Table of Contents

• Introduction
• Prolegomena To Any Future Federalism That Will Be Able To Present Itself As Such
• The Necessary Conditions of All Possible Experience of Competitive Federalism
• Cartels at Every Level
• Against Perpetual Peace (Among the States): The Supreme Court’s Federalism, So-Called
• Energy in the Executive, and the Court
• Conclusion
• References
• Download the Explainer

Introduction

Some three decades ago, Federalism! resonated in demands for congressional term limits, restrictions on Congress’s commerce powers, and support for the Supreme Court’s state-protective jurisprudence. Those days are long gone. The conservative agenda has shifted; its more libertarian contingents have devoted themselves to the project of re-limiting a centralized, sprawling “administrative state.” Still, federalism remains a fixed star in our constitutional firmament. States remain the default setting of American politics, from federal elections to the nuts and bolts of day-to-day politics and administration. There are reasons to be cautiously optimistic about a rejuvenated federalism—provided one understands federalism properly, and provided key institutional players discern the opportunities.

Federalism is a “they,” not an “it.” Good federalism is competitive federalism. It compels junior governments—states—to, well, compete for the talents, affections, and assets of mobile citizens. Consumers and producers can sort themselves into jurisdictions that provide an attractive mix of amenities and public services at an acceptable tax price. Call it preference satisfaction: more people get more of what they like. Successful state experiments may induce others to follow; the dispersion of state school choice policies over the past decade may be an example of such “yardstick competition.” Finally, the fear of losing productive firms and citizens may help to discipline spendthrift, overregulating state governments.

Competitive federalism’s antithesis is “cooperative federalism,” which envisions the states and the central government not as rival power centers but as partners in a collective enterprise. That enterprise is the production of a social-democratic model, characterized by high transfer payments, copious social services, and an ample supply of environmental amenities, nowadays mostly related to climate policy. I have described this arrangement as “cartel federalism,” the better to capture “cooperative” federalism’s central institutional dynamic: to wit, the displacement of institutional competition with the production and distribution of rents among politicians, bureaucrats, and concentrated industry sectors.

Competition among governments resembles competition in private markets in this respect: most producers loathe it. State governments that try to satisfy a high demand for redistributive policies also run a high risk of out-migration. To curb the flight risk, they collude and induce the federal government to suppress competition on important margins and, ideally, all of them. Barring unusual political conditions (about which more below), those state demands meet with ready supply by Congress. Witness federal labor protections, workplace safety rules, and “cooperative” arrangements from Medicaid to the Clean Air Act. It is a common but bad mistake to label those exertions as nationalist impositions on the pitiful states. They are mostly demand-driven by states—more precisely, their political elites.

In earlier writings, ranging from my academic tome, The Upside-Down Constitution to a Mercatus Center booklet titled Federalism and Constitution: Competition versus Cartels to more journalistic entries such as a recent National Review essay “How the Roberts Court Mangles Federalism” I have argued (not very originally) that competitive federalism has numerous advantages if you put a premium on living in a reasonably free and prosperous society. More controversially, I have tried to show that our Constitution facilitates (and, rightly understood, nearly commands) competitive federalism. This essay connects the dots in the contemporary federalism landscape and touches on high-toned law and economics jazz to shed light on competitive federalism’s present condition and prospects.

Those “dots” lie in plain sight: the ruinous state of our public finance; the raging contentions between “red” and “blue” states; the grim brawl over “climate policies” that have no prospect of reducing global temperatures by a single degree; and the federal courts’ increasingly prominent role, which they have yet to comprehend. This all hangs together in a way that should encourage federalism’s true friends.

Prolegomena To Any Future Federalism That Will Be Able To Present Itself As Such

In a widely cited article, Stanford economist Barry R. Weingast identified the parameters of competitive, “market-preserving” federalism:

• States underneath a central government possess sufficient institutional authority and integrity to engage in political and economic competition over “some range” of fiscal, labor, educational, environmental, and other salient policies.
• States have autonomy over conduct within their jurisdiction, provided (a) they permit free entry and exit and (b) their activities do not cause excessive externalities. Enforcement of these conditions is entrusted to the central government.
• Competitive federalism requires limits on federal transfer payments made to subordinate governments.^[1]

Look at this list, and then our federalism: your heart sinks. Formally at least, the powers of Congress reach into every nook and cranny of daily life. States’ autonomy has been severely limited and compromised. “Cooperative” federalism dominates in most domestic policy arenas: education, disaster relief, and health care, to name a few of the more significant pieces. These federal-state arrangements appear immune to any serious reform effort.

Federal transfer payments to state and local governments are hardly “limited.” In 2023, they equaled $1.1 trillion, or roughly 18 percent of all federal outlays. A small share ($48 billion) pays for roads and other pieces of our crumbling infrastructure. In contrast, Medicaid accounts for 56 percent of transfer payments ($616 billion). The program has grown by leaps and bounds over the past quarter-century—first, because of the Patient Protection and Affordable Care Act (ACA); more recently, through “emergency” Covid funding. Toss in $167 billion for various forms of “income security”: the overwhelming portion of federal payments bankroll current consumption and straight-up income transfers to state budgets. Worse, the programs have become increasingly debt-financed.

Federal transfers and conditional funding programs have proven to be the Achilles heel of competitive (constitutional) federalism for a full century. The programs erode state autonomy. They create fiscal illusions, inflate the demand for public services, and produce bloated intergovernmental bureaucracies with powerful interest group support. (Federal education funds benefit students only incidentally. Mostly, they inure to the benefit of the National Education Association.) Persuasive critiques of this regime have come from many quarters, including the first Reagan Administration. Yet meaningful reforms have failed to materialize, and the programs have continued to grow.

However, things look substantially better concerning points (1) and (2). States, Weingast et al write, must have sufficient autonomy to compete over some range of policies. “Competitive federalism” is a question of more or less. At one end, we do not want or permit state competition over the basic attributes of equal citizenship. Conversely, no central government can erase state competition on every margin.   

How wide, then, is the range? By international comparisons, American federalism is still among the most competitive in the world, alongside Switzerland. States compete vigorously. At least, their political leaders think so. Not long ago, Florida Governor Ron DeSantis and California Governor Gavin Newsom—back then, still presidential aspirants; since replaced by candidates from those two states—engaged in a highly publicized debate over their states’ social and economic models. Think tanks and trade associations rank states on numerous metrics—business, climate, housing affordability, and even religious liberty.^[2] The copious supply suggests a demand.

The Necessary Conditions of All Possible Experience of Competitive Federalism

Prospectively, the question is whether competitive federalism’s range will expand or contract. As a rule, you want to bet on its erosion. Specifying competitive federalism’s formal conditions is easy; sustaining them over time is fiendishly hard. Try locking political elites into a regime that disciplines and constrains them: over time, they will figure out a way to establish cartels. State cartels, moreover, have a crucial advantage over private producer cartels: they are represented, via their states’ delegations in Congress, in the central government that organizes the requisite transfers and prevents defections.  Thus, competitive federalism can thrive only under unusual political conditions.

The most crucial condition is enough states that cannot be bamboozled or bribed into cartel arrangements. They must stand firm against blandishments, on matters they deem of existential interest to their internal governance. The divide need not be fifty-fifty. Given the legislative hurdles to enacting a federal law, there must be enough states to block cartelization.

Tragically, the issue that kept federalism competitive through the antebellum era was slavery. There could not be a Commerce Clause so broad as to permit Congress to govern that most “internal” of state affairs, and the idea of bribing states into a slavery-but-not-too-much-of-it cartel was too absurd to have occurred to anyone. Compartmentalizing the intractable issue along state lines was the only path.

Slavery is mercifully long gone—not because of some federalism compromise but of Grant v. Lee. But history offers other, less harrowing examples of competition-protective political constellations. Early twentieth-century federal prohibitions against child labor, for example, were an attempt by progressive states to wipe out the advantages of producers in less regulation-minded states. (All states already had child labor prohibitions at the time, though not as strict as the federal statute.)  After the Supreme Court invalidated the federal statute in Hammer v. Dagenhart, 1918, efforts to establish a uniform national standard foundered on the opposition of some 16 states—at the time, enough to block even proposed constitutional amendments. Not until 1938 did child labor prohibitions appear in a federal statute (the Fair Labor Standards Act).  By then, child labor had effectively disappeared (except on farms—which, sure enough, were exempted from those provisions of the FLSA).

Today’s political environment, too, features a stable, cohesive bloc of pro-competitive and uniformly “red” states, led by Texas and Florida. Their business model rests on low taxes, a relatively permissive regulatory environment, and (crucially, we’ll see) affordable energy. “Blue” states, led by California, New York, Illinois, and Massachusetts, champion an opposed, social-democratic model.   

Intense competition between these two blocs manifests itself in a high degree of out-migration of capital and labor from blue to red states. Texas and Florida have experienced substantial in-migration, especially for high-income earners. Disproportionately, those folks come from California, New York, and Illinois.^[3]  

All this is known even to casual observers of American politics. Still, the sectional divide among the states features several underappreciated aspects worthy of note.

First, while there are reasons to lament the polarization of our politics, it has made competitive federalism more salient and resilient. Red states deem their advantages nonnegotiable, and they cannot be bribed or cajoled into federal schemes that they view as a threat to their business model. To this day, for example, ten states have resisted the considerable temptation to participate in the ACA’s Medicaid expansion.

Second, the regional divide between the states resembles that of the Gilded Age: anti-cartel states mostly in the South; pro-cartel states (New York, Massachusetts, Illinois) mostly in the North, now joined by California. Back then, however, the backward Southern states were the periphery of the American economy, that was dominated by the industrial and financial powerhouses in the North. Now, as noted, many of those same states are the most dynamic, fastest-growing jurisdictions, while blue states are bleeding businesses, well-to-do citizens, and congressional seats. In that crucial respect, competitive federalism is alive and well.  It belongs to the winners.

Third, competitive policies tend to come in clusters. A typical low-tax state will also feature right-to-work laws, policies that support cheap and abundant energy, and a business-friendly environment. (It will also tend to resist “wokeness” and identity politics.)  While no citizen or business will migrate to a red state for any individual policy reason, everything happens on the margin; when many advantages come in a package, they do matter.

Conversely, pro-competitive states will view even incremental federal impositions as threats to their business model. For example, these states have resisted the National Labor Relations Board’s initiatives to re-classify large cohorts of workers and contractors as “employees” along with extending the reach of federal labor law in other ways. Those controversies between unions and employers have a pronounced federalism dimension. California wants a high minimum wage and other dubious entitlements and therefore demands them as a floor for the nation. Texas et al predictably resists California Uber Alles initiatives.

Fourth, the institutional forum matters. Outcomes differ when disputes are fought in Congress, administrative agencies, or courts. To be sure: Congress still exercises powers with profound federalism implications. An important example is the $10,000 cap on the state and local income tax deduction (“SALT”) enacted in the early days of the Trump Administration. That reform increased competitive pressures on high-tax states with large numbers of wealthy and high-income households. Almost surely, it hastened the exodus of high-income earners from those states. The SALT cap is scheduled to expire in 2025. The timing promises a major congressional brawl in the first year of the incoming administration.

Increasingly, however, the decisive federalism arena is a set of constitutionally unprovided-for actors—to wit, administrative agencies. As Yale Professor Abbe Gluck put it once, federalism’s contours were shaped by the Constitution, principally meaning the federal judiciary.^[4] Then, federalism came from Congress. State bargains were haggled out in bipartisan committees whose members often had more in common with one another than with the rest of their parties. Now, the federalism arena is dominated by the Executive, under statutes that delegate vast regulatory and fiscal powers to administrative agencies.

