The Devil in Devolution





Adapted by the author from Disunited States, © 1997 John
D. Donahue. Published by permission of Basic Books, a division
of HarperCollins Publishers, Inc.

The shift in government's center of gravity away from Washington
and toward the states—a transition propelled by both popular sentiment
and budget imperatives, and blessed by leaders in both major parties—reflects
an uncommon pause in an endless American argument over the balance
between nation and state. That argument got underway when the
Framers gathered in Philadelphia to launch a second attempt at
nationhood, after less than a decade's dismal experience under
the feeble Articles of Confederation. The Constitution they crafted
was a compromise between those who wanted to strengthen the ties
among essentially autonomous states, and those who sought to establish
a new nation to supersede the states as the locus of the commonwealth.
While anchoring the broad contours of state and federal roles,
the Framers left it to their successors to adjust the balance
to fit the circumstances of the world to come and the priorities
of future generations.

This moment of consensus in favor of letting Washington fade while
the states take the lead is badly timed. The public sector's current
trajectory—the devolution of welfare and other programs, legislative
and judicial action circumscribing Washington's authority, and
the federal government's retreat to a domestic role largely defined
by writing checks to entitlement claimants, creditors, and state
and local governments—would make sense if economic and cultural
ties reaching across state lines were weakening over time.
But state borders are becoming more, not less, permeable.

From a vantage point three-fifths of the way between James Madison's
day and our own, Woodrow Wilson wrote that the "common interests
of a nation brought together in thought and interest and action
by the telegraph and the telephone, as well as by the rushing
mails which every express train carries, have a scope and variety,
an infinite multiplication and intricate interlacing, of which
a simpler day can have had no conception." Issues in which
other states' citizens have no stakes, and hence no valid claim
to a voice, are becoming rarer still in an age of air freight,
interlinked computers, nonstop currency trading, and site-shopping
global corporations. Our current enchantment with devolution will
be seen one day as oddly discordant with our era's challenges.

The concept of "the commons" can help to cast in a sharper
light the perils of fragmented decisionmaking on issues of national
consequence. In a much-noted 1968 article in Science, biologist
Garrett Hardin invoked the parable of a herdsman pondering how
many cattle to graze on the village commons. Self-interest will
lead the herdsman to increase the size of his herd even if the
commons is already overburdened, since he alone benefits from
raising an extra animal, but shares the consequent damage to the
common pasture. As each farmer follows the same logic, overgrazing
wrecks the commons.

Where the nation as a whole is a commons, whether as an economic
reality or as a political ideal, and states take action that ignores
or narrowly exploits that fact, the frequent result is the kind
of "tragedy" that Hardin's metaphor predicts: Collective
value is squandered in the name of a constricted definition of
gain. States win advantages that seem worthwhile only because
other states bear much of the costs. America's most urgent public
challenges—shoring up the economic underpinnings of an imperiled
middle-class culture; developing and deploying productive workplace
skills; orchestrating Americans' engagement with increasingly
global capital—involve the stewardship of common interests. The
fragmentation of authority makes success less likely. The phenomenon
is by no means limited to contemporary economic issues, and a
smattering of examples from other times and other policy agendas
illustrate the theme.


FAITH AND CREDIT

In the late 1700s, states reluctant to raise taxes instead paid
public debt with paper money, with progressively little gold or
silver behind it. Even states like Georgia, Delaware, and New
Jersey that exercised some restraint in issuing paper money saw
merchants lose confidence in their currencies, as the flood of
bad money debased the reputation of American money in general.
Half a century later defaults and debt repudiations by Pennsylvania,
Arkansas, Florida, Illinois, and a few other states—which for
the states concerned were unfortunate, but apparently preferable
to the alternative of paying what they owed—polluted the common
American resource of creditworthiness, and for a time froze even
solvent states and the federal government out of international
credit markets.

