The Two Towers of Progressivism: To save the Constitution, target “cooperative federalism” and the cartel state

By Mario Loyola,  Texas Public Policy Foundation 

The administration of Franklin D. Roosevelt dealt our Constitution a grave blow. When the Supreme Court rubber-stamped the New Deal, the framework of limited and enumerated federal powers — which shaped the very structure of our Constitution — was swept away. Federal power over every aspect of our lives has been expanding ever since, with no end in sight.

Conservatives understand that much. What they don’t yet understand is why this happened. That’s a problem. After all, how much good can a doctor do if he doesn’t understand what’s making the patient sick? In recent years, luminaries of constitutional history such as Richard A. Epstein and Michael Greve have made important strides in helping us understand how the progressive movement of the last hundred years has ravaged our Constitution. Some of their insights are startling.

The great internal danger to the democratic form of government is its vulnerability to capture by political elites. James Madison called them “factions”; today we call them “special interests.” The Constitution was designed to protect against them, chiefly by limiting the federal government’s power and guaranteeing strong property rights and freedom of exchange.

The Bill of Rights contains important protections. But the greatest protections the Constitution provides are the structural limitations it places on federal power. In key areas, those limitations have eroded, leading to the very expansion of federal power that opponents of the original Constitution warned about during the ratification debates.

The structure of our Constitution was meant to guarantee local self-government under the protective umbrella of limited federal power. Federal and state governments were each accorded exclusive zones of responsibility. That created a broad scope for regulatory and tax competition among state governments, a result the Framers explicitly intended.

This framework of competitive federalism created a powerful brake on the growth of government. Federal powers were specifically enumerated and strictly limited, as the Tenth Amendment specified. State governments had a more plenary “police power” in the areas of health, safety, commerce, etc., but interstate competition and the mobility of both people and capital tended to keep state government light.

The erosion of the federal structure of our Constitution over the last hundred years has come about through the dramatic expansion of two federal powers: the spending power and the commerce power. It is important to understand what was driving this transformation. Officials in uncompetitive states started to realize that they could use the federal government to secure protection from competition and to win other benefits for themselves and their special interests, as long as they were willing to give up self-government in favor of nationalized policies.

In the Child Labor Cases of the early 20th century, the Supreme Court struck down various efforts by Congress to impose a uniform child-labor standard throughout the country. All the states had child-labor laws on the books. But the precise age threshold varied from state to state: 14 in some, 16 in others, and 12 in a few. Those states with lower thresholds stood to gain a competitive advantage over states with higher thresholds, and the latter cried out for the protection of a uniform federal standard. However, because the federal interstate-commerce power was then thought not to extend to purely intrastate labor contracts, the Supreme Court struck down the various federal schemes.

The Child Labor Cases demonstrated that progressive state officials were more than ready to give up their autonomy and let the federal government control the policy, so long as the federal standard favored heavier regulation. In league with their special interests and with like-minded federal officials, these state officials succeeded over the next decades in destroying the Constitution’s limits on both the federal commerce power and the federal spending power.

The expansion of the spending and commerce powers allowed the Progressive movement to accomplish several things. Through the various schemes known as “cooperative federalism,” Congress was able to seize substantial control over state budgets and state regulation. The general purpose was to expand federal power, but more often than not the specific purpose was to protect states with uncompetitive policies. The expansion of the federal spending and commerce powers also allowed progressives to impose a variety of forced-transfer schemes, whereby government forces money to flow in the direction of special interests. These schemes, alive and well today, run the gamut from progressive taxation to cartels and monopolies erected by government for the benefit of special interests. Their common theme is government-created barriers to competition that weaken property rights and limit the freedom of exchange.

Democracy in America as we know it today is the creation of these two towers of the Progressive movement: cooperative federalism (i.e., federal control of state policies) and barriers to competition (i.e., the government-created cartels and monopolies). In the progressives’ version of democracy, the losers outnumber the winners, and the losses greatly outweigh the winnings. But the losses are diffuse whereas the winnings are concentrated. As Milton Friedman lamented, the average American is taken advantage of in lots of small ways, in order to pad the profits of concentrated special interests.

In a new study for the Texas Public Policy Foundation, Reclaiming Liberty: How States Can Revive the Tenth Amendment and Save the Constitution, I try to show how these two towers of the progressive movement were built atop the ruins of the Tenth Amendment. I argue that we must knock them down and revive the Tenth Amendment if we are to save the Constitution.

Recall that the framework of limited and enumerated federal powers enshrined in the Tenth Amendment and throughout the Constitution was meant to leave most government spending and economic regulation in the hands of the states, where both would be subject to intense interstate competition. Any state could serve its special interests with high levels of spending and regulation, but, because people and capital could always move to another state, its comparative disadvantage would probably make the policy unsustainable over the long term.

The progressives’ solution was to nationalize the desired levels of spending and regulation. In order for this to happen, it was necessary to sweep away the Constitution’s strict limits on both federal taxation and the federal commerce power, so that Congress in both domains could absorb the powers of state government.

