Richard E. Wagner American Federalism Richard E

RICHARD E. WAGNER AMERICAN FEDERALISM RICHARD E. WAGNER Arlington, Virginia ABOUT THE MERCATUS CENTER The Mercatus Center at George Mason University is the world’s premier university source for market-oriented ideas—bridging the gap between academic ideas and real-world problems. A university-based research center, Mercatus advances knowledge about how markets work to improve people’s lives by training graduate students, conducting research, and applying economics to offer solutions to society’s most pressing problems. Our mission is to generate knowledge and understanding of the institutions that affect the freedom to prosper and to find sustainable solutions that overcome the barriers preventing individuals from living free, prosperous, and peaceful lives. Founded in 1980, the Mercatus Center is located on George Mason University’s Arlington campus. www.mercatus.org Copyright © 2014 by Richard E. Wagner and the Mercatus Center at George Mason University 978-1-942951-05-6 paperback 978-1-942951-06-3 Kindle ebook Mercatus Center George Mason University 3434 Washington Blvd., 4th Floor, Arlington, VA 22201 703-993-4930 2nd printing May 2015 CONTENTS Introduction 1 I. Some Relevant Analytical Principles from Public Choice 4 II. Public Choice, Liberty, and National Republics 17 III. Public Choice, Liberty, and Federal Republics 38 In Closing 52 About the Author 55 emocratic governments can be either national or federal in form. Within a national republic, a single govern- Dment is the source of all taxation and regulation. That government might delegate some power to tax and regulate to lower units of government, but that delegation is the province of the higher government and can be reversed if that higher government so chooses. In contrast, within a federal republic people face at least two independent sources of taxation and regulation. For instance, US state and federal governments have the independent ability to tax and regulate their citizens. Federalism is generally described as a pro-liberty form of government. Yet it is surely reasonable to wonder how two sources of political power within the same territory can be more favorable to liberty than one. It turns out that the pro-liberty quality of federalism is a possible but not a necessary feature. This essay explores this two-edged quality of federalism to discern more clearly the relationship between federalism and liberty. All thinking about government and liberty must face a choice between two distinct starting points. One point of departure is to treat government as the source of individual rights, which gives government the ability to give or take rights at its discretion. The alternative point of departure treats individual rights as prior to government, with people creating government to support the rights of person and property. This distinction is perhaps more analytical than historical, but it is historically meaningful all the same. In Europe before the 1 American founding, governments were absolutist in character. Government was the province of kings and other nobles, who stood apart from the society over which they governed. There existed traditionally established rights, duties, and obligations that governed relations among classes throughout the society, but governance was the business of the ruling class in any case. Merchants and peasants might hope for good government over bad, but what they got was not their business. In contrast, the American experiment was founded on a rejection of these feudal trappings of power and status. Government was not a source of individual rights because government was rather something that people created to support and protect those rights. In this alternative scheme of thought, law, which governs relationships and interactions among the members of society, is prior to government. This is the scheme of thought that informed the American constitutional founding. That founding is now more than two centuries behind us, and our constitutional framework has changed greatly, sometimes for the better and sometimes not when those changes are appraised from the perspective of individual liberty. This essay explains how the ability of the federalist form of government to preserve and protect individual liberty depends on some significant details con- cerning its constitutional structure. Constitutional systems must and do change through time. Sometimes they change for the better, but not always. In the two centuries since our government’s founding, some features of the American system have changed for the better, but other features have changed for the worse (from the perspective of liberty). A federal form of government can promote liberty, but it can also impair it. Which outcome is likely depends significantly though not exclusively on the constitutional structure within which governments operate. This essay explores the central features of a pro-liberty constitutional structure for a federal republic, and examines how the erosion of federal liberty that has been underway for around a century might be amended in a pro-liberty direction. 2 AMERICAN FEDERALISM The American federal system was founded on the principle that competition among governments is the appropriate institutional complement to the individual liberty on which the nation was founded. Over the past century or so, however, the federal system has become increasingly monopolistic or collusive. A system of competitive federalism stands in opposition to a system of monopolistic federalism, in which political entities act in cartel- like fashion to promote the interests of their supporters over the interests of the rest of society. Within a system of monopolistic federalism, government becomes an instrument for expanding or contracting individual rights; this imports feudal principles into a constitutional system founded on the rejection of those principles. This essay is presented in three parts. Part I presents some analytical background from the theory of public choice, which provides the framework for the rest of the essay. Public choice treats politics as a peculiar type of business. As a business, politics entails a systematic form of practice that involves rendering services and securing payment for those services. But it is a peculiar type of business, because politicians and bureaucrats can force people to consume their services, in contrast to ordinary businesses, which must attract willing customers. Part II applies public-choice principles to the economic organization of a national republic. This part uses public-choice principles to explore the ways and pro- cesses through which a national republic can weaken liberty in the pursuit of political gain. This part provides a point of departure for part III, which asks whether or under what conditions a federal republic might be better able to maintain liberty than a national republic. What comes out of this examination is recognition that, relative to a national government, a federal form of government can either support or impede liberty, depending on some significant institutional and constitutional features regarding the extent to which the federal system promotes competition or cartelization among governments. RICHARD E. WAGNER 3 I. SOME RELEVANT ANALYTICAL PRINCIPLES FROM PUBLIC CHOICE In exploring whether or the extent to which the federal form of government does significant work in securing liberty, it is necessary to adopt some suitable conceptual framework to facilitate exploration of the topic. I shall do so by using the economic theory of public choice. This theory provides a general conceptual framework for examining governments of all types. At its most general level, public-choice theory is grounded on the simple claim that people seek to be effective rather than ineffective in their activities. What renders an action effective varies with the institutional setting inside which that action occurs. Actions that are effective in bringing about commercial success, for instance, might not be effective in bringing about political success. In a similar manner, different constitutional arrangements will promote different types of political activity. Those activities, in turn, will have different implications for human liberty. A. Public-Choice Principles and the Practice of Government Much of economic theory takes as its object of interest various aspects of commercial and industrial practice. Theorizing about commercial practice is different from practicing commerce, yet the two should be related. Economic theory abstracts from many significant details about commercial practice, yet a good theory should enable a commercial practitioner to see points of contact between his or her practical activities and the theorist’s formu- lation, while also recognizing that the theorist is developing a lean and abstract portrait of a complex activity that cannot be 4 AMERICAN FEDERALISM reduced to some simple recipe.1 So the theorist’s world is not the practitioner’s world, and yet the two are connected: the theorist presents categories and relationships that the practitioner can recognize, even if much richness has been shed; the practitioner can look at the theorist’s formulations and get a simplified view of some key facets of the practitioner’s activities. Public choice theory is a branch of economics that treats politics as a form of commercial activity, though a peculiar form. Politicians are businesspeople who earn their livelihoods through political practice. Other people

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