An administrative government is a presidential, White-House-directed government. Thus, the exercise of regulatory power and the distribution of trillions of federal funds will be shaped by partisan calculations. The calculus will not always benefit states that are governed by the sitting President’s party. Especially in election years, federal funds and regulatory forbearance tend to be directed disproportionately at swing states that are within reach of the President’s party. Substantive policy objectives, too, may prompt a political “misdirection” of federal funds or regulatory demands. In the early years of the ACA’s implementation, for example, the Obama Administration’s HHS officials trolled the country and offered ever-more generous financial and regulatory terms to red-state officials, to persuade the laggard states to participate in the ACA’s Medicaid expansion. Similarly, the panoply of “green” boondoggles authorized by the Biden Administration’s Inflation Reduction [sic] Act may wind up disproportionately in red states, most of which still allow industrial facilities to be permitted and built within reasonable time. That said: under present conditions, competitive federalism is itself a partisan issue. Given the Executive’s dominance over federalism relations, that is the arena where the contentions will be fought.

And that, in turn, entails that many federalism disputes will return to the institutional arena where the Founders chiefly housed them and where its contours were defined for much of our history:  the federal courts. Over the past three-plus decades, just about every significant federal regulatory initiative has been subject to judicial intervention, often at the instigation of coalitions formed by state Attorneys General. Federal immigration policies, student loans, Covid policies, and environmental and energy policies have all been challenged by one state bloc or another.^[5] And “bloc” is just the right word. Bipartisan litigation is a rarity. The state AG coalitions are grimly partisan, and they have remained remarkably stable.

With great regularity, the cases have ended up on the Supreme Court’s doorstep. Curiously, though, the Court has shown no comprehension of the federalism dynamics, nor for that matter its own central role. Understanding this perplexity requires a bit of political economy and historical context, and an excursion into the New Deal’s lasting, lamentable legacy.

Cartels at Every Level

Federalism requires robust constitutional safeguards, not simply against federal overreach but also and perhaps more so in federalism’s “horizontal,” state-to-state dimension. Any federal order will pose countless conflicts and coordination problems between and among states. There should be rules for such disputes.

Those rules can be supportive of state competition, or not. Most federal constitutions, for example, allocate tax revenues between the central government and the subordinate entities and then mandate a redistribution of funds from rich states to poor states. That is a constitutionally mandated cartel arrangement. Our unwritten New Deal Constitution enshrines a similar arrangement in the form of conditional funding statutes that put vast sums in the hands of state-level bureaucracies and are now unreformable. Our written Constitution, in contrast, contains nothing of the kind. Instead, it teems with pro-competitive federalism provisions.

• Competitive, “market-preserving federalism” requires free exit and entry between states. That’s the Privileges and Immunities Clause (Article IV Section 2— “the cornerstone of the union,” in Alexander Hamilton’s estimation).
• The Constitution contains additional (qualified or categorical) prohibitions against state imposts and duties, interstate compacts, and laws impairing the obligation of contract (Article I Section 10).
• States must give “full faith and credit” to each other’s records, proceedings, and public acts (Article IV Section 1).

From that general structure, one can readily infer another precept: equal states must have authority to govern their citizens and territory, not sister states’. The guiding principles are free entry and exit; non-discrimination; non-aggression; and comity.

Per Weingast, those conditions must be enforced “by the central government.” Which branch, though—the political branches, or the federal courts?

Legislative coordination will almost invariably proceed on terms European lawyers call “positive harmonization,” meaning a uniform or minimum standard across jurisdictions—distinct from neutral, market-preserving rules. Federal legislatures anywhere in the world are abysmal even at deciding what should belong to the central government and what should belong to the local governments. They are almost entirely incapable of deciding what belongs to which state—in other words, to make rules that delineate equal states’ jurisdictions vis-a-vis each other, on neutral, “market-preserving” terms. Any set of such rules will produce losers and winners, and the losers will demand protection or compensation—a “harmonizing” baseline for labor law, environmental standards, and countless other matters across the country.

Judicial coordination, in contrast, will invariably proceed on “negative,” market-preserving terms. The courts’ sheer lack of institutional capacity prevents them from conjuring up and enforcing harmonizing standards. They can, however, break down barriers to competition.

This holds across a wide variety of federal arrangements. In the 1960s and 1970s, for example, the European Union project was floundering. The Court of Justice of the European Union (CJEU, then still the ECJ) took it upon itself to produce an “ever closer union” by breaking down member-states’ protectionist barriers. For a time, the ECJ jurisprudence generated a much freer, more common, and competitive market. The interlude lasted for roughly a decade until the European Commission (EC) increased its capacity and produced what Margaret Thatcher, in a terrific put-down of EC President Jacques Delors, called “harmonization through the back Delors.”  

American history offers much the same lesson. Throughout the nineteenth century, the Supreme Court was the chief engine of economic integration. It broke down state trade barriers to interstate commerce. The Court’s principal tools were now-discredited doctrines: the dormant Commerce Clause, and federal general common law.

In the early decades of the twentieth century, though, Congress took over. In the New Deal era, the Supreme Court officially ceded the field. In pathbreaking decisions such as Wickard v. Filburn (1943) and Yakus v. United States (1944), the Court vastly expanded the powers of Congress and administrative agencies over the nation’s economy.  At the same time, decisions from Erie Railroad (1938) to International Shoe (1943) vastly expanded the states’ powers to govern transactions in interstate commerce without fear of federal judicial reprobation. The constitutional barriers were flattened, and the road was paved for unchecked cartel federalism of conditional funding programs and federal minimum standards.

For some three decades, this worked tolerably well. As already noted, federalism compromises were haggled out in Congress, by bipartisan committees that in turn closely supervised “their” executive agencies. Under their watchful eyes, the Federal Communications Commission administered the “Ma Bell” monopoly over long-distance calls, with a proviso to dole out some of the proceeds to local carriers. Congressman Jamie Whitten’s Agriculture Committee ensured that the Ag Department would cast a benign glance, if any, at state-sponsored cartels from Florida’s sugar producers to California’s Sunkist. Federal transfer payments greased some of those deals, but those payments remained limited (by modern standards) and chiefly funded infrastructure investments, not consumption.

None of this survived the Great Society, the vast expansion of the regulatory state, the inexorable rise of executive, and presidential government, and the partisan polarization of American politics at all levels. The bipartisan committees that once engineered federalism bargains are no more. Many of the cartels have broken, mostly for good. Ma Bell no longer rings except for octogenarians and disco fans. The “Detroit bargain”—domestic automakers’ protections for unions and a de facto exclusion of black labor in exchange for tariffs—is no more.

That form of Congressional mediation among states has been supplanted by various “green” subsidies on the supply side; competition between union and right-to-work states in the production process; and EV mandates on the consumption side. In short, the central “competition versus cartel” question that the New Deal had sought to settle has become fiercely contested between stable blocs of partisan states.

In that environment, one might think (or at any rate hope) that the judiciary would rethink a federalism order inherited from the New Deal, and instead re-assert constitutionally grounded rules to dampen sectarian litigiousness and to keep the states out of each other’s hair. However, the Court has failed to supply a single rule of that kind. In important respects, it has made matters worse. Federalism’s fate largely hangs on the Justices’ escape from self-imposed dogmatism.

Against Perpetual Peace (Among the States): The Supreme Court’s Federalism, So-Called

Consider two landmark decisions of the Court’s 2022-2023 Term. In National Pork Producers v. Ross, a splintered majority upheld a state statute prohibiting the sale of pork products in California unless the animals were raised under conditions deemed sufficiently humane by the state.  In the second case, Mallory v. Norfolk Southern, a narrow majority held that any corporation that registers to do business in a state thereby consents to the jurisdiction of that state’s courts even if neither the plaintiff, nor the defendant, nor for that matter the injury, had anything else to do with the state. In the case at bar, a Virginia railroad worker with temporary residence in Ohio sued a Virginia company over injuries sustained in Virginia. Naturally, he sued in Pennsylvania, where the trial lawyers reign and Norfolk Southern is perforce registered to do business.

Both decisions give carte blanche to states that contrive to govern actors and conduct in other states. The Pork Producers theory contends that any state can bar the import of goods from any state with supposedly odious production conditions: a state with or without right-to-work laws, or with or without medical leave for, say, late-term abortions. According to Mallory, any state may establish jurisdiction over any enterprise registered to do business in the state—that is to say, all of them. Both cases permit and incentivize states to “compete” on the least plausible margin: mutual aggression.

Justice Neil Gorsuch wrote both opinions, with an unwarranted snark, a proudly pronounced indifference to practical consequences, and the perennial refrain: If the pork people or the railroad barons don’t like it, they should go to Congress.

Pork Producers and Mallory directly address horizontal federalism questions (respectively, the dormant Commerce Clause and the scope of personal jurisdiction. Very similar questions arise in regulatory and administrative law cases. Administrative law scholars have designated their field “the new federalism,” because practically any comprehensive federal regulatory scheme will have massive distributive consequences between and among states. Often, regulators and state officials know who the winners and losers will be. Again, the Supreme Court’s opinions and decisions show no comprehension of the federalism stakes. The Court bears a great responsibility for helping fuel a “federalism” of mutual state aggression. Energy and environmental cases provide proof.

Energy in the Executive, and the Court

Energy and environmental cases constitute a disproportionate share of multistate litigation. An overwhelming number of those cases arise under and over the Clean Air Act (CAA); of those, the great majority have to do with the regulation of greenhouse gases.

The proximate cause of these contentions is a momentous 2007 decision captioned Massachusetts v. EPA. A 5-4 majority of Justices held that (1) the Commonwealth had “standing” to sue EPA over its failure to address greenhouse gas emissions from automobiles. States, you see, deserve “special solicitude in the standing analysis,” providing them with a right to sue in cases where no private party would have access to a court. The Court held that (2) greenhouse gases could and probably had to be regulated as “pollutants” under the “capacious” definition of the Clean Air Act (CAA).

En route, the majority deployed supposedly state-friendly rhetoric. Poor little Massachusetts could not do anything meaningful about climate change; the least it could expect was for the federal EPA to do its duty. This was and remains a complete and probably willful misunderstanding of federalism’s constitutional architecture and political economy.

A dozen-plus blue states supported Massachusetts. A roughly equal number of states, however, protested the initiative. Those, naturally, were red states, almost all with a large domestic fossil fuel industry and low energy prices. Despite Massachusetts’ artful pleading, the opposing states saw the initiative for what it was: a full-scale attack on the national energy industry and, consequently, producer states’ essential competitive advantage. Massachusetts v. EPA mentioned the inter-state aggression inherent in Massachusetts’ attempt to rope in a federal agency as its handmaid—the actual federalism issue in the case—with not a single word.

On a benign interpretation, the Massachusetts v. EPA Court attempted to cram the climate change question into Congress. (No one at the time thought greenhouse gases could effectively be regulated under a CAA built for conventional pollutants and localized pollution.) However, after the Obama Administration torpedoed a compromise cap-and-trade bill then rattling around in Congress, the carbon wars, unleashed by Massachusetts v. EPA, played out in federal agencies and the courts. The state coalitions have remained stable over the intervening 17 years (and counting). The states continue to litigate every EPA rulemaking on the issue.

Note well the competitive federalism aspects of the carbon wars unleashed by Massachusetts v. EPA. From any realistic environmental perspective, the agitation seems hard to comprehend. Even EPA’s most ambitious initiatives, from various permutations of the “Green Power Plan” to EV mandates, will do practically nothing to stem wildfires or rising sea levels—not a century hence, and surely not here and now.