Presidential primaries, which are run state by state, provide
another example. Each state prefers to be first in line to hold
its primary (or at least early in the queue). In recent presidential
election seasons—and especially the 1996 Republican primaries—states
have wrecked the common resource of a deliberative primary process
in a rational (but nonetheless tragic) pursuit of parochial advantage.
California's primary in June 1992 had come too late to matter;
anxious to avoid another episode of irrelevance four years later,
it staked out March 26 for its vote. But several other states,
whose own votes would be rendered superfluous once California's
crowd of delegates was selected, rescheduled their primaries in
response. A spiral of competitive rescheduling led to ugly squabbles
as Delaware and Louisiana crowded New Hampshire's traditional
first-in-the-nation franchise; a mass of state primaries ended
up bunched right behind New Hampshire, and a grotesquely compressed
primary season ensued. The outcome was clear by the first days
of March, and California's primary—although held two months earlier
than it had been in 1992—was just as irrelevant. Most voters perceived
the 1996 primary season as a brief spasm of televised name-calling.
Even supporters of the eventual nominee felt that Senator Dole,
and the voters, had been ill served by the process.

Term limits for representatives and senators present a similar
"commons" problem. Despite a flurry of term-limit legislation
at the state level, anyone convinced that the United States should
have a less-professionalized Congress may not want to count on
state term-limit laws to accomplish the goal. If less-entrenched
legislators make for better law—a plausible although not invulnerable
proposition—then a citizen legislature is a common benefit for
the nation as a whole. Yet an individual state is usually better
off when represented by politicians with experience in the ways
of Washington and a deep reserve of past favors on which to trade.
Even if a majority of a state's citizens would like to see a Congress
of fresh faces, they may well prefer to see other states
restrict representatives and senators to a few years' service,
while keeping their own old lions on the job.

The Constitution's "full faith and credit" clause,
a court case in Hawaii, and the quadrennial uptick in political
tawdriness brought an unusual sort of commons problem to center
stage in 1996. The issue was whether the definition of "marriage"
should be broadened to include same-sex unions. A handful of Hawaiian
same-sex couples had asserted the right to have their relationships
reckoned under state law as no different from heterosexual marriages,
invoking provisions in the state constitution that bar sex discrimination
in almost any form (including, the plaintiffs argued, restrictions
on the gender of one's spouse). When a shift in the composition
of Hawaii's supreme court made a seemingly lost cause suddenly
viable, it dawned on advocates and opponents alike that if Hawaii
legitimated same-sex marriage, those unions would have to be recognized
nationwide. If any homosexual couple—at least those able to afford
two tickets to Hawaii—could bypass more restrictive laws in their
home states, the rapid result could be a national redefinition
of what marriage means, without anyone outside Hawaii having any
voice in the outcome.



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National opponents of gay marriage staged a preemptive strike
in the form of the Defense of Marriage Act, requiring the federal
government to counter heterodoxy in Hawaii or anywhere else by
declaring a national definition of marriage—one man, one
woman, and that's that. Beyond excluding same-sex spouses from
receiving benefits under any federal program, the act gave states
the right to refuse recognition to other states' marriages. The
Defense of Marriage Act raced through Congress and President Clinton
quickly signed it (albeit without ceremony and literally in the
middle of the night). Annoyed at being forced to alienate his
gay supporters in order to stay wrapped in the family-values mantle,
Clinton charged, no doubt correctly, that the bill's authors were
driven by the partisan spirit of the election year. But whatever
their motivations—and however one feels about same-sex marriage—they
had a point: The definition of marriage in the United States should
be settled by national deliberation.

There is an interesting historical irony here, however. Not so
long ago, divorce was only a little more common, and only a little
less out of the mainstream, than homosexual unions seem today.
While the causes for its increase are many and complex, the pace
was set in part by states' calculations of parochial advantage.
Around the turn of the century legislators in several Western
states—notably Nevada—passed liberal divorce legislation in part
to encourage economic development. Unhappy couples facing onerous
divorce laws in their home state could head West for a few weeks
or months. There they could dissolve their union, while solidifying
the local economy, in some striving desert town. Other states
might have resisted the trend to more lenient divorce laws. But
any couple—at least any able to afford a ticket to Reno—could
bypass their home-state restrictions. If a legislature held the
line it would only be subjecting its citizens to extra expense
while sending money out of state.

