Economic Freedom and Federalism for Federal Courts
Federalism and economic freedom have eroded in the U.S. during crises and wars. Historians disagree on whether most blame should be placed on big government or big business or some combination. Economic historian Robert Higgs, in Crisis and Leviathan, surveys the events in U.S. history and actions that expanded federal powers:
A series of national crises eroded the traditional barriers to government’s growth, leaving legacies that have endured long after each crisis passed. This ratchet effect also helps explain the decline of economic liberties and the failure of efforts to fundamentally reform government.
The federal powers gathered during World War I were recast during the Hoover and Roosevelt Administrations as new peacetime federal powers needed to “fight” the Great Depression (as discussed in this Independent Institute summer of Crisis and Leviathan):
Most traditional restraints on federal power gave way. The Supreme Court struck down some legislation, but Roosevelt ultimately won: changes in the Court’s composition led to a revolution in constitutional jurisprudence that weakened the protection of private property rights and gave federal economic regulation free rein.
The governmental response during the worst years of the Great Depression (1932–1933) left the most enduring legacies: federal lending for many different purposes; federal production and sale of electricity; federal manipulation of agricultural production, prices, and marketing; federal regulation of virtually every aspect of labor markets; a vast federal social insurance system; a plethora of anticompetitive federal laws; and a large variety of federal subsidies—the list could go on.
But the economic interventions allowed by the Supreme Court disrupted the economy in ways unexpected by advocates, and critics argue interfered with natural economic recovery processes, prolonging the Great Depression. A similar series of federal interventions followed the Great Recession of 2008, with a similar delay in economic recovery. Again, critics disagree about how much blame should fall on federal government interventions before, during, and after the Great Recession (and many still blame the financial sector for much of the boom and bust).
What role could the federal courts play in recovering the protections of property rights and contracts that were long key to protecting free enterprise from federal regulatory and tax policies? Could a policy of principled judicial activism return the “Constitution in Exile”?
Legal scholar James Huffman, writes on principles judicial activism here:
Almost twenty years ago I presented a lecture at the Heritage Foundation titled, “A Case for Principled Judicial Activism.” For a mid-day lecture, it drew a pretty good crowd. At the conclusion there was polite applause, but my sense was that only Roger Pilon, a constitutional scholar at the Cato Institute, was in enthusiastic agreement with my thesis.
In a nutshell my thesis was that courts in the United States should be restrained in second guessing legislative and administrative policy decisions, but activist in the protection of liberty and the enforcement of constitutional limits on government power. Many at Heritage were sympathetic with my argument for protecting neglected economic liberties, and for confining Congress to its enumerated powers.
In his article, Huffman discusses a 2011 Institute for Justice study arguing that concerns about judicial activism are overblown, and that the courts have neglected their traditional role of enforcing Constitutional limits on federal powers. There seems to have been very little “activism,” especially in protecting economic freedoms from federal regulations.
Focusing on economic freedom provides a lens to view not only policies of the New Deal and the decades of federal regulations since, but also for comparing economic growth and development around the world.
Hong Kong and Singapore, city-states where voting and civil liberties are limited, enjoy the greatest degree of economic freedom and fastest increases in prosperity, according to the Economic Freedom of the World and Index of Economic Freedom reports. Next on the list is New Zealand, an island with a population of 4.5 million.
What is it about enclaves and city states that encourage and enable prosperity? Monaco, Liechtenstein, Andorra, are other very prosperous city-states. Switzerland is similar, a strongly federalistic country where the political power of Swiss cantons is limited and local, and the central government has very limited power.
These amazing prosperity of these countries offers empirical support for federalism and federal republics. Here is a short video on the benefits of federalism and economic freedom, outlined in the U.S. Constitution:
A Constitution is a charter that sets the limited scope and reach of federal powers. Hong Kong’s charter limited taxes and regulations and did not allow welfare or redistribution policies. Lower taxes taxes and fewer regulations enabled rapid progress and prosperity.
