‘Competitive federalism’

Justin Walker & Benjamin T. Lee

Freedom has many difficulties and dem-ocracy is not perfe-ct, but we have never had to put a wall up to keep our people in, to prevent them from leaving us.
So said President John Kennedy, from West Berlin, two years after the construction of the Berlin Wall. His boast was a modest one, true of ours and every free nation. But America not only offers us a nation to choose or leave. It also offers us a free market of 50 states to choose from. In America, when you disagree with the policies adopted in your state, you can move to a state you like better.
In The Upside-Down Constitution, Michael Greve says this free-to-flee principle is fundamental to the Constitution’s structure and protected by plenty of its text. As he tells it, the founding generation’s federalism means states must compete with one another, hoping to entice people to live, learn, work, hire, invest, trade, spend, raise families, and pay taxes within their borders.
The “must” in that last sentence matters to Greve. No cartel-style collusion is allowed. To say states can or should compete is political science. To say they must compete—to say the Constitution compels it—is law. To illustrate, imagine that for many years a state has redistributed the inco-me of its business owners to provide the rest of the s-tate with a basic social safety net. In this hypothetical, the business owners, a sm-all minority, consider this tolerable. But now imagine the political majority wants more. What’s to stop it from crossing the line, at least in the eyes of the minority, between tolerable and intolerable tax rates?
Greve has an answer: The political majority likely knows (or at least its leaders and representatives likely know) that if the tax burden on a political minority begins to outweigh the benefits of staying put, the minority can leave—and take their tax base with them. When that happens, the state loses not just the tax revenue from the tax increase, but also all the tax revenue previously paid by the leavers.
Now run the same hypothetical but with workplace safety regulations on factory owners. Or lending regulations on bankers. Or wage and hour regulations on bakers. And on and on and on. If the taxes and regulations are burdensome enough, it wouldn’t take long before a state loses factories and banks and bakeries—and with them, much of its tax base.
Our point is not that this free-to-flee dynamic is go-od or bad—a constitutional feature or a constitutional glitch. The point is that, if Greve is right, the framers made it a crucial part of our federalism. Just as sellers compete for customers’ business in a free market—driving prices down and quality up—Greve says, quoting the Federalist, states were meant to “compete for citizens’ ‘affections.’” That’s what he calls “competitive federalism.”
When The Upside-Down Constitution surveyed the state of our federalism in 2-012, it claimed to often find the opposite: “cartel federalism,” with 50 states unconstitutionally colluding rather than competing, and with Congress acting as the cartel’s organizer and enforcer.
To see how Greve views Congress as the cartel enfo-rcer, consider the incentives that influence how states behave: (1) A state might hesitate to be the first to act in implementing policies t-hat disadvantage a desirab-le political minority beca-use dissatisfied members of the minority can move to 49 other states; (2) The political minority cannot escape the policy if all the states adopt a policy at the same time—i.e., if they collude; (3) But in the absence of a cartel enforcer, any collusive effort by states is likely to fail because each state has an incentive to defect to attract the political minority away from the colluding states. (You might call all this an imprisoner’s dilemma.)
This is where Congress steps in. According to Gre-ve, it can “organize cartels and preclude defections”—and it often does so at the states’ request. If Congress raises taxes on each state’s political minority and sends the money back to the states, it’s the best of all worlds for the advocates of the tax increase. They can tax the political minority in their state without the risk of losing them to another state. By making the other 49 states just as unappealing to them, the political minority has nowhere else (in the U.S.) to go—an effect not too different from a state putting a wall up to keep its people in.
Reading The Upside-Down Constitution today calls to mind the two most important Supreme Court decisions on federalism decided in the decade since its publication: NFIB v. Sebelius (2012), and Murphy v. NCAA (2018). The results were good for “competitive federalism.” But neither decision relied on the reasons Greve’s book would suggest are the most compelling.
First, NFIB v. Sebelius matters because of what it did to the Affordable Care Act’s Medicaid expansion. That expansion took hundreds of billions of dollars from every state’s taxpayers and then purported to give each state a choice: Expand Medicaid and accept additional funding in return, or refuse to expand it and lose all Medicaid funding (including the funds the state received before expansion).
A majority of seven justices found the expansion unconstitutionally coercive. As explained by the four of those justices who would have gone the farthest, “no state could possibly refuse the offer that the ACA extends.” The “sheer size of this federal spending program in relation to state expenditures means that a State would be very hard pressed to compensate for the loss of federal funds by cutting other spending or raising additional revenue.” When states “really have no choice other than to accept the package [Congress offers], the offer is coercive, and the conditions cannot be sustained under the spending power.”
Fair enough. But if Greve is right, there is (much) more wrong about federal grants to states than the conditions Congress puts on them. Indeed, if Greve is right, even a federal grant to states that arrives without conditions is constitutionally suspect. Under his theory, Congress acts unconstitutionally any time it assumes the role of enforcing “cartel federalism.”
Only a policy expert (not us) could say how much federal spending Greve’s theory would cover. Safe to say, however, that it might make the Court’s holding on the Medicaid expansion look modest in its effect.
The second case is Murphy v. NCAA. In the Professional and Amateur Sports Protection Act, Congress made it unlawful for a state to “authorize” sports gambling. When New Jersey passed a law that made sports gambling legal within the state, the NCAA sought to enjoin the state law on the grounds that it violated the federal statute. The central issue in Murphy was whether the federal statute is “compatible with the system of ‘dual sovereignty’ embodied in the Constitution.” The Court held that it is not.
According to Murphy, the “fundamental struct-ur[e]” of the Constitution reflects a “decision to withhold from Congress the po-wer to issue orders directly to the States.” In other words, the Constitution doesn’t allow Congress to tell the states not to compete through sports gambling when doing so commandeers a state’s legislature and frustrates “political accountability.”
Murphy means that individuals get to choose whether to live in a state that allows sports gambling. They can vote with their feet. And that means a state considering a ban on sports gambling must balance the benefits of the ban against the cost of some opponents leaving the state.
Again, plenty of people would call this a constitutional glitch, rather than a feature. But Greve’s theory says it’s a recipe for better policymaking in the same sense that a free market is a recipe for better goods and services, which improve when sellers must compete for buyers who can weigh the costs and the benefits of what they’re buying.
This “competitive federalism” means more than anti-coercion and anti-commandeering doctrines. And it has little to do with a federal-state “balance”—a term Greve mentions (with disapproval) about 100 times in 500 pages. Greve’s project instead has everything to do with restoring competition between the states themselves.
We take no position on whether the Supreme Court should take up that project—or whether Greve is right in all respects. The Court has its own purposes—and even Greve nods. But just as NFIB and Murphy concerned competitive-versus-cartel federalism—though the Court did not identify them as such—so too do other cases already at the Court or heading its way. They include National Pork Producers v. Ross (for which certiorari has been granted) and Kentucky v. Yellen (currently making its way through the lower courts). If you’ve read The Upside-Down Constitution, you might be watching those consequential cases through the “prism” Greve says can clarify this “clouded” field.