Elected politicians (including state attorneys general) don’t usually have long time horizons. They do care about near-term calculable payoffs. Political elites in California, New York, or Massachusetts face a high internal demand for environmental amenities, or at any rate, belief satisfaction. Hence come fracking bans, state EV mandates, and other interventions that drive up the cost of energy. Such energy prohibitions immediately concern consumers and those producers who require reliable energy, from data processors to smelters. The only plausible way for “net zero” states to neutralize the attendant competitive and comparative advantages for “drill, baby, drill” states is to raise the price of energy in those states. Antitrust lawyers call that behavior “raising rivals’ costs.” The most viable way of achieving that end is to enlist the support of federal regulatory agencies, from the EPA to the Department of Energy to Federal Energy Regulatory Commission and National Highway Transportation Safety Administration. Et voila: the blue states’ relentless crusade for federally sponsored energy cartels, and the red states’ fierce insistence on protecting their considerable advantages on this vital margin. 

Over the years, the Supreme Court has grudgingly corrected course, but only up to a point. “Special solicitude” state standing is probably gone, and some of EPA’s more adventurous maneuvers to engineer a zero-carbon world, or perhaps to make the planet spin westward for a change, have fallen victim to restrictive judicial doctrines. None of that, though, provides much assurance. Once the Supreme Court has declared some interest group theater open, it rarely rings down the curtain. And the play is no fun—not for regulated enterprises who must fear that their long-term investments will be turned into stranded assets by the next administration, and not for production-oriented states.

Conclusion

We face a mixed picture for the recovery of competitive federalism. A rock-solid bloc of pro-competitive states provides the foundation, and a comparison point against the bloated model of hyper-spending and over-regulated states wanting to impose cartel federalism nationwide. Yet, transfer programs will continue to grow; any meaningful reform must await a rip-roaring debt crisis. Competitive federalism’s prospects in the regulatory arena depend now, as they have for some two decades, on the outcome of the next presidential election, and the one after that.

Under any scenario, the Supreme Court will play a prominent role in the (competitive) federalism arena. We can charitably describe the Court’s record as dismaying.  On the authority of Pork Producers and Mallory, each state has full authority to exercise universal legislative and judicial jurisdiction over all other states. No obstacles—not even explicit constitutional provisions—stand in the way. That will have to change.

The sensible perspective—and a prompt to suitably inclined political actors and legal entrepreneurs—is to heed Monty Python’s sage advice: Always look on the bright side of life. There is no way but up, and some political actors possess the incentives and the capability to pursue a competitive federalism agenda, with a fair chance of making progress.

By way of timely comparison, the seemingly impregnable “administrative state” had a dismal year in the Court’s just-concluded Term. The Chevron mandate to defer to agencies ended, as did agencies’ authority to adjudicate disputes over private rights. Much as the Supreme Court commentariat chalks this up to judicial appointments, it was foremost a product of a long-term intellectual rethinking among academics, think tanks, policy advocates, and litigators—non-profit law firms, state attorneys general, and occasionally commercial lawyers—who took up those cudgels and, over time, learned how to deploy them.

It may seem odd that so much of federalism’s future may hang on a bunch of lawyers and judges. Then again, America’s federalism, more than any other country’s, has always been a lawyerly province, because we live under a constitution that makes it so. It remains for those jurists to discern contemporary federalism’s favorable background conditions, and to litigate and rule accordingly.

References

[1] Barry Weingast, “The Economic Role of Political Institutions: Market-Preserving Federalism and Economic Development,” The Journal of Law, Economics, and Organization, Volume 11, Issue 1, April 1995, Pages 1–31.

[2] See the US News & World Report ranks for state competitiveness here Rankings: Economy – States With the Best Economies (usnews.com); See also Will Ruger and Jason Sorens’ Freedom in the 50 States: An Index of Economic and Personal Freedom Freedom in the 50 States 2023 | Cato Institute; Climate rankings here https://taxfoundation.org/research/all/state/2024-state-business-tax-climate-index/; housing affordability here https://www.nar.realtor/blogs/economists-outlook/state-to-state-migration-trends-in-2022; and religious liberty here https://lawliberty.org/religious-freedom-in-the-states/?mc_cid=e4f7d717f3&mc_eid=fabd919e4b

[3] See this assessment for understanding how competitive federalism separates winners and losers: https://wirepoints.org/new-2020-irs-migration-data-reveals-which-states-won-and-lost-the-competition-for-people-and-their-wealth-a-wirepoints-50-state-survey/

[4] Abbe R.  Gluck, “Our National Federalism,” Yale Law Journal, Vol. 123, No. 6, April 2014.

[5] Marquette Professor Paul Nolette’s website provides a searchable database of multi-state lawsuits against the federal government, all the way back to the Reagan Administration.

Download the Explainer

In May 1938, or the ninth year of the Great Depression, a minister in Columbia County, Pennsylvania cast about for a sermon topic. In the past the minister, C.R. Ness, had spoken to the members of North Berwick Evangelical Church on a variety of themes: Paul’s Letter to the Philippians, the healing power of Jesus. He counseled families on their private lives, selecting topics such as “The Devotional Life of Men,” or “Traps for Young People.”  This time, however, Reverend Ness chose the Book of Job. 

And small wonder. By 1938, Columbia County felt like Job. The Book opens with Job at his prime, so righteous and prosperous he is known as “The Greatest Man of the East.” But God allows the Devil to play with Job and test him with trial upon trial. One after another, Job’s fortune, his family, his health are taken away. Since the beginning of the decade, Columbia County had endured its own series of trials –joblessness, shortages of cash, mortgage foreclosures, meals of only stewed tomatoes, or no meals at all. The siege was gradually wearing away citizens’ confidence in their own future. 

“Why Do the Godly Suffer?,” Ness asked his flock. Was God testing Columbia County’s faith?  “This will be a very timely series,” commented the editors of the local paper, the Berwick Enterprise. Job’s ancient travail, and his sustained faith, would console people now, “in these days of depression.”

Nor were Ness’s parishioners alone in their sense of desperation. In nearby Allentown, cash-short and underemployed citizens had, two years before, marched to the state capital and occupied the Senate gallery. Philadelphia, also nearby, had once been known as The Workshop of the World. No longer. In the early years of the Depression, hungry families revolted. Now two in ten still sought work.

Such troubles beset every region, and with such severity that Americans everywhere felt a sense of biblical retribution. Drought had plagued Western states for many seasons now, beggaring farmers. Black walls of dust, some a mile high, descended on farm towns, destroying crops and farms, and recalling the punishments in Job: “a great wind came from the wilderness, and smote the four corners of the house.” It was the Book of Exodus that crossed the mind of a columnist when another plague, grasshoppers, covered fields, devouring harvests. “Grasshoppers are locusts,” as in the plagues suffered by Pharaoh, wrote the columnist. The grasshoppers’ arrival was “the American equivalent of the Biblical plague that smote Egypt.”¹  Later, the folksinger Woody Guthrie would recall that many believed they were suffering as the Egyptians had. “We watched the dust storm coming up like the Red Sea.”²

In the spring of 1938, when Ness sermonized on Job, unemployment in the building trades averaged more than 40%. Nationwide, one in five workers found themselves still jobless— or jobless yet again. It seemed that God was indeed smiting the land. Afterward, in the 1940s or 1950s, recalling their benumbed state, many Americans still treated the decade-long downturn as a divine test, or, more often, a great mystery, better left unexplored.

The eight mostly prosperous decades that have intervened since have only deepened the aura of mystery around the Depression. That is partly because the facts about the Depression lie outside the range of our experience. Today even the thought of unemployment greater than 10 percent spooks us; joblessness stayed stubbornly above the 10 percent line throughout the 1930s. Today we consider a rising stock market our national birthright. After the initial crash from a market high of 381 in 1929, the market stayed low for more than a generation, attaining its 1929 level only in the 1950s.

Further befogging the record have been those most equipped to illuminate it: scholars. Largely out of fealty to the President who led us during the Depression period, Franklin Roosevelt, many historians have been unwilling to probe the effect of Roosevelt’s multi-year recovery program, the New Deal. Economists, especially economics professors, will readily blame the rough post-crash period on the Federal Reserve’s failure to supply sufficient liquidity – money. 

But with a few exceptions, the economics trade neglects the obvious next question.  What about the years that followed? Why did recovery not return after five years, or after seven? It is not, after all, a deflation shock, however sharp, that converted the initial depression, lower case, into a Great Depression, with capital letters. It was the duration that made the Depression great. Whether monetarist or Keynesian, economists respond to commonsense queries about the later years with a single line: “That is complicated.” It is as if a sign has been placed over the period to intimidate the curious: “Here Be Dragons.” 

Still, the duration of the Depression matters. These days, politicians routinely invoke the New Deal as a model of inspiration, without delving into the evidence of its effect. They do so even though the New Deal never, not even eight years in, met Roosevelt’s primary goal to “put America back to work.”

In reality, recovery’s absence in the 1930s is not so mysterious. Natural disasters contributed to the plight of the farms. The drought of the 1930s was unusually severe. The summers were unusually hot. While the “mighty wind” of the Dust Bowl resulted from a man-made eco-disaster: the overplowing of tens of thousands of acres. 

The absence of a general recovery also can be explained. Recoveries, after all, are like people. They make choices. In each year of the 1930s, the recovery surveyed the economic landscape — and opted to stay away a while longer. Simple facts go a good way towards explaining why each year—and for slightly different reasons — the recovery absented itself. The same facts reveal the dangers of faith — not religious faith, but the political kind.

This story starts with the market crashes before 1929. These occurred with regularity as the Nineteenth Century closed and into the Twentieth. In those years, our laws did not task the federal government with managing the economy. When the economy stumbled, the economy had to right itself. The private sector, the belief was, would and should take the lead. Congress limited the federal government’s assignment to budget discipline that would keep the currency stable. Later, Congress created a new institution to aid the management of money, the Federal Reserve. Most relief work, however, was the work of the states. 

In such a situation, the market determines how far prices fall.  Even the price of labor. Nor is this necessarily evil. When businesses are less profitable, employers have fewer funds for wages. The obvious move for employers is to reduce wages. Most workers prefer lower pay to losing their jobs altogether.

In the early 1920s, as James Grant has shown, Washington and the young Fed addressed a severe downturn by halving federal spending and raising interest rates.  These moves would today be considered counterintuitive, to put it politely. In the same period, a new president, Warren Harding, sent a signal: there was no need for grand reform from the government, despite the downturn. Grand reforms might impede recovery; what business needed was the assurance that giant changes from the government would not be forthcoming. “No altered system will work a miracle,” said Harding. “Any wild experiment will only add to the confusion. Our best assurance lies in efficient administration of our proven system.”  Assailing the heavy burden of taxes postwar, Harding, once elected, made it clear to the public that he intended to reduce taxes wherever and whenever he could. Fewer burdens would free the private sector to pull the country forward.

 It did. Indeed, the economy recovered so rapidly that the early 1920s downturn is today known as The Forgotten Depression. Stock prices rose dramatically, more than tripling over the decade. Jobs materialized, and most importantly, the standard of living increased. Productivity gains meant the old six-day work week could drop to five days. That gave America a gift we still enjoy: Saturday. Perhaps the best symbol of the general 1920s acceleration came from Henry Ford’s production line. At the beginning of the decade the standard car, the Model T, could reach the impressive speed of 40 miles per hour. But the Model A, sold from 1927, moved at 55 or 60 miles per hour. 