The wholesale liberalization of American divorce laws is often
seen as a mistake—if not from the perspective of men who can cast
off unwanted obligations with minimal bother, at least from the
perspective of women and, especially, young children who all too
often are left economically stranded. Which raises a question:
If states should be free to refuse recognition to marriages made
elsewhere, on the grounds that another state's definition of marriage
offends local morals, should they also be able to refuse to recognize
out-of-state divorces? Suppose that Vermont, say, passed legislation
toughening divorce laws and declaring Vermont marriages immune
to dissolution by another state's laws. If the legislation survived
constitutional challenge (which is doubtful, as it is for the
Defense of Marriage Act's comparable provisions) there would be
some definite advantages: More traditional states could wall themselves
off as enclaves against unwelcome national trends; a potential
spouse could signal the depth of his or her commitment by proposing
a Vermont wedding. On the other hand, the United States would
become a little bit less of a nation.

In one of the less glorious episodes in American history, this
country attempted to define human slavery as an issue each state
could settle on its own, according to its own economic and ethical
lights. Northern states, however, eventually proved unwilling
to accept the proposition that the moral commons could be so neatly
subdivided. The Fugitive Slave Act required antislavery states
to make room in their moral world for slaveholders to transport
their "property" for use anywhere in the nation. The
repercussions ultimately led to attempted secession, and then
to the national abolition of slavery. The meaning of marriage
may be another moral issue so basic that it must be dealt with
through a national debate, protracted and painful as that will
doubtless turn out to be.


ENVIRONMENTAL REGULATION

Antipollution law is perhaps the most obvious application of the
"commons" metaphor to policymaking in a federal system.
If a state maintains a lax regime of environmental laws it spares
its own citizens, businesses, and government agencies from economic
burdens. The "benefits" of environmental recklessness,
in other words, are collected in-state. Part of the pollution
consequently dumped into the air or water, however, drifts away
to do its damage elsewhere in the nation. If states held all authority
over environmental rule-making, the predictable result would be
feeble regulations against any kinds of pollution where in-state
costs and benefits of control are seriously out of balance. Even
in states whose citizens valued the environment—even if the citizens
of all states were willing to accept substantial economic
costs in the name of cleaner air and water—constituents and representatives
would calculate that their sacrifice could not on its own stem
the tide and reluctantly settle for weaker rules than they would
otherwise prefer.

A state contemplating tough antipollution rules might calculate
that its citizens will pay for environmental improvements that
will be enjoyed, in part, by others. Even worse, by imposing higher
costs on business than do other states, it risks repelling investment,
and thus losing jobs and tax revenues to states with weak environmental
laws. Congress explicitly invoked the specter of a "race
for the bottom"—competitive loosening of environmental laws
in order to lure business—to justify federal standards that would
"preclude efforts on the part of states to compete with each
other in trying to attract new plants." In a series of legislative
changes starting in the early 1970s, the major choices about how
aggressively to act against pollution were moved to the federal
government. While aspects of enforcement remained state responsibilities—introducing
another level of complications that continues to plague environmental
policy—the trade-off between environmental and economic values
moved much closer to a single national standard.

National regulation in a diverse economy does have a downside.
States differ in their environmental problems, and in the priorities
of their citizens. Requiring all states to accept the same balance
between environmental and economic values imposes some real costs
and generates real political friction. Yet even if the tilt toward
national authority is, on balance, the correct approach to environmental
regulation, there is reason to doubt we got all the details right.
Moreover, logic suggests that the federal role should be stronger
for forms of pollution that readily cross state borders, and weaker
for pollution that stays put. But federal authority is actually
weaker under the Clean Air Act and the Clean Water Act than under
the "Superfund" law covering hazardous waste. Toxic-waste
sites are undeniably nasty things. But most of them are situated
within a single state, and stay there.


CORPORATE CHARTERING

Few questions about the division of economic authority across
our federal system have received as enormous an investment of
intellectual energy as the state chartering of corporations. Since
corporations can operate nationally, whatever their state of incorporation,
state decisions on chartering have national implications. In the
eighteenth and much of the nineteenth centuries, corporate charters
were granted under far more stringent conditions than they are
today, usually on the understanding that demonstrable public good
would result from the corporation's activities. As corporations
came to be seen less as agents of the public interest; as states
came to presume, instead of demanding proof of, public benefits
from business enterprise; and as some firms became sufficiently
national to have meaningful choices about which state to call
home, the specific terms of state chartering came to matter more.
In 1896, New Jersey adopted aggressively liberal chartering rules,
and became the legal home of choice for major corporations. New
Jersey shifted to a somewhat tougher chartering law in 1913, however,
and rapidly lost its hegemony to Delaware, which had altered its
own incorporation provisions to mirror New Jersey's previous law.
Delaware has tenaciously defended its dominant place in corporate
chartering ever since.

