The Region

The power of Congress to regulate interstate economic competition

Larry Kramer - Professor of Law, New York University Law School

Published June 1, 1996  |  June 1996 issue

We may need to argue about whether Congress should step in to prohibit "economic warfare" among states, but we don't need to argue about whether Congress has the power to do so: It does. Article I, section 8 of the Constitution authorizes Congress to "regulate Commerce ... among the several States," and the Supreme Court has interpreted this clause expansively. In Gibbons v. Ogden,1 which involved Congress' power to restrict state control of transportation services, the Court defined commerce to include "every species of commercial intercourse." Speaking through Chief Justice Marshall, it elaborated:

Commerce among the states, cannot stop at the external boundary line of each state but may be introduced into the interior. It is not intended to say, that these words comprehend that commerce, which is completely internal, which is carried on between man and man in a state, or between different parts of the same state, and which does not extend to or affect other states ... The genius and character of the whole government seems to be, that its action is to be applied to all the external concerns of the nation, and to those internal concerns which affect the states generally; but not to those internal concerns which are completely within a particular state, which do not affect other states, and with which it is not necessary to interfere, for the purpose of executing some of the general powers of the government.

This language was consistent with what the public had been told when the Constitution was presented to it for approval. Hence, James Wilson explained to the Pennsylvania ratifying convention:

Whatever object of government extends, in its operation, beyond the bounds of a particular state, should be considered as belonging to the government of the United States. Whatever object of government is confined in its operation and effect, within the bounds of a particular State, should be considered as belonging to the government of that State.2

It is, of course, important not to read things out of context. When Wilson spoke, the problem foremost in everyone's mind was overtly protectionist state laws, and federal power was seen as a means of assuring a free market among the states. As the Court explained in H.P Hood v. DuMond: 3

Our system, fostered by the Commerce Clause, is that every farmer and every craftsman shall be encouraged to produce by the certainty that he will have free access to every market in the Nation, that no home embargoes will withhold his exports, and no foreign state will by customs duties or regulations exclude them. Likewise every consumer may look to the free competition from every producing area in the Nation to protect him from exploitation by any.

The commerce power was not, however, limited to legislation that opens up markets. Congress was charged more broadly with protecting the economic health of the nation from any and all forms of harmful interstate activity. Protectionism was merely one type of activity by a state that produced suboptimal economic conditions or imposed negative externalities on other states. The power conferred was designed to reach others as well, and Congress was commissioned to regulate national markets in whatever way best serves the nation's welfare. Hence, Congress has enacted—and the Supreme Court has upheld—laws restricting interstate sale or distribution of lottery tickets,4 punishing someone for crossing state lines to engage in prostitution,5 and prohibiting discrimination based on race in any business engaged in interstate commerce.6 Against this background, the claim that Congress can regulate or prohibit an economically harmful form of competition by and among states is not even controversial; on the contrary, an argument that this is beyond federal power is frivolous (sanctionably so).

To be sure, the founding generation did not expect Congress to acquire power as extensive as that exercised today. But the logic of this growth, a response to changed circumstances, is consistent with the original understanding. The commerce power played a limited role in the early years of the republic because the economies of the states were largely independent. Between the Civil War and World War I, these economies became functionally integrated. By 1930, practically everyone consumed or produced goods bought and sold in other states. Improvements in transportation and communication accelerated this process. Rail services expanded, supplemented by automobiles and the trucking industry; wire services and radio (not to mention telegraph and telephone) made events around the country immediately accessible. Other states became less distant, and what happened there was of considerable importance.

These developments, in turn, made national solutions necessary for problems that had previously