When the Dow Jones Industrial Average accelerated, moving up by more than half within the course of a year, citizens of course expected some kind of market crash. The fall of 1929 brought that crash. Beyond inflated share prices, other factors, well documented by the extensive studies of the early years, exacerbated the subsequent downturn: the young Fed’s missteps, an international crisis, the collapse of vulnerable small banks across the land. Congress passed, and President Herbert Hoover went along with, a damaging tariff, Smoot-Hawley. Hoover’s tolerance of tariffs is particularly regrettable since Hoover knew better: his insights on the costs of the perverse policies at Versailles were so trenchant they won praise from even that most judgmental of colleagues, John Maynard Keynes. The 1929 plunge of the Dow was dramatic, but from November, the market began to move up smartly, from a low of 199 to 294 in April of 1930. The three preceding downturns had averaged 15 months in duration.³ Therefore citizens reasoned, just as they might today: “All things being equal, the recovery will come soon.”

But this time, all things were not equal. For Hoover, unlike Harding or his successor Calvin Coolidge, was inclined to action. Indeed, Hoover’s very reputation as a rescuer was what had brought this nonpolitician, engineer, and investor to the Presidency. Hoover had made his name in World War I, by organizing and seeing through a program to feed starving Belgians behind enemy lines. Further fame had come to Hoover when he directed a program to feed revolutionary Russia. Now Hoover ached to mount the most glorious rescue of all, the rescue of the American economy.

Hoover therefore turned to measures his “do less” predecessors would have eschewed. Rather than allowing the financial markets to bottom out, Hoover tried to stop their drop, personally, by railing against short sellers, whom he characterized pejoratively as those who conduct “raids on our markets with purpose to profit.” Hoover loaded burdens on business with a large tax hike, raising the top income tax rate to 63% from 25%. Even Hoover’s smaller interventions today look perverse: At a time when transactions were difficult, Hoover threw sand in the gears by introducing a tax on checks. As the President’s machinations proceeded, the banking crisis deepened, and the Dow plunged again.

Not content with meddling in markets, Hoover likewise tried to manage prices in another new area: labor. The economy wasn’t producing enough. Under a then-novel theory, higher wages would prompt recovery because they would invigorate workers and enable workers to spend more, stimulating the economy. Production, Hoover said, “depends upon a widening range of consumption only to be obtained from other purchasing power of high real wages.”  As Lee Ohanian of UCLA has noted, through a combination of suasion and brute pressure, Hoover drove employers to raise the average real manufacturing wage by 10 percent^.4

In 1931, Hoover and Congress codified their wage drive with passage of the Davis-Bacon Act. The official purpose of Davis-Bacon was to boost the economy through federal spending on construction projects in the states. But the law also mandated that builders pay “prevailing wages,” which translated to higher wages, for Washington and unions had a hand in setting levels.  Strapped firms had to comply if they wanted the contracts –-but could hardly afford the wages. So the firms cut worker hours — dramatically—hired fewer workers or rehired more slowly. Bank failures did their damage. So did scarce credit. Still, the pressure on wages matters more than the history books convey. By 1932 joblessness hit 25 percent. The same year, the Dow Jones Industrial Average plunged further, dropping to 41.2 in July 1932, or almost 90 percent off its 1929 high. 

Such stunning numbers—yet more stunning because they came years into the downturn—struck many Americans dumb. Others thought to reverse troubles through protest. In 1932, some 25,000 veterans converged on Washington to demand the government advance their “bonus,” a pension package set to be paid in 1945. Congress deadlocked, and for months the vets camped off Capitol Hill. Eventually, the President sent federal troops to clear the camps, torching their makeshift shelters. One of the presidential candidates that year, Franklin Roosevelt of New York, occasionally made conservative speeches, vowing to cut federal spending.  Roosevelt likewise promised to help the worker, whom he characterized as “the forgotten man at the bottom of the economic pyramid.” But in other speeches, Roosevelt, like a politician from our own day, tried out class war rhetoric, assailing “princes of property.” 

Though Roosevelt hardly made clear which policies he would promulgate, voters in 1932 opted for change and elected him. Over the winter of 1932-1933 rounds of bank failures amped up national anxiety. Like Hoover before him, the new president rejected Harding’s “no change” rule. Indeed, Roosevelt promised the opposite: “bold, persistent experimentation,” action for action’s sake, so much action that Roosevelt made Hoover look tame.

By the spring of 1933, the normally can-do American public was ready to go along with new interventions. Americans went along with, even savored, Roosevelt’s growing habit of scapegoating business. They also accepted the notion that Roosevelt’s experts, a clutch of professors quickly nicknamed the Brains Trust, knew better than they.  Roosevelt was presented as a kind of political pastor, and Americans warmed to that, too. Today presidents who speak through new media gain special popularity: think of Donald Trump on X. Then, a new medium also worked magic: the radio. As Americans sat in their living rooms, Roosevelt’s disembodied voice reassured them: “The only thing we have to fear is fear, itself.” Soon Roosevelt was delivering routine talks to the American population, his Fireside Chats. “Even if what he does is wrong, they are with him,” commented the humorist Will Rogers of the electorate and Roosevelt at inauguration time. “If he burned down the Capitol we would cheer and say, “Well we at least got a fire started, anyhow.”

The dire situation offered Roosevelt a license available to none of his predecessors, at least not in peacetime: the license to direct the entire economy, from monetary policy to Wall Street, industry, agriculture, and even then-new industries, such as utilities. With his New Deal, the President claimed that license. In the famous 100 Days, his first legislative drive, Roosevelt established dozens of large programs to oversee or alter virtually every sector of the economy. 

The National Recovery Administration, tasked with managing the industry, became the centerpiece of the New Deal. It was no accident the President selected a brigadier general, Hugh Johnson, to lead the National Recovery Administration (NRA), and a blue eagle as the NRA’s symbol. The NRA was to be a kind of military campaign, demanding suspension of disbelief. “Do not trifle with that bird,” warned Johnson.

Under statutes bearing visible traces of Benito Mussolini’s syndicalism, the NRA assigned large firms and industry leaders, to draft codes to promote efficiency in their markets. These codes spelled out in magnificent detail right down to what price a cleaner might charge to press pants, or which chicken a butcher must kill first — every aspect of daily business. One theory the NRA applied was a cartoon version of Henry Ford’s assembly line. Consumer choice at the counter slowed down commerce, the theory ran, and, the code’s authors maintained, slowed recovery. Fewer choices would accelerate the rate of transactions. Today, businesses make their money precisely because they offer consumers options. Starbucks comes to mind. Under the New Deal, such choice was suppressed. 

Another principle embedded in the NRA was that wages and prices must stay high or move higher. All codes, as Lee Ohanian reports, set a minimum wage for lower-skilled workers, and most set wages for
higher-skilled workers as well.⁵ Thus did the New Deal scale Hoover’s higher-wage policy. That smaller businesses might be disadvantaged by codes crafted by industry giants, few dared discuss. 

One who did was a tiremaker from Newark, Ohio, Carl Pharis. Pharis detailed his situation in a letter to Senator William Borah. Pharis Tire and Rubber was a small firm, which, through great discipline, held market share by producing “the best possible rubber tire” and selling at “the lowest price consistent with a modest but safe profit.”  The NRA code imposed a price floor on tires that forced the prices of Pharis tires to the same levels as the tire giants. Under this system, even a firm loyal to the New Deal like Pharis’s would fail. “We are surely on our way to ruin,” Pharis told Borah. 

The absurdity of these methods went overlooked, however, in part because they were put forth by great minds. This, even though the Brains Trusters displayed little awareness of how a business such as Pharis Tire and Rubber operated on the ground, or what roles consumers and sellers, individuals, might play in the marketplace. The most perspicacious of Roosevelt’s advisors, Raymond Moley, captured the myopic credentialism of his fellow Brain Truster, Felix Frankfurter:

The problems of economic life were [to Frankfurter] matters to be settled in a law office, a court room, or around a labor-management bargaining table “The government was the protagonist. Its agents were its lawyers and commissioners. The antagonists were big corporate lawyers. In the background were misty principals whom Frankfurter never really knew at first hand…These background figures were owners of the corporations, managers, workers and consumers.”

Those who dared to violate NRA rules confronted criminal charges and jail time: the NRA’s fathers had given their statute teeth. One company the Justice Department indicted was a small wholesale kosher butcher firm in Brooklyn, New York, Schechter Brothers. A third of their industry had already failed. To survive Schechter Poultry kept wages lower than the poultry code mandated. Paying wages that were too low was one of the many charges against them brought by the Justice Department. In the Schechters’ culture customers liked to pick their own chicken, as they had in the old live poultry markets of Europe. Choice was the Schechters’ market advantage over their new antagonist, the supermarkets. The poultry code held that the butchers must hand the buyer the first chicken that came into their hands. The Schechters’ feared, legitimately enough, that denying their buyers this option would lose them business—and allowed customers to continue choosing. That emerged as another count against them.

To win in public or in court, the Roosevelt Administration routinely resorted to intellectual bullying. In the Schechter case a federal prosecutor, Walter Lyman Rice, listened as one chicken dealer, named Louis Spatz, explained that he liked to set prices low to win customers, “same as any other business.”  This common-sense the prosecution treated as primitive ignorance. An exchange between Rice, a graduate of Harvard Law, on the one hand, and Spatz, an immigrant with little English, on the other, captures the confidence with which the New Deal pulled rank. 

Rice: You are not an expert. 

Spatz: I am experienced, but not an expert…

Rice: You have not studied agricultural economics….

Rice: Or any sort of economics?

Prosecution: What is your education? 

Spatz: None, very little.

The Supreme Court put the bully in its place. In its 1935 opinion on Schechter, the justices unanimously struck down the entire NRA. The High Court was even confident enough to pun about their decision: the NRA must go, “bone and sinew,” as one justice put it. But in the meantime, the Administration tugged and shoved at the demand curve for other industries. Hunger was still common across the land. Yet the NRA’s corollary agency in agriculture, the Agricultural Adjustment Administration both forced and paid farmers to destroy their crops, again on the principle that less product would drive up prices. No potato farmer could produce more than five bushels of potatoes without a special permit. “Despite the millions of times those cabalistic letters have appeared in print,” wrote a columnist in 1935 of the AA, “not all understand fully what they mean.” In Maine, it is said, that some authorities even required that farmers pour poisonous blue dye on the extra potatoes, to ensure they were unsalable and inedible. In Texas, mules long trained to step over delicate cotton rows were now driven over those plants to destroy them. The mules balked, as the papers reported.⁶ 

Farmers hardly saw the logic in the crop reduction scheme, but cash short as they were, they found themselves reluctant to turn down the generous payments. In Texas, where Lyndon Johnson worked for the New Deal, farmers in 1934 received some $50 million for complying with the production cutback. 

Consumers were franker. After six million piglets were slaughtered in the name of nudging up prices, a disconcerted housewife wrote to the Agriculture Secretary, Henry Wallace: “It just makes me sick all over to think how the government has killed millions of millions of little pigs.” As it happened the price increase that had followed was too violent, raising “pork prices until today we poor people cannot even look at a piece of bacon.” 