Herbert Croly, the Progressive intellectual, considered state
chartering a silly anachronism by 1909, arguing that "a state
has in the great majority of cases no meaning at all as a center
of economic organization and direction." Croly's call for
national chartering was made "not because there is any peculiar
virtue in the action of the central government, but because there
is a peculiar vice in asking the state governments to regulate
matters beyond their effective jurisdiction." States whose
chartering rules appeal to managers win taxes, fees, and ample
job opportunities for corporate attorneys, while the costs of
unbalanced corporate law are spread widely, wherever the state
has operations, sales, creditors, or investors. The commons scenario
predicts a systematic weakening of the conditions of incorporation.

The phrase "race to the bottom" was introduced
in 1933 by Supreme Court Justice Louis Brandeis—who also, interestingly
enough, popularized the term "laboratories of democracy"—in
connection with corporate chartering. Multistate companies, Brandeis
said, sought charters "in states where the cost was lowest
and the laws least restrictive. The states joined in advertising
their wares. The race was one not of diligence but of laxity."
The modern debate over the prudence of state chartering got underway
in the early 1970s with an article by William L. Cary in the Yale
Law Journal
on the pernicious effects of interstate competition
for corporate charters.

Some defenders of rivalrous state chartering argued that Delaware's
advantage was not due to weak conditions of incorporation, but
rather to its efficient procedures for chartering—streamlined
administrative rule-making, courts dedicated to corporate law,
a specialized private bar, and a tradition of depoliticizing corporate
law made sustainable by the paucity of actual corporate operations
within the state. But the more interesting rebuttal to the "race
for the bottom" critics came from a group of scholars who
emphasized the importance of market rationality in the crafting
of corporate law. Ralph Winter, in an influential 1977 article,
started by acknowledging that states compete to maximize their
share of the nation's corporate charters, and that they do so
primarily through loosening the conditions of chartering. But
the race was to the top, not the bottom, Winter and like-minded
analysts argued, because the goal toward which states raced, and
the pace of their scramble, turn out to be set not by corporate
managers but by investors.

The story goes like this: Corporations must attract capital. Investors
will be more likely to commit their funds to firms whose charters
require managers to do right by investors. And that story seems
sound, so far as it goes. But this is not quite the end of the
conversation. Interstate competition promotes laws that favor
investors not because legislators are directly solicitous of shareholders,
but because investors have leverage over managers, and managers
have leverage over state policymakers. By this same logic, interests
with a weaker claim on managers' devotion have no reason to expect
that interstate competition will generate favorable results. For
example, the dynamics of state competition for corporate charters
are unlikely to generate a national pattern of laws that strengthens
the hand of employees within the firm.


LEGALIZED GAMBLING

There has never been a time in America when a person determined
to gamble could not find some action. Nor is legal gambling,
for that matter, anything new. The Continental Congress fed and
armed Washington's army, in part, with revenues from a lottery,
and state-sanctioned games of chance financed the early growth
of Harvard and other colleges. For much of this century, however,
gambling has operated in the economic shadows. Except for the
exotic enclave of Nevada, government's stance toward gambling
ranged, until recently, from vigilant hostility to narrowly circumscribed
tolerance.

This has changed with an astonishing speed and completeness. In
1988 Nevada and New Jersey were alone in allowing casino gambling.
Eight years later there were around 500 casinos operating in 27
states, and some form of gambling was legal in all but two states.
The total annual amount wagered legally in the United States is
about $500 billion. (For a sense of scale, consider that America's
entire annual output is in the range of $7,000 billion.)

Gambling brings some obvious benefits to the state that runs the
lottery or hosts the casinos. It can generate relatively high-paying
jobs even for workers without much training. It yields welcome
revenues for the state treasury. (States took in $27 billion from
lotteries in 1994, and had $9.8 billion in revenues left over
after paying off winners and covering administrative costs. In
1994, taxes paid by casinos alone yielded $1.4 billion for states
and localities.) Legalized gambling can also produce political
benefits, most directly the rich lodes of campaign contributions
available from a highly profitable industry that is so intensely
dependent on political favor.

