Reconceptualizing Unfunded Mandates and Other Regulations

I. INTRODUCTION Beginning with the childhood maxim of "I cut, you choose," we learn the lesson that decisionmakers act more responsibly when forced to bear the costs of the rules they enact. Much legal scholarship bears the imprint of this lesson, but this scholarship also teaches us that the issue is more complex than first appears. Different arguments for cost awareness or cost internalization arise in different contexts: it is variously argued that unfettered decisionmakers underestimate the costs they impose, issue commands that are selfish,' engage in inefficient and unfair redistributions,2 or are simply driven too much by the political benefits their directives generate.3 On the other hand, it has been pointed out, requiring explicit compensation for the costs of all rules may threaten the production of sensible rules when extracting payment for the benefits conferred by those rules is impractical.4 The presence of multiple decisionmakers produces additional difficulties. Sometimes, we have to rely on the goodwill of the rulemakers, or on lessthan-concrete feedback mechanisms, to cause the rulemakers to care about the welfare of those subject to their rules. We do not, for example, expect governments to pay marginal victims or truckers when they raise or lower speed limits on highways; parents are not encouraged to pay their children when exercising disciplinary authority; employers do not pay when they issue unpopular workplace rules; judges do not pay disappointed litigants. In contrast, governments must occasionally pay when they intrude upon or "take" private property, legislators sometimes live by the rules they draft, and in the contrary examples just listed the rulemaker is thought to bear some costs---especially if its rules prove unwise and unpopular. As with most balancing acts, reasonable observers may disagree with the balance struck between the various concerns in particular contexts. This Article deals with one such controversial context: unfunded mandates. As used in this Article, the term "unfunded mandates" refers to directives emanating from one level of government to subordinate levels, unaccompanied by the funds necessary to defray the costs of implementations The obvious, and oft-stated, objection to such rulemaking is that unconstrained or "free" rulemaking-in this case an apparent separation of rulemaking power from the political costs inherent in raising the funds necessary to implement these rules-will lead to unwise or excessive directives 6 The bulk of the commentary about unfunded mandates follows this tack,7 albeit without much linkage to the even more substantial literature on government takings or other closely related matters.8 In turn, a small but effective literature has emerged to make the case for unfunded mandates using arguments equally familiar in other areas. For example, although state and local governments may be burdened by uncompensated directives from the federal government, these subordinate governments may join together and become effective players in the federal political process.9 Moreover, the obvious alternative of funded mandates raises serious problems familiar to students of moral hazard and other agency conflicts in a variety of areas of law.10 Under a system of funded mandates, recipient governments have an incentive to overspend federal funds and to lobby the central government for unwise mandates. Funding may thus change the identity of the exploiter-state and local governments may begin exploiting the federal government-without reducing the overall amount of exploitation. This Article explores the uneasy case against and for unfunded mandates in light of the wider literature on cost internalization. Its strategy is to compare unfunded mandates to alternative institutional arrangements, ranging from full federal funding-"funded mandates"-to full privatization of program costs-"unfunded regulation"-from three perspectives. The first, the public choice perspective, reduces to a question of political accountability or cost internalization by politicians. …