The extent to which Roosevelt relished disruptive experiments becomes clear in accounts of Roosevelt’s efforts to deflate the currency. After committing to the gold standard, Roosevelt abruptly reversed course and, surprising even his advisors, announced in April 1933 that the U.S. was leaving the standard. The move, an effective surprise devaluation, rocked other nations, many likewise enduring downturns. American central bankers dispatched to a London Conference a few weeks later now considered their main work restoring comity among rattled foreign governments. But Roosevelt undermined his negotiators by lobbing another bomb, calling plans for stabilization a “specious fallacy.”  Returning home, George Harrison of the New York Fed told others “He felt as if he had been kicked in the face by a mule.”⁷

When cutting the dollar from gold did not keep commodity prices at the levels he sought, Roosevelt undertook to do so himself. His method was direct purchases of gold on the open market. Even for an institution as large as the United States government, this was a puzzling move equivalent of trying to raise the level of the ocean by dropping in water with a thimble. One by one, Roosevelt drove from the Administration those alert to his fallacies. “We are entering on waters for which I have no charts,” a financial advisor to Roosevelt, James Warburg, said in his resignation letter. As Liaquat Ahamed reports in Lords of Finance, Britain’s central banker, Montagu Norman, reacted by saying “This is the most terrible thing that has happened.” Even the truest of Roosevelt loyalists, Henry Morgenthau, found himself confused by the fashion —from his bed, in the morning, after breakfast —in which Roosevelt set his gold purchase prices.

One morning, as Morgenthau recorded in his diary, FDR ordered the gold price up 21 cents. Why 21, Morgenthau asked. Because 21 was 3 x 7, Roosevelt replied, and three was a lucky number. “If anybody really knew how we set the gold price,” Morgenthau recorded, “they really would be frightened.” 

Markets were. The Dow Jones Industrial Average slipped down again. This is not to say that the private sector gave up in 1993 and 1934. In the spirit of a then- popular children’s book, The Little Engine That Could, companies responded to their obstacles by simply pushing harder. As Alexander Field has shown in his book A Great Leap Forward, engineers and scientists at private companies strained mightily and produced innovations that enabled companies to do more with less: diesel replacing the steam engine in railroading, for example.⁸ A road network planned by the states in the 1920s was in the process of construction, making it easier for firms to ship goods around the country. But these efforts came under duress, despite the obstacles of new regulations and random interventions. 

In every downturn, certain industries continue to grow and have the capacity to serve as a locomotive of recovery: the energy sector after the financial crisis of 2008 is a good example. The industry that had that magic potential in the 1930s was electricity. In each year of the Depression—except 1933—American households used more electricity than before.⁹ Utilities such as Commonwealth and Southern were commencing the expensive work of wiring even hard-to-reach rural areas. 

Now the federal government entered this market. Its start was the establishment of the Tennessee Valley Authority, or TVA, which aimed to serve the South through hydropower. Soon after came the Rural Electrification Administration, or REA, to fund the wiring of farms. At first, power companies told themselves and shareholders they could work with the government. REA officials met with companies, who assumed the funding would subsidize their work laying lines. The press interpreted these events with similar optimism: “As 95% of the electric industry in this country is in the hands of private operating companies,” wrote the New York Times, “the administration’s public funds will be dispensed in that proportion.”¹⁰ Instead, the REA bypassed the companies and funded local cooperatives, new and willing to follow REA’s direction. For a while, competition ensued; when the REA’s co-ops threw up their own lines on a rural road, a private company quickly laid its own, to mark its own plans. New Dealers smeared these efforts as “spite lines.”¹¹ Over time, it became clear that the REA and TVA together were not helping companies like Commonwealth and Southern. Rather, they were squeezing them out of the market in a pincer action. 

After the pincers came the hammer. The Administration saw through the passage of a law governing the capital-intensive utilities industry: the 1935 Public Utilities Holding Company Act, or PUHCA. The private companies labeled the law “a death sentence” because PUHCA so constrained their ability to raise capital that they genuinely could not compete. 

Even those industries not scapegoated suffered under the New Deal tax policy. Though Hoover had raised taxes, Roosevelt boosted them yet again, specifically targeting those who were most likely to create jobs through investment: top earners. On a theory we would call Keynesian — though John Maynard Keynes was just beginning to elucidate it—the Administration wanted businesses to overcome their prudent tendency to save in hard times and distribute their profits instantly to stimulate the economy. In 1936, Roosevelt set out to force businesses to do so by seeing through the passage of an undistributed profits tax of 27%. The levy came on top of the (also increased) corporate income tax. 

The New Dealers practiced an early iteration of what we call lawfare, selecting and prosecuting political opponents and stars of industry for tax evasion. The Administration picked the symbol of 1920s prosperity, the former Treasury Secretary Andrew Mellon, for one show trial. The initial decision to order an audit had been made by Treasury Secretary Morgenthau over the protest of the Bureau of Internal Revenue intelligence unit head Elmer Irey, whose review of Mellon’s returns had not alarmed him. His own experience also probably told him that one of the authors of the tax code, Mellon, was unlikely to claim anything other than legal deductions.

But President Roosevelt made it clear he would not honor the American law’s traditional distinction between tax avoidance – legal deductions, say – and tax evasion—illegal moves. Over time it emerged that politics, not logic, drove the officials: ‘You can’t be too tough in this trial to suit me,” Morgenthau told the prosecutor, the future Supreme Court justice Robert Jackson. “I consider that Mr. Mellon is not on trial but Democracy and the privileged rich and I want to see who will win.”¹² Mellon was largely exonerated, but only after years: he spent his eightieth birthday in a Manhattan courtroom. By the end, even liberal columnists such as Walter Lippmann reckoned the Mellon prosecution was a
“profound injustice.” 

Some businesses dared to pipe up, suggesting that higher tax rates created a moral hazard of their own. “When you outrage a citizen’s sense of equity,” warned a spokesman for the Ford Motor Company, “you school him in evasion.”  A Harvard friend of the President’s, Alexander Forbes, wrote later to the President to argue that those causes for which rich men took tax deductions, charities such as university research, often did better than the federal jobs programs the Administration now funded. These latter were mere temporary jobs, “boondoggle.” Roosevelt replied by impugning Forbes’ morals; in a national emergency, the righteous move was to pay even those taxes not required by the tax code. Roosevelt, now well at home in his role as minister to the national flock, did not hesitate to chide or shame. To a lawyer who asked about the courts’ treatment of tax avoidance, FDR would write in 1937: “Ask yourself what Christ would say about the American Bar and Bench were he to return today.”¹³ 

The seasons passed and the New Deal created tens of thousands of jobs through programs such as the Works Progress Administration, or the Public Works Administration. Those who claimed one of these jobs, or worked on the Civilian Conservation Corps, clearing forest, say, were truly glad of the employment. Even tens of thousands of make-work jobs, and even the billions spent on these posts did not bring joblessness down to what Americans considered tenable levels. As the election year 1936 dawned, unemployment remained close to two in ten. 

Yet that year, the nation gave President Roosevelt a second term in a resounding landslide. Only two states, Vermont and Maine, declined to support the man and the New Deal. Though the landslide still warrants more study, some explanations for the victory are evident. Four years in, Roosevelt had indeed become something like a national father. Alf Landon, the Republican candidate, chose to offer the electorate a version of New Deal Lite, which gained him no votes.

Now more thoroughly intimidated—the duration was beginning to feel permanent – voters supported Roosevelt as passengers support a captain in a storm: it is too late for another choice.

Yet a third reason, doubtless the strongest, was Roosevelt’s exquisite preparation for the 1936 presidential contest. Through 1935 and 1936, as authors such as Burton Folsom have shown, the New Dealers found a way to please, support, and fund nearly every large bloc that mattered to the election’s outcome. In dark times, and no longer on the land, seniors in cities and towns sought a pension. Social Security became the law of the land in 1935. Labor unions sought laws that would give them more muscle to pressure firms to accept unionization. The 1935 Wagner Act gave them muscle and then some, enough to force unionization on a resistant giant like Henry Ford. For farmers, likewise, there was a gift: the subsidies flowed. 

In swing states, as Folsom shows, New Deal outlays increased dramatically. And for governors and mayors — always influential in presidential contents— millions came for construction projects, sparing the states and towns the difficult task of raising taxes. Many elections are bought, but the 1936 election qualifies as the boughtest. The states, the commentator Raymond Clapper wrote in the Washington Post, now realized that it was important “to keep on the good side of Santa Claus.” To voters still struggling, however, this Santa Claus seemed like a necessary miracle. 

Still, such unprecedented and cynical electioneering cost the country troubles that we continued to endure well into prosperity, and even today.  Through its outlays, the government was not only squeezing out business but also squeezing out what remained of Tocqueville’s local America. The statistics tell the story: the twelve months of 1936 were the first peacetime year in American history that federal spending outpaced state and local spending. The following year, federal spending fell back – but only for that year. The federal government has dominated states ever since.

There was another cost in the political culture, one we likewise feel. Sensing the inevitability of victory, Roosevelt’s opponents took to sliming the Administration. Members of an opposing group, the Liberty League, pointed to the record, but also assailed Roosevelt personally, more unusual then than now. This venture into the mud did not profit those opponents. Roosevelt responded with not just mud but a kind of mudslide, assailing “business and financial monopoly.” In tones that would sound unstatesmanlike even in our own era of trash talk, he told Americans of his opponents that “I welcome their hatred.” 

“I should like to have it said of my first administration,” the campaigning president said in the same speech, delivered just days before the election, “that in it these forces of selfishness and lust for power met their match. I should like to have it said of my second administration that in it these forces met their master.” Some voters relished the prospect of all-out class war; many more, one suspects, chose not to consider the consequences of such a declaration. 

But businesses did consider them. After the election, when Roosevelt made good on his promises, launching a vigorous antitrust campaign, effectively the opposite policy of the early New Deal and the syndicate-friendly NRA. Now the New Deal officials, who had set prices, officially deplored the “disappearance of price competition.”¹⁴ New actions assailed the oil industry, tobacco manufacturers were convicted of colluding absent proof of meetings or agreements, a daunting precedent. Companies reeled. It was in this period that utilities surrendered; Wendell Willkie of Commonwealth and Southern even sold part of the company to the TVA. After waiting politely through the 1936 election, labor unions used their new power to mount an unprecedented series of strikes, even occupying factories in so-called “sit-down strikes.” As Roosevelt’s own Labor Department mournfully reported: 

“There were 4,740 strikes which began in the United States during 1937, in which 1,860,621 workers were involved. These workers lost approximately 28,425,000 man-days of work while strikes were in progress during the year.”¹⁵ 

Each of these man-days lost postponed recovery. To halt the strikes, employers again paid higher wages than otherwise. Again, that constraint forced them to rehire more slowly. Companies despaired and went on strike themselves: net domestic private investment, the statistic that measures a company’s capacity to increase productivity, had been negative earlier in the Depression. In 1938 the measure turned negative yet again.¹⁶ A new Federal Reserve law increased the amount of cash banks had to hold in reserve; anxious, the banks held far more than officials had predicted, contracting credit. As Robert Wright shows in a forthcoming history of the period, even Social Security, which many Americans today rate the best of the New Deal, impeded recovery in the later 1930s: the few paycheck dollars held back by the government as worker payments were dollars that went unspent and uninvested.

Workers mulled the failure of relief programs. There was a new awareness of the degradation that came with competing with neighbors for federal benefits. Voters even reconsidered Roosevelt’s promise to help the Forgotten Man. Their mood resembled that of an editorialist in Muncie, Indiana who had published on the question two years before.¹⁷ “Who is the Forgotten Man in Muncie? I know him as intimately as I know my own undershirt. He is the man who is trying to get along without public relief and has been attempting the same thing since the Depression cracked down on him. He is too proud to accept relief yet deserves it more than three-quarters of those who are getting it.”  This 1938 period came to be known as the “Depression within
the Depression.”

Preparing for the 1938 midterm election, the President sought during the primaries to drive out disloyal Democrats, even as he tried to give the appearance of impartiality. But this time, Moley later recalled, “the “mysticism did not sit well with the country.”¹⁸ While they might repeat the Job story at church, they were now beginning to realize that populist slogans are no substitute for prosperity, and voted accordingly, weakening the President’s majorities in both houses. Roosevelt himself began to weary of the New Deal.

