Interstate Competition and the Race to the Top

Federalism is an essential part of the Constitution's design. The division of sovereign power between the States and the federal government helps foster interjurisdictional competition, which, in turn, checks government power. (1) Provided a right of exit is maintained, the excessive imposition of economic burdens in one jurisdiction will cause taxpayers and businesses to flee to other jurisdictions. For this reason, federalism often is seen as a friend of the free market. (2) The existence of competing jurisdictions disciplines state intervention in the marketplace. (3) But it would be a mistake to assume that interjurisdictional competition invariably favors market-oriented policies, at least insofar as alternative policy measures would enhance the welfare of state residents. Federalism is not just for free marketeers. Provided states cannot externalize the costs of their own policy choices, robust interjurisdictional competition facilitates the enactment of better public policy at the state level. (4) Rather than inducing a "race to the bottom," such competition can create a race toward the top. (5) Although those of us who generally favor freer markets believe federalism will advance that cause, those who believe more stringent regulation is welfare-enhancing should support interjurisdictional competition too. On both theoretical and empirical grounds, competition among jurisdictions is a powerful means to discover and promote the policies that are most effective at providing people with what they desire. Other participants in this Symposium have discussed whether the U.S. Constitution embodies a particular economic theory. Even if the Constitution does not implicitly endorse free enterprise, it embodies an understanding of the nature of government power in economic terms. Specifically, the Constitution embodies the theory that dividing and structuring the government will discipline and channel the exercise of sovereign power for the people's benefit. This theory of political economy recognizes that government officials are economic actors and that governmental institutions will respond to economic incentives. In response, James Madison thought it necessary to set faction against faction, (6) and the Framers created checks and balances between and among the coordinate branches of the federal government. (7) Many believed that a system of dual sovereignty would provide a double security to the people and their liberty. (8) In the case of federalism, the Constitution's structure is quite instructive. The Constitution creates a federal government of limited and enumerated powers that are expressly set forth, largely in article I, section 8. (9) All powers not granted to the federal government are reserved to the States or to the people. (10) The States, on the other hand, are not so limited--at least not by the federal Constitution. (11) Federal constitutional limitations on states--like federal powers--are limited, and these limitations are imposed against a background of reserved power. For purposes of the federal Constitution, states possess a plenary police power that can extend to any matter not precluded by federal law. (12) As a result, the federal government has the power to reach only a limited set of issues and concerns, while a near infinite set of all else remains. Even under current Supreme Court doctrine, federal jurisdiction is authorized only in a defined set of areas, even if we may argue about how limited or discrete those areas are. This structure creates a presumption that states have the power to address a given policy concern unless the Constitution has given the federal government the express power to intervene. This structural presumption makes sense not merely as a constitutional matter, but also as a policy matter. That is, we should presume that state governments should handle policy questions unless there is reason to believe that federal intervention is necessary. …