Greece is a land of many islands and former city-states, but as a nation-state has turned into a failed welfare state. The Greek government is bankrupt and across the country banks are closed. Economists note that after decades of rapid economic growth, the Greek government significantly increased government spending (from 25% to 35% of of GNP from the 1970s to 1990s). A July 1, 2015 article in The Independent explains:
The seeds of the current crisis were sown in the 1980s, when PASOK built up a huge client state, buying the support of various electoral groups through selective subsidies and favours. Other parties soon joined them in this endeavour, turning Greek politics into a bidding war, and the Greek state into a patronage machine. Between the late 1970s and the early 1990s, government revenue surged from under 25 per cent of GDP to over 35 per cent, but client states are expensive to maintain, and government favours fuel demand for more government favours. So the money was never enough, and the shortfall was made up by borrowing and printing more of it. Government debt increased from less than 20 per cent of GDP to more than 100 per cent, and inflation jumped from less than 5 per cent to more than 10 per cent, while growth largely stalled.
The Greek economy had become a rent-seeking economy, in which economic activity is not about creating wealth, but about extracting wealth from others through the political process.
Representative democracy allows regular elections to secure “the consent of the governed.” But without a Constitution to set boundaries of democratic government, temporary majorities with limited knowledge can be stirred up to vote for damaging actions and policies. Putting Socrates to death, for example.
Across the U.S., cities and state governments are also heading for bankruptcy after many decades of legislatures voting themselves richer pensions, often based on optimistic financial forecasts. Pensions are a central part of Greek overspending, as this 2010 Economist post explains:
It is striking how often their annoyance is expressed in angry comparisons of the Greek and German retirement pension rules. Even the news that the Greek government was planning to raise the legal retirement age from 61 to 63 as part of swingeing austerity measures seems to have been like a red rag to a bull in Germany, which not long ago increased its legal age from 65 to 67.
Greek pensions are a thicket of confusion. This is a blog posting, not a print article, so I have only been Googling this rather than making a dozen calls, but according to this conference paper, civil servants in Greece employed before 1992 can retire after 35 years service, if they have reached 58, and retire on 80% of their final basic salary. That certainly sounds a great deal more generous than similar civil service schemes in Germany, which seem to insist on 40 years of service, and set the pensions rates in the low 70% range of final basic salaries.
Students should understand a bit of the history and economics of pensions. They may think Social Security and other pension systems were designed to give everyone twenty to thirty years of paid retirement. Instead, Social Security and state pensions were established at a time with the average retirement age was the same age that people died. That may seem brutal, but pensions were originally a kind of insurance policy.
It was called social insurance because now one knew who would fall in the half of workers that died early, or in the other half that lived longer. For those who lived ten, twenty, or thirty years beyond retirement, Social Security plus private pensions plus savings and accumulated assets like a house and investments, provided needed income through old age.
 |
| Source in medical history article. |
Well, that was then and this is now. It is great news that people live longer. But social insurance programs designed to provide supplementary income in old age had to be adjusted to this good news. Managers of private sector pensions had to put much more money aside during working years, so those investments could cover far more years of expected life after retirement.
State and federal government pensions should have done the same, but most didn’t. State workers wanted higher pay and politicians “kicked the pension funding can down the road” as they say, leaving the problem for future politicians.
When the Social Security system was established in 1935, full benefits began at age 65. Life expectancy was 60 years for men and 64 for women. So, again, Social Security was a social insurance program to support those who lived years or decades longer.
Students can research state and local public employee pension systems. This 2013 Manhattan Institute report begins:
Even as the federal government struggles to stabilize its finances, many states are facing their own daunting sets of fiscal deficits. These take the form of unfunded liabilities totaling almost $1.4 trillion and stemming from obligations to pay for public employees’ pensions, retiree medical insurance, and other retirement benefits. Reform efforts ostensibly being made to solve this crisis have fallen short.
Another 2013 Manhattan Institute Issue Brief focuses on amendments to state constitutions that limit legislative power to reform public employee pensions.
Seven states have specific clauses in their constitutions that protect public employee pensions: Alaska, Arizona, Hawaii, Illinois, Louisiana, Michigan, and New York. These seven states hold 20 percent of state governments’ total pension debt, and many billions more in local pension debt. These states should amend their constitutions to remove language guaranteeing pension benefits for public workers.
Constitutional amendments generally require a supermajority vote by the legislature and voter approval. All seven states have amended their constitutions in recent decades, in some cases dozens of times. The amendment process is worth pursuing, because protecting pensions in state constitutions is bad public policy. It limits the flexibility of bankruptcy negotiators, elevates the interests of workers over taxpayers, and prevents insolvent cities from discharging obligations that they cannot afford.
So, when we look at federal court system reform proposals, stronger support for federalism and economic freedom seem worth considering.