The flood of new laws slowed which is certainly one reason the nation finally began to recover in 1939 and 1940. Many have argued that the dramatic rise in federal spending to support Britain in its war with Germany facilitated the comeback and that the further billions in outlays that came after Pearl Harbor guaranteed it. But another factor was perhaps more important: Roosevelt turned to the war long before Pearl Harbor. To arm Britain – and then America – he needed to ally himself with great companies and drop his domestic class war. Relieved businesses appreciated the ceasefire and began to produce and hire accordingly. 

Historian Robert Higgs has developed a useful thesis to explain this lost decade: “regime uncertainty,” the notion that an erratic, aggressive government can terrify businesses into slowdown. The same theme was taken up by the chief economist of Chase Bank, Benjamin Anderson in a 1945 book, Economics and the Public Welfare. Though individual policies promulgated during the Depression may have differed, Anderson noted, there was one commonality: authorities’ arrogance. “Preceding chapters,” concluded Anderson at the end of his section on the Great Depression, “have explained the Great Depression of 1930–1939 as due to the efforts of governments, and very especially of the Government of the United States, to play God.” When playing God failed, Anderson noted, our government had determined that “far from retiring from the role of God,” it “must play God yet more vigorously.”¹⁹

What is the relevance for our own fractious age, and our own future downturns? The first point is that realization comes gradually: Americans did not see all the errors in the New Deal at first. Another point is that policy matters. When we belabor, lame, or derail the private sector, we reduce the likelihood of strong recovery. A third is that countercyclical spending, now institutionalized as the standard antidote to downturns, may not deliver all we imagine. Perhaps the federal response to the early 1920s is the better model. However severe the initial monetary challenges, the downturn after 1929 would not have become the Great Depression had Presidents Hoover and Roosevelt replayed the restrained federal policy of the early 1920s: reduce uncertainty and allow the market to take the lead. 

The Depression also shows that we underrate the damage of bitter partisan attacks. There is a price to slinging the first mud in a conflict, and a price to descending into the dirt with your opponent. Had the opposition to Roosevelt been stronger, clearer, and less demagogic, it would have had wielded more influence.  Another point, that of Robert Higgs, also warrants underscoring: the uncertainty generated by a power-happy demagogue, or an arrogant regime, costs all of us more than standard texts convey. 

Yet a final thought, especially relevant now, involves the cost of politicizing economics. Any of us can understand that politicians must back silly or profoundly perverse policies to win an election. Many advocates of free markets will vote for candidates who emphasize anti-market concessions during campaign season, consoling themselves with the fact that the same campaigners, in a kind of aside, occasionally pay lip service to the power of markets. The voter, sometimes naively, hopes that once secure in office, the politicians will deliver the free-market policy. Sometimes, they do.

What is truly insidious however is when politicians advertise those subpar policies, from tariffs to, say, child credits or make-work jobs, as optimal economics, a guarantee of prosperity. For then, at least for a while, voters believe them. That is what happened in the 1930s. In such cases, the public, like the long-suffering 1930s electorate, becomes complicit in its own deception and disappointment.

In short, there is a price for placing faith in political leaders as one would in a church, a price for which voters are also responsible. “Have we found our happy valley?” Roosevelt asked when he called for a political license to continue his experimentation from on high in 1936. By reelecting him, even those many voters who did not have New Deal jobs agreed to continue to travel behind Roosevelt in his quest, and to tolerate policy that, at some level, they knew could not deliver. The consequence of this complicity was that second term of Depression. 

The Americans who succumbed to political lures and failed to wind down, halt, block, or attenuate the New Deal were our great grandparents, or at the very least, our forerunners. Americans today owe it to them to forgive that error – and remember it. After all, they and we are one people. It is possible therefore to extend the sage Anderson’s point. The Great Depression did not endure because God struck America. It endured because our leaders played God. And because we let them.

References

1. Thorne, Frank, “Warning of Pest Heeded Too Late.” Buffalo News, July 11. 1936.
2. Ken Burns, 2012. “Bonus Material.” The Dust Bowl. Public Broadcasting Service. 
3. Museum of American Finance. Banking Panics, 1930-1931. Richard Sylla. https://www.moaf.org/publications-collections/financial-history-magazine/82/_res/id=Attachments/index=0/Article_82.pdf  (https://www.federalreservehistory.org/essays/banking-panics-1930-31)
4. Ohanian, Lee. E. “What, or who—started the Great Depression?” Working Paper 15258, National Bureau of Economic Research, 2009.
5. Cole, Harold L. and Lee Ohanian. New Deal Policies and the Persistence of the Great Depression: A General Equilibrium Analysis. Journal of Political Economy, Vol. 112, No. 4.
6. Pegler, Westbrook. “New Farming Theories.” Chicago Tribune Service, August 30, 1933.
7. Ahamed, Liaquat, Lords of Finance: The Bankers Who Broke the World, New York, Penguin Press, 2009. 
8. Field, Alexander. A Great Leap Forward: the 1930s Depression and U.S. Economic Growth. New Haven: Yale University Press, 2012.
9. Historical Statistics of the United States, Colonial Times to 1957, Series S 81-93, “Use of Electric Energy: 2902 to 1956, p. 511. 
10. Hirsh, Richard F., Powering American Farms: The Overlooked Origins of Rural Electrification. Baltimore:  Johns Hopkins University Press, 2022.
11. Chayes, Antonia H., 1951.  “Restrictions on Rural Electrification Cooperatives” Yale Law Journal. no. 61.
12. John Morton Blum, Ed. From the Morgenthau Diaries: Years of Crisis, 1928-1938, Boston: Houghton Mifflin, 1959. 
13. Martin, George, CCB: The Life and Century of Charles C. Burlingham, New York: Hill and Wang, 2005 and Folsom, Burton W. Jr. 2008. New Deal or Raw Deal? How FDR’s Economic Legacy Has Damaged America, New York, Threshold Editions.
14. Roosevelt, Franklin. “Message to Congress on Curbing Monopolies,” 1938.
15. Monthly Labor Review, May 1938. United States Department of Labor.
16. Net Private Domestic Investment: Net Fixed Investment, Series A560RC1A027NBEA, Federal Reserve Bank of St. Louis, U.S. Bureau of Economic Analysis. https://fred.stlouisfed.org/series/A560RC1A027NBEA, August 22, 2024.
17. Lynd, Robert S and Helen Merrell Lynd, Middletown in Transition: A Study in Cultural Conflict, New York: Harcourt Brace and Company. 1937.
18. Moley, Raymond, After Seven Years, New York: Harper and Brothers, 1938.
19. Anderson, Benjamin M, Economics and the Public Welfare, New York: Van Nostrand Company, 1949.

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AIER has submitted amicus curiae briefs to the New Hampshire Supreme Court in the combined cases Rand v. State and ConVal v. State. We took this step because our economic research is directly relevant to the issues raised in these cases.

In Rand, the trial court ruled that New Hampshire’s property tax system was unconstitutional and ordered the State to start redistributing property tax revenue from towns with high property valuations to the rest of the state.

In ConVal, the trial court ruled that New Hampshire’s “adequacy aid” to local school districts was insufficient and ordered a near-doubling of state funding for local schools.

Our briefs support the State’s position that the N.H. Supreme Court should overrule the trial court and find New Hampshire’s property tax and school finance systems constitutional. Our research finds that “property-wealthy” towns don’t necessarily have wealthier people than property-poor towns. They just made good local government decisions in the past. Moreover, their high property values mean that most residents have already fully paid for the privilege of living in a place with good services and/or low taxes. In general, AIER supports choice and competition among local governments as the best way to give households the mix of services and tax levels that they want, while keeping local government as efficient as possible. Centralizing school finance would damage this objective.

Our filings (pdf downloads):

• • Motion to Appear as Amicus Curiae, Contoocook Valley School District & a. v. The State of New Hampshire

• • Brief of Amicus Curiae, Contoocook Valley School District & a. v. The State of New Hampshire

• • Motion to Appear as Amicus Curiae, Steven Rand & a. v. The State of New Hampshire

• • Brief of Amicus Curiae, Steven Rand & a. v. The State of New Hampshire

In Leave Me Alone and I’ll Make You Rich: How the Bourgeois Deal Enriched the World, Deirdre McCloskey and I distinguish the Bourgeois Deal — ”leave me alone, and I’ll make you rich” — from the Blue Blood Deal of aristocratic oligarchy and the Bureaucratic Deal of the modern welfare state. The Bourgeois Deal is the ethos of Adam Smith’s Commercial Society, and the permission-requiring and command-giving Blue Blood and Aristocratic Deals are the ethos of the Political Society. A single sentence embodies each:

• Bourgeois Deal, Voluntary, Commercial Society: “May I take your order?”
• Blue Blood and Bureaucratic Deals, Administrative Society: “That’s an order!”

Note the assumptions here about political equality — or the lack of it. The person saying, “May I take your order?” voluntarily subordinates himself to another’s wishes. The person saying, “That’s an order!” subordinates others to his wishes. The person saying, “May I take your order?” invites others to evaluate a menu of options in light of their own knowledge and preferences. The person saying, “That’s an order!” compels others to ignore their own knowledge and preferences. The commercial society’s order-taker asks people to cooperate. The administrative society’s order-giver commands people to cooperate.

Which respects others’ humanity and dignity? Which respects their knowledge, experience, and autonomy? 

Consider a chicken restaurant. “May I take your order?” contains a lot of information. It says, in effect, that a team of people who are there of their own volition — even if being there is the best of a lot of very bad options — stand ready to fry chicken obtained from one willing seller with knowledge about chicken farming and put it on a bun obtained from another willing seller with knowledge about baking. These willing sellers, in turn, went into their occupations with the conviction that raising chickens or baking buns would be the best way to provide for themselves and their families.

Political choices are different. The candidate who covets your vote offers an exchange of sorts — a “plausible belief,” to quote Thomas Sowell — in exchange for a vote. Still, it’s a plausible belief that the candidate will give orders that the voter finds congenial, and with luck, to other people. It is, in effect, an offer to make someone else do what you want them to do without you having to go to the trouble of offering them something better than their alternatives. It’s an offer to give other people “offers” they can’t refuse.

The great American statesman Daniel Webster put it this way in 1837:

“There are men, in all ages, who mean to exercise power usefully; but who mean to exercise it. They mean to govern well; but they mean to govern. They promise to be kind masters; but they mean to be masters.”

“That’s an order!” might be necessary under certain circumstances. Firms exist because of prohibitive negotiation and transaction costs. The military has a chain of command. It might be necessary to tolerate an evil like taxation to avoid the greater evils of invasion, subjugation, and domination. “Because I said so” isn’t an entirely indefensible response to a child wondering why he can’t drink the stuff in the bottles under the kitchen sink. These are exceptions to the general rules that Adam Smith, and so many after him, have thought should govern relationships between adults and equals, not general rules to which liberty is the exception. 

When we’re asking about the kind of society we want to live in, it might be possible that we should want to live in a society where we recognize one another’s right to say “no, thank you” to an offer — that is to say, a world where people take orders instead of give them.

During the most recent debate with Vice President Harris, former President Trump declared that he has “been a leader on IVF… everybody else knows it.” Trump, of course, was referring to his recent campaign promise that the government pay for or that insurance be mandated to pay for all IVF treatment costs.  

Whether Trump’s proposal would make him a leader is a point of debate, given Democrats and introduced a bill mandating insurance coverage of IVF earlier this summer. But whatever the case, Trump’s IVF proposal would certainly lead in the wrong direction. 