Yet there are costs as well. Some people will always gamble whether
it is legal or not, but many more do so only when the law allows.
Access to legal opportunities for gambling has been found to increase
the number of people who develop a gambling problem. The consequences
range from mild economic inconvenience to bankruptcy, embezzlement,
divorce, and suicide. In 1995—ten years after their state launched
a lottery, and four years after the first legal riverboat casino
opened—nine out of ten Iowans indulged in gambling. One in twenty
reported having a gambling problem, and Iowa social-service agencies
were coping with a surge of collateral family and financial damage.

But shouldn't we leave it to officials in each state to tally
up the expected costs and benefits and make decisions that sum
to the right national policy? The logic of the commons makes this
less than likely. If a state loosens its own restrictions on gambling,
it gains the benefits in jobs, tax revenues, and political favor.
It also suffers costs—but not all the costs. When citizens
of other states buy the lottery tickets and visit the casinos,
they leave their money behind when they return home, but take
their gambling-related problems back with them. States that still
ban gambling suffer much of the damage from the national trend
toward legalization, but without sharing in the benefits.

Iowa, in fact, had maintained stringent antigambling laws until
the mid-1980s. But as a growing number of Iowans played lotteries
in neighboring states it became harder to resist proposals to
revitalize a battered economy through riverboat casinos aimed
at attracting out-of-state gamblers, especially from the prosperous,
casino-free Chicago area. At first, Chicagoans did come, by the
busload. But Illinois legislators, seeing gambling dollars heading
down the interstate to Iowa, opted to allow riverboat gambling
in their state, too. Iowa's initial liberalization law had tried
to lower the risk of problem gambling by limiting the size of
any one bet and the amount any person could gamble away in a single
day. But when Illinois, Mississippi, and Louisiana introduced
riverboats without any limits, Iowa lifted its own restrictions.
In a similar way, after Montana allowed slot machines in taverns
in 1985 neighboring South Dakota called and raised, allowing slot
machines in bars and convenience stores.

By 1996 the only two states with no legal gambling at all were
Utah, whose Mormon culture was uniquely resistant to the national
trend, and Hawaii, where it is a good deal harder than in most
other states for citizens to escape local restrictions by doing
their gambling in the state next door. The federal government's
absolute deference to the separate states began to bend that same
year with legislation establishing a commission to examine the
broader national impacts of gambling. A Nevada congresswoman denounced
the bill as "the nose under the tent of Federal interference
with the right of states to regulate gambling." She was entirely
correct. But it is questionable whether exclusive state control
over so massive a change in the legal economy's scope, with such
sweeping implications for our culture, ever made much sense.

Not every issue, to be sure, can be cast as a commons problem.
And even where state officials are tempted to pursue narrow
agendas at the expense of national interests, it is not automatically
true that the shared loss exceeds the advantages of state autonomy,
or that an acceptable way can be found of safeguarding common
interests without straining the framework of our federal system.
There are two basic strategies for overcoming the confusion of
incentives that trigger the tragedy of the commons. One is to
fragment the commons into private holdings where property rights
are unambiguous. The other is to maintain a polity that commands
both the capacity and the legitimacy to give force to common interests.
The debate over the future of America's federal-state balance
can be seen, in a sense, as pivoting on this strategic choice.
Devolution seeks to simplify incentives by subdividing the commons
into separate plots. Federal reform requires accepting the challenge
of balancing multiple interests within the national commonwealth.

Fixing the federal government is an intimidating proposition in
the late 1990s. The trajectory of fiscal and political trends
suggests that devolution will remain the focus of politicians'
promises and citizens' hopes for some time to come. But the inherent
limits of a fragmented approach to national adaptation will eventually
inspire America to reappraise the ascendancy of the states. Not
too far into the new century we will again collect the resolve
to confront together our common fate. And we will once more take
up, in the two-century tradition of Americans before us, the echoing
challenge of George Washington's 1796 farewell address: "Is
there a doubt whether a common government can embrace so large
a sphere? Let experience solve it."



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