On the spending side of this “cooperative federalism,” the federal government runs enormous deficits and then transfers nearly all the money it has borrowed to the states in the form of federal assistance. Why? Because by inflating state budgets well beyond the level that states would be able to sustain if they had to tax their people directly, and by attaching conditions to the funds, Congress can effectively seize control of state budgets and programs, turning the states into mere field agencies of the federal government. Federal assistance to the states thus masks what is in reality exactly the opposite: a program of state fiscal assistance to the federal government, a dramatic increase in de facto federal spending. Medicaid is the perfect example. Though it is often described as a federal match for state programs, it is in fact a forced state match for a largely uniform federal program — and a terrible one at that.

On the regulatory side, the federal government passes laws that require enormous administrative resources to implement. Rather than having to raise the revenue to do the implementation itself, the federal government essentially deputizes state agencies and makes them do the legwork. Take the Clean Air Act. Officials of the Environmental Protection Agency (such as former EPA regional administrator Al Armendariz) have made it clear that their goal is to “crucify” industries. New EPA regulations, for example, are blatantly designed to drive coal plants out of business altogether, despite billions invested in clean-coal technology in recent years. But the EPA offers states “permission” to implement the federal standards in their own way, so long as they meet a plethora of conditions. States jump at the chance because of the implied threat that if they don’t, the EPA will come in and do the implementing itself. Progressive proponents of this arrangement like to pretend that it’s voluntary, but in fact it’s pure blackmail, as we saw when Texas tried to call the EPA’s bluff a few years ago. It refused to implement the EPA’s new greenhouse-gas regulations and invited the agency to process the industrial permits itself. But the EPA didn’t have the resources to do this. As a result, many companies in Texas’s heavy industries were left without necessary permits and faced shutdown. The state had no choice but to back down and issue the permits on the federal government’s behalf.

Both the spending and regulation sides of “cooperative federalism” allow the federal government to expand its control of state governments while escaping accountability. The Supreme Court has thus far permitted this kind of commandeering, even though it is totally incompatible with the Court’s pronouncements on federalism in New York v. U.S. (1992) and Printz v. U.S. (1997). Time will tell whether “cooperative federalism” can survive the Court’s prohibition on federal commandeering of state agencies.

The other tower of progressivism, the cartel state, is just as formidable an enemy. It is truly everywhere — from occupational licensing for lawyers, doctors, and hairdressers, to alcoholic-beverage regulations at the state level, to the federal agriculture and labor regulations adopted as emergency measures during the New Deal. All these regulations effectively create monopolies and cartels that transfer wealth from to special interests from everyone else.

Cartels for agriculture and labor were the whole point of the New Deal. All the New Deal–era Supreme Court cases that expanded the federal commerce power approved some kind of cartel in either agriculture or labor. Once the federal commerce power was dramatically expanded, federal law could be used to create new monopolies and cartels, and to protect those created by state governments.

In the purely private economy, you usually don’t need to worry about monopolies and cartels. As Judge Robert Bork wrote in his classic The Antitrust Paradox (1978), in a competitive environment, new entrants can always offer a price somewhere between cost and what the monopolist or cartel is trying to charge. Plus, in the case of cartels, there is no way to enforce price discipline among cartel members. The attempt to sustain monopoly or cartel pricing thus becomes a recipe for losing market share to competitors.

Through regulation, however, government can solve these problems. Government is therefore the perfect co-conspirator for anybody who wants to create a monopoly or a price-fixing cartel. Government can write laws to prevent the entry of new competitors and also to enforce cartel discipline. These monopolies and cartels are the most important tools that progressives have for protecting their special interests. Almost the entire progressive agenda, from the early 20th century onward, boils down to creating a monopoly or cartel for some part of its political coalition. This agenda is therefore in some measure a throwback to the era of Crown monopolies in England, which the Framers were especially keen on preventing in America.

The solution is to revive a strong conception of property rights and freedom of exchange. First of all, people in each state — including supposedly competitive states such as Texas — should look around and realize how many cartels and monopolies are being erected all around them by politicians of both right and left. Those cartels and monopolies, including occupational licensing requirements, should be the first-priority target for those committed to knocking down the two towers of progressivism. If you want to create a constituency for economic liberty, you must show the public the benefits of economic liberty.

A belief in strong property rights and freedom of exchange must gain new adherents among the federal judiciary. Sooner or later, jurists and politicians will have to realize that, in order for our Constitution to function properly, the federal commerce power must be limited, and economic regulation must — as much as possible — be subject to competition among the states.

Reclaiming the Constitution means knocking down the two towers that the progressive movement erected on the ruins of the Tenth Amendment: cooperative federalism and the cartel state. Both towers continue to grow ever stronger, and at every step liberty suffers another blow. There is little time to waste.

— Mario Loyola is a senior fellow at the Texas Public Policy Foundation and the author of Reclaiming Liberty: How States can Revive the 10th Amendment and Save the Constitution. In fall 2013 he was visiting fellow at the Classical Liberal Institute of New York University School of Law.

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