The proposal has many downsides. To begin with, government-funded IVF would be enormously costly. A back-of-the-envelope estimate indicates that government funding IVF would cost about $7 billion annually. This figure assumes that the average IVF cycle costs between $15,000 and $20,000, doctors perform about 413,776 assisted reproductive technology (ART) cycles annually, and IVF constitutes more than 99 percent of ART procedures/​cycles. 

This figure, however, assumes that the current number of ART cycles and average IVF cycle costs stay consistent, which is highly unlikely. Currently, most patients self-pay for IVF, which limits IVF use. Furthermore, a subsidized program creates new incentives for would-be parents to delay childbearing or engage in elective fertility preservation, leading to growing use of the program over time.  

Israel provides a case in point: in Israel, IVF has been publicly funded since it was first introduced in 1981. Reliance on the technology has grown since then, when it was a nascent technology, and between 1990 and 2012, the number of IVF cycles increased eightfold.  

Some of the increase in utilization is no doubt due to innovations that improve the procedure’s effectiveness. For instance, the development of intracytoplasmic sperm injection (ICSI) in the early 1990s meant that IVF became beneficial to a much larger portion of the population, as ICSI helped resolve many cases of male infertility. Even since major technological innovations like ICSI, IVF utilization in Israel has grown. The percentage of births attributable to IVF in Israel in 1995 was only 1.7 percent, but by 2018 that figure had nearly tripled. 

In large part due to its generous policy, Israel also has by far the highest per capita IVF use of any country. Israel’s generous IVF program funds unlimited IVF until a woman has delivered two live children, and benefit eligibility continues up until 45 years of age. Israel also covers elective fertility preservation, and in line with Trump’s proposal, Israel’s policy covers “all treatment costs,” including medication, procedures, testing, and more advanced add-ons like preimplantation genetic testing (PGT).  

If the US implemented a program that subsidized or mandated coverage for “all treatment costs,” substantial growth in IVF use would likely occur. Current IVF use in Israel is more than six times greater per capita than in the US. In countries like Denmark, which subsidize IVF generously but to a lesser extent than Israel, IVF use is still more than four times greater per capita than in the US.   

If a US policy were so generous that it induced Israeli levels of IVF use, the program would cost around $43 billion annually, or about what the federal government spends annually on its major housing rental assistance programs (housing vouchers and project-based rental assistance). Even if the program were “only” generous enough to induce Denmark’s level of IVF use, it would cost $27 billion per year, or more than NASA’s annual budget. 

Yet, unlike the federal government’s housing assistance programs, the benefits of an IVF subsidy would surely be regressive if fertility patterns hold. Under existing patterns, women with higher education or higher income are more likely to delay childbearing: according to CDC research 42.9 percent of women with a bachelor’s degree or greater delivered their first child at 30 or older. In comparison, just 3.3-10.5 percent of women with less than a bachelor’s degree delivered their first child at 30 or older. But older women are also more likely to run into fertility issues and subsequently utilize IVF. 

Given the current national debt and deficit’s threat to our economic stability and the related need for fiscal restraint, creating a new, expensive entitlement program with benefits captured by highly educated and high-income beneficiaries is misguided.  

Even setting aside such a program’s steep price tag and regressive profile, would the money be “worth it”? Trump’s stated motives for the program are pro-natal, yet it is not clear that a subsidized program would actually result in more births.  

The new incentives created by such a program suggest that growing reliance on IVF alongside fewer births overall is possible or likely. This is partly because would-be beneficiaries may falsely believe that a subsidized or mandated policy allows them leeway to delay childbearing, only to find that childbearing is more difficult later in life, even with the assistance of reproductive technology. 

Countries like Singapore, Japan, Australia, and Denmark have subsidized reproductive technology and still seen fertility decline in recent years. And in all countries that subsidize IVF besides Israel — a unique country not only because of its extremely generous subsidies but also its broader cultural commitment to natalism — the fertility rate is currently below replacement. 

Beyond the program’s enormous cost and uncertain or negative influence on births, a subsidy or mandate would conflict with some taxpayers’ views on conception and reproduction. While most Americans disagree with more extreme views put forward by IVF critics, it is nonetheless reasonable that critical parties not be forced to subsidize activities that they find objectionable. 

Although Trump’s plan is a disaster from the perspective of cost, incentives, and value neutrality, IVF is a true medical miracle for many couples with fertility challenges. Protecting IVF means protecting individuals’ freedom to avail themselves of the most successful procedure to treat a range of fertility issues and create human life, and doing so is critical.  

But protecting IVF from efforts to limit its use and reduce its efficacy does not mean subsidizing or mandating coverage. Trump and future policymakers would do well to enthusiastically defend the procedure, but avoid the cost and pitfalls of a government-supported industry. 

“In one sense, at any rate, it is more valuable to read bad literature than good literature. Good literature may tell us the mind of one man; but bad literature may tell us the mind of many men….The more dishonest a book is as a book the more honest it is as a public document.” ~G.K. Chesterton, Heretics 

Limitarianism: The Case Against Extreme Wealth by Ingrid Robeyns is a very bad book. Writing a review of it thus presents a challenge. Who wants to read a review that is the equivalent of shooting fish in a barrel of dead fish? Yet, while reading Robeyns’ tendentious screed, I was faced with the absolute certainty that quite a few of my colleagues and students would love this book. Chesterton’s observation thus puts the right question forward. The interesting thing about Limitarianism is not why it is so very flawed, but rather why Robeyns and others would think it was good. 

The thesis of the book is simple. Robeyns thinks it is wrong for anyone to have more than a million dollars in wealth, but she will agree to a compromise of a maximum wealth of ten million dollars. Robeyns doesn’t care what currency unit you use (dollars, pounds, or euros) as long as there is an enforced maximum. To the immediate reply that a 100% tax on wealth over that amount might be problematic, Robeyns repeatedly insists that she isn’t necessarily advocating that tax rate. Not that she thinks there is anything wrong with a 100% wealth tax, there are just other ways to get there. For example, you could convince everyone in the world it is bad to have lots of wealth. 

The bulk of the book is Robeyns shouting at the reader about why anyone having high wealth is so incredibly bad. First: “It’s Dirty Money.” Some wealthy people acquired their wealth by stealing it. Obviously, that is an argument against theft, not high wealth, but in a perfect example of how this book works, having established that we all agree stealing is bad, Robeyns then notes that people get wealthy in lots of other similar ways — like only paying whatever they are required to pay in taxes or owning companies that pay wages less than what Robeyns thinks workers should be paid. You see? Stealing wealth and not paying more than you owe in taxes are both “dirty money.” So, high wealth is evil. 

The roll call of reasons why high wealth is evil goes on like that for a couple hundred pages. High wealth is bad because it “undermines democracy” when wealthy people convince legislators to vote for things Robeyns doesn’t like. High wealth is “setting the world on fire” because rich people use airplanes and some corporations produce and use fossil fuels. Nobody deserves high wealth because wealthy people need a society in order to protect their wealth from theft, and the social contract should be fair and inclusive, not allowing people to get high wealth because of inheritance, luck, or having talent and the ability to work hard. Allowing some people to have high wealth is bad because “there is so much we could do with that money,” the “we” meaning (of course) people like Robeyns. High wealth is bad because it leads to philanthropy, which is terrible because the wealthy person gets to decide who should benefit from the philanthropic enterprise. 

Most of all, it would be good for the wealthy people themselves to give up their wealth because being wealthy is not only psychologically bad for the wealthy, but also the children of the wealthy really suffer from growing up with wealth. So, if you care about the kids, don’t let them grow up wealthy. I know that last sentence sounds like I am exaggerating and that there is no way Robeyns is as extreme as the last three paragraphs make her sound. But here is Robeyns: “People are free to make themselves as unhappy as they like. But that doesn’t take away our societal responsibility toward their children.” Similarly, the rich “are just as vulnerable, psychologically, as the rest of us, and if we care about the vulnerability of other people in general, then we should also care about how excessive wealth can destroy the lives of the super-rich.” 

There is an aura of unreality hovering over nearly every page of this book. The most jarring portion comes early when Robeyns sets out to refute anyone who thinks that all the wealth in the world today has been a big benefit to the poor. Lots of people are under the impression that there is less extreme poverty in the world now than there was in the past. Robeyns is here to assure us that this may not be true. Again, it may seem hard to believe Robeyns really says this. But, “the dominant narrative—that in the past everyone was very poor, and we have greatly reduced extreme poverty on a global scale—is misleading at best.” How is it possible that Robeyns could raise doubt about the fact that there is less extreme poverty today than there was in the past? First, the data before 1981 are not perfect, so maybe people really were better off in the past. Second, if instead of using $2 a day in income as the measuring line for extreme poverty, we use a higher number, then there are more poor people today than we estimate using the lower number. (Not surprisingly, she does not note that no matter what threshold you pick for extreme poverty, the global rate has declined.) 

Robeyns is willing to concede, however, that maybe there is more wealth in the world than in the past. But, even if so, the higher levels of wealth still aren’t a good thing. Because some people have much higher wealth than others, we cannot say that the increasing wealth is actually a good thing for the poor people who, while they may no longer be starving to death, are not as rich as the super wealthy. Her inability to acknowledge joyfully that there has been a massive decline in extreme poverty over time is tied very closely to the strangest parts of the book. There is no place in this book where Robeyns seems aware of the mechanisms by which wealth is generated. In Robeyns’ view, some very bad people have acquired a large amount of wealth by doing very bad things, and thus the net result of all that increase in wealth is negative no matter what has happened to the poorest people in the world. 

As I said at the outset, writing an entire review just documenting how bad this book is would be an incredibly easy task. Pick a page at random, and you’ll find multiple examples of an argument neither cohesive nor persuasive. The question is: how is it possible that the book is this bad? The answer is found in the Introduction. On the third page, Robeyns notes, “For a long time, I felt that there was something wrong with an individual amassing so much money, but I couldn’t properly articulate why.” So, she “decided to deploy my training in philosophy and economics to answer the question: Can a person be too rich?” The arguments in this book did not lead Robeyns to her conclusion; she started with the conclusion. When you start your investigation already knowing the answer to the question, then you may not notice that the reasons you offer for your conclusion are not persuasive to someone who is skeptical about the conclusion. If it seems like the arguments are non sequiturs attacking straw men, that isn’t important to Robeyns. The conclusion is right even if the arguments fail. The result of this approach is a religious book written for the already converted. 

What makes Robeyns’ book so useful for understanding what many people are thinking is that it becomes obvious that people who want to get rid of high wealth are not reaching the conclusion because they are persuaded by reasons of the sort found in Robeyns’ book. Instead, it is an article of faith. If having high wealth is inherently evil, then the conclusion is obvious. There is no reason to permit inherently evil acts to continue if we can stop them. Trying to explain why high wealth is evil is beside the point; it just is. 

Ten Years After, the 1970s rock band, provides a marvelous way to think about this mindset in “I’d Love To Change the World.” “Tax the rich, feed the poor/ ‘Til there are no rich no more.” I have always thought those lines were pretty funny and highly ironic; taxing the rich to feed the poor doesn’t help end poverty; it just gets rid of the rich. But, in reading Robeyns’ book, my realization was that there are people who do not think those lines are ironic. Taxing the rich to feed the poor is desirable not because it will help the poor, but simply to get rid of the rich.  

Of course, the idea that a society should get rid of the wealthy is not new. Lycurgus, the crafter of ancient Spartan society, implemented a whole series of radical changes (breaking up large land holdings, forbidding the manufacture of luxurious items, inhibiting trade with other cities, forcing everyone to eat at communal meals) in order to rid Sparta of the rich. He seemed total unconcerned that Sparta would be a poorer society; Lycurgus’ ideal Spartan lifestyle was one devoid of any hints of luxury. 

