefits.  I think nations are formed by an autocratic process of a group coming together and then having an identity.  In the early country, regionalism was important.  I don’t think federalism was ever terribly important.  I’m thinking of Brutus’ response to Federalist 78.  Remember what he says there.  When Hamilton tries to say the court is powerful but not too powerful, it’s like Goldilocks, not too strong, not too weak, just right.  And what Brutus says is, “Beware.  The Constitution gives Congress vast amounts of power and it gives the national court system vast amounts of power and they’re going to walk hand in hand to overwhelm the states.”  Well, I think that has largely borne out throughout history and it was there.  It was Brutus that said it.  The losers were saying it.

The difference between Brutus and me is that he was lamenting what was likely to happen and I say, “It was a good thing, too.”  So I don’t think we have ever had a terribly robust federal system, but one can imagine where and one can imagine a setting in which Mormons in Utah did a pretty good job.  We might eve