Murphy’s Law and Economics

I think we’ll be talking about Murphy v. NCAA for awhile. It’s the most important federalism decision since NFIB v. Sebelius, and it will almost certainly make its way into constitutional law casebooks. Upon first read, I thought that the rule laid down by Justice Alito — that “Congress cannot issue direct orders to state legislatures” — was novel, sweeping, and misguided. Upon further reflection, I think it might be novel, sweeping, and right.

Before Murphy, a reasonable interpretation of the Supreme Court’s anticommandeering cases would have been the following: Congress cannot compel state legislatures to enact a law, nor can it compel state executive officials to enforce a law, unless (1) Congress is acting pursuant to its authority under the Reconstruction Amendments, or (2) the relevant federal statute applies equally to states and private actors (the Reno v. Condon exception). Congress can, however, prohibit state legislatures from enacting laws that Congress does not want the states to enact. See, e.g., Arizona v. United States, 567 U.S. 387, 399 (2012) (“There is no doubt that Congress may withdraw specified powers from the States ….”). And Congress can pay states to enact and enforce the laws that it wants them to enact and enforce, as long as the offer isn’t overly “coercive” (whatever exactly that means).

The first rule — that Congress can’t commandeer state legislatures or executive officials — has made sense to me ever since I first encountered it as a 1L in Heather Gerken’s Constitutional Law class. The anticommandeering doctrine allows states to serve as checks on federal power; it at least arguably increases political accountability by preventing federal lawmakers from laundering their preferred policies through state legislatures; and it stops Congress from shifting the costs of regulatory programs onto states. A growing literature on the law and economics of federalism has come to understand the anticommandeering doctrine as (a) allocating to the states a valuable “entitlement” (specifically, the right to determine what laws states enact and enforce), and (b) allowing states to sell that entitlement back to Congress for a price. For foundational contributions to this literature, see articles by Daniel Farber, Rick Hills, Neil Siegel, and Aziz Huq, among others.

This literature emphasized the potential applicability of the Coase theorem to the commandeering context: In the absence of transaction costs, the initial allocation of an entitlement shouldn’t determine who ends up holding it — if the entitlement is originally assigned to the lower-value user, then the higher-value user should purchase it. If transaction costs in the intergovernmental market for entitlements are low (and that’s, concededly, quite an important “if”), then the primary effect of the anticommandeering doctrine’s entitlement allocation is distributional — it makes the states that much richer and Congress that much poorer. This distributional outcome might be justified on a number of grounds: my view is that by making Congress pay the states, the doctrine has the salubrious result of shifting revenue-raising obligations to the federal level, which is a good thing because (i) the federal government enjoys an advantage vis-à-vis the states in enacting and enforcing tax laws that are broadbased and difficult to evade or avoid, and (ii) the federal tax system (for historical and structural reasons) tends to be more progressive than even the most progressive state tax systems.

But it was never clear to me why these same arguments wouldn’t apply in the preemption context too. If Congress can’t tell states that they must tax X or must regulate Y, why should Congress be able to tell the states that they can’t tax X or can’t regulate Y? All the same arguments that justified the anticommandeering doctrine apply. Like commandeering, preemption weakens the states as a check on federal power. Like commandeering preemption also creates an accountability problem — if my state taxes go up, I’ll probably blame the state officials who raised my taxes rather than the members of Congress who effectively forced them to do so by barring the state from taxing X and thereby causing the state to raise taxes on everything and everyone else. And we might worry that members of Congress have skewed incentives here: when they bar the state from taxing X, they get political credit from constituencies that oppose taxes on X, but they can avoid political blowback from other constituencies who pay more in state taxes because X is now exempt but who blame state officials rather than federal lawmakers. The outcome is likely to be an inefficiently large number of instances in which Congress preempts state tax authority (and perhaps other state regulatory powers as well).

In steps Justice Alito. The distinction between a federal law that tells states what they must do and a federal law that tells states what they must not do is, he says, “empty.” And so it is. But with an important exception: When “Congress enacts a law that imposes restrictions or confers rights on private actors,” and “a state law confers rights or imposes restrictions that conflict with the federal law,” then “the federal law takes precedence and the state law is preempted.”

This exception might seem ad hoc, but it fits reasonably well into the constitutional law and economics framework. If Congress doesn’t want states to tax Treasury bonds, it can pay states not to tax Treasury bonds. If Congress wants states to set their drinking age at 21, it can pay states to set their drinking age at 21. But when Congress enacts a comprehensive regulatory scheme, then the decision of one state to enact laws that are inconsistent with that scheme raises compliance costs across the board and undermines the federal effort. This is the familiar holdout problem, and it’s a well-recognized reason why Coasean bargaining might break down.

As I see it, Justice Alito’s opinion in Murphy can plausibly be understood to reflect these economic insights (whether or not he actually thought about the constitutional law and economics literature along the way). The Court has given states an entitlement to decide what laws they will and won’t enact. Generally, when Congress wants states to enact or not to enact a particular law, Congress can buy the entitlement from the states. Transaction costs in most cases aren’t insuperably high: this isn’t, for example, a situation where the parties don’t know where to find each other, or where there are too many parties on each side of the transaction for dealmaking to be feasible. But — and this is an important caveat — where holdout problems are likely to be significant, the Court will allow Congress to seize the entitlement and prohibit states from enacting certain laws. And while we don’t have a perfect proxy for the existence of holdout problems, the fact that the state law conflicts with a federal regulatory scheme is as good an indication as we’ve got.

Or, at least, that’s my second impression of Murphy. The opinion is less than 48 hours old. Students, professors, and practitioners will be puzzling over it for years if not decades. My second impression is much more favorable than my first. Indeed, if Murphy continues to grow in my esteem at a constant rate, it will become my favorite opinion of all time by around next Wednesday . . . .