Lycurgus provides an interesting contrast to Robeyns. Both have the ideal of a world in which there “are no rich no more.” There is an intellectual honesty in Lycurgus’ implicit argument that a poor-but-equal world is superior to a rich-but-unequal world. That is not what Robeyns is arguing, however. Limitarianism wants to have it both ways. Robeyns wants to get rid of the wealthy, but does not want to get rid of the wealth. In Robeyns’ Limitarian Paradise, there is no trade-off between the technological marvels and phenomenal wealth in the modern world and limiting everyone to no more than one or ten million dollars of wealth. Somehow, we can redistribute all the wealth in the world and still keep on generating just as much wealth in the future, even though creative and hard-working people have hit their personal limit on wealth. Robeyns argues this will happen if we develop a culture “where material gain is not the leading incentive — where people may also choose to work hard because of personal commitment, challenges they have set for themselves, or for intrinsic pleasure, esteem, and honor.” 

To pretend that you can have all the riches of the modern world and eliminate the ability for anyone to become wealthy is a sure sign of someone who has no understanding of how all this wealth was generated in the first place. Robeyns’ book, however, provides insight into why people advocating income limitation plans often seem so unaware of how economic growth occurs. If getting rid of rich people is akin to a religious mandate to rid the world of evil, then of course it is safe to impute bad motives to anyone arguing that there are possibly benefits to the world from allowing people to do things that will make them wealthy. Despite appearances, Robeyns book is not really an attempt to persuade anyone of her beliefs; instead, it is an insight into the minds of zealots. 

Here in the US we don’t normally have much interest in the domestic politics of our neighbors Mexico and Canada. Mexico, for example, is part of our presidential election only insofar as immigration is a top issue. But we don’t ask “why are people from throughout Mexico and Latin America crossing our border in large numbers?”  

Mexicans aren’t just fleeing their homeland to enter the relatively safe and stable US – they are now leaving Southern Mexico for Guatemala, of all places, amid the near civil war there between feuding drug lords in Chiapas. As Mexico’s political system deteriorates, crime is increasing, and the outgoing president, Andres Manuel Lopez Obrador (or AMLO as he is known) completes his quest to eliminate the independence of the country’s judiciary. 

AMLO’s administration has followed in the footsteps of other left-wing populist leaders in the Western Hemisphere in Venezuela, Colombia, Bolivia and Nicaragua. He has decried “neoliberalism,” consolidated power, appealed directly to the poor, working class, and alienated middle-class of Mexico. During his time as president, AMLO had many confrontations with the Mexican Supreme Court specifically and the judiciary more broadly. Particularly in the last few years of his presidency as his power increased and his respect for the law declined, he and the court clashed as he tried to expand the power of the military, pull back from fighting crime and tried to ‘pause’ stable, productive economic relations with the US. This prompted him to push through a “reform” that will see every judge throughout Mexico subject to regular election, not lifetime appointment as American federal judges are, and Mexican judges were previously. 

He is promoting the reform as a way to eliminate judicial corruption, but this is a charade. The reform is merely a way for his party, the powerful Morena party, to exert control over one of the last independent institutions in the country. Judges will be beholden to political interests, not law. Voters in Mexico are completely unprepared to understand what makes a “good” or “qualified” judge. A voter in the capital of Mexico City, a metropolitan area of perhaps 20 million people, would be voting for thousands of judicial candidates with no information other than party identification, including for the Supreme Court. Money will purchase judges and corruption will far outstrip the problems the system now faces. 

Some US states, and some countries, have various forms of “elections” for judges, be it options for recall, yes or no votes on maintaining a judge, or even a few with regularly competitive elections. But federal courts are appointed for life, which provides some insulation from political forces. So why has Lopez Obrador decided to make this radical move? In Bolivia, which has judicial elections, the Economist just recently described the electing top judges as a “disaster” which poisoned the country’s politics. What’s bad for the nation as a whole, though, can still be very good for a power-hungry politician. In Bolivia, the two main competitors for the presidency are jockeying for support from the elected court and everyone understands that the court’s decisions are motivated by nothing more substantive than politics. 

In some ways, this looks like a return to the days of the monolithic PRI party that dominated Mexican politics in the 20th century. But there’s an additional reason why AMLO has proposed the reform. Destroying the judiciary as a counterbalance to the elected power in Mexico is straight out of the playbook populists have used to consolidate their control. In Venezuela, for example, President/Supreme Dictator Nicolas Maduro had his hand picked Supreme Court stamp his stolen election as legitimate, and AMLO has dreams of a similar scenario when the US or a future Mexican president comes after him for aiding Mexican drug traffickers or forces him to explain how he and his sons have bank accounts in the Cayman Islands or Switzerland stuffed full of pesos. Once the judiciary is under control, populists next take over the central bank and begin to intimidate independent media outlets. The institutional and social checks on majoritarian power are eliminated creating an opportunity for dictatorship, and lifetime rule and enrichment through graft. 

How is this related to immigration and relations between the US and Mexico? Those Mexicans who are leaving for other countries see very limited economic opportunities, no domestic security, and no hope in their political institutions after a six-year assault on foreign investment, the rule of law, and economic development under President Lopez Obrador. Daniel Ortega in Nicaragua, the Castro boys in Cuba, Maduro in Venezuela and now AMLO, all claim to be men of the people fighting for the common person against the evil forces of capitalism and imperialism. Shockingly, the situations in their countries deteriorate, their citizens flee, and they consolidate their grip on power. 

More than $35 billion in direct foreign investment in Mexico is now on hold according to the Wall Street Journal. The peso, which has historically been a very stable currency, has dropped 15 percent since the judicial ‘reform’ was announced. Protests from the legal community and the political opposition are intensifying. In at least five of Mexico’s states, battles between rival drug organizations have produced bloodshed and instability. The costs to the Mexican nation will be enormous. Eliminating an independent judiciary may very well force Mexico to pull out of the USMCA, the replacement for NAFTA. Remember Mexico is the United States’ largest trading partner, and vice versa. Such a shift will have devastating economic effects on both sides of the border. 

But three sets of interests benefit from Lopez-Obrador’s plan. The first is the old institutional power brokers in public and private unions. The move towards economic and political liberalization undercut their ability to pursue graft, control jobs, and influence policy. They’d like a return to the “good old days” of no foreign businesses interfering with their rule of the labor market, which will increasingly become blurred as the private sector shrinks while the economy contracts. 

The second set of interests are those involved in the illegal drug trade. In the past, analysts argued that while the Mexican government lacked the capacity to effectively fight the war against the large cartels that once ruled the drug trade, under Lopez Obrador two things have changed. The first is that the days of the large cartels are in the past. The Netflix series Narcos is great television, but there is a reason it is set in the 80s and 90s. Now smaller operations, more prone to violent turf wars with unstable business operations, have replaced the once mighty cartels with bloody results. The second is that Morena has used local alliances with those in this new entrepreneurial drug “industry” to help ensure they have convincingly won local and state elections. 

Lopez Obrador in fact helped shield some of the larger drug organizations from US prosecution, which led to his infamous “hugs not bullets” policy. Whether he was motivated by a newfound interest in humanitarianism or following the requests of his friends in the drug industry, AMLO diverted military and police resources away from fighting the drug traffic. Unsurprisingly hugs did not stop the drugs, and the US responded by pressuring the Mexican government to work with them for high profile arrests, like that of the son of the notorious “El Chapo,” now in a US prison. According to press reports the Blackhawk helicopters and troops sent in to get him were not hugging anyone. 

Finally, this new system benefits the army, which is another important strategy in the populist playbook. As we’ve seen in Venezuela, once politicians control the formal political institutions and the criminal activities in society, they need the support of the army. Military coups are part of the landscape and history of Latin America.  

Lopez Obrador has adroitly freed the military from fighting the drug war, something they had no desire to do. Instead, he has placed the military in charge of lucrative endeavors like managing ports and airports. They have taken over the construction of major infrastructure projects. These activities are all in direct violation of the Mexican Constitution, and the Supreme Court ruled against these moves just last year in one of their many fights with AMLO. The possibility for political power and of course further bribes and graft at ports and large construction projects shouldn’t be difficult to predict. He has also essentially placed the police under military control, which has expanded the army’s power base. 

The third winner in all of this is Morena, and indirectly Lopez Obrador. His party controls Mexico, and should the judicial reform pass, their formal power may rival if not exceed that of the PRI. While some observers are hopeful that his successor Claudia Sheinbaum may pivot in a different direction and guide Mexico towards more moderation, it’s difficult to see how she might do so if she chooses to reject AMLO’s legacy. As one astute observer noted to me, while it is possible she may become her own leader and wish to escape AMLO’s shadow, a more likely alternative may be that she follows the Medvedev/Putin model and is simply complicit in allowing his rule to continue into a second term. After all, this observer said, it is AMLO who controls Morena, and Morena is the most powerful civilian force in the nation. 

The losers here are obvious. First and foremost, Mexicans of all social and economic classes will lose the lifeline that NAFTA/USMCA, economic liberalization, and attempts at political liberalism has created. Millions of Mexicans ascended from working class status “clase trabajadora” to the middle class through manufacturing jobs and foreign investment from the US and abroad. As others have correctly outlined, those treaties depended on a guarantee of an independent judiciary. While some of those commercial agreements may transfer to international commercial courts, many won’t. Existing investment may wither, and new investment will almost certainly go from paused to stopped.  

AMLO himself has a vision of Mexico that is very much anti-development. He has a romantic vision of an early twentieth century, rural Mexico. Whether his base will realize (too late) what that means for the future is difficult to tell. But if I were to predict the future, I’d return to the issue of immigration. While many across the political spectrum are falling all over themselves to oppose “illegal” immigrants, immigration has long benefited the US. Whether it was the waves of Southern European immigrants at the end of the nineteenth and start of the twentieth century, the Irish immigrants from the 1850s after the Irish potato famine, or even the many Venezuelans who have entered the US recently, running for their lives from Maduro and his Cuban handlers. Immigrants come with skills, and they are willing to take risks and work. Once we move past the political grandstanding, we will eventually see how good it is to get a new influx for our workforce. 

But in the short term, these developments will be problematic for the US because Mexico is right next door and heading down a very dangerous path. Empowering one party, strengthening the military, destroying checks and balances, and allowing criminals to have free rein throughout Mexico will not end well for other countries. The attractions of militarism and the reliance of a strong hand “la mano duro,” as it is known in Latin America, is tantalizing. But it is a fantasy, a mirage that leads to dictatorship. Mexico should reject the abolition of its independent, albeit imperfect courts. If they need more evidence of how this will end, they shouldn’t look to AMLO for promises but look to Venezuelans and how their courts have protected the only one person — the dictator, not his subjects. 

Economic misconceptions persist due to misguided intuitions that overlook complex factors, a preference for principles over outcomes, the influence of epistemic bubbles, and political tribalism. Despite frequent refutation flawed ideas endure, requiring constant vigilance from economists.

Harwood Economic Review

Table of Contents

Governments, Not Markets, Impel ESG
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Daniel Sutter

Investors Make Houses More Affordable, Not Less
David Youngberg

Sense and Nonsense on Petrodollars
Peter C. Earle

Boosters Beware: Stadiums Aren’t Magic
Art Carden

Protectionists Are Wrong: Free Trade is the Path to Prosperity
Vance Ginn

Overpopulation: An Ancient Myth Refuted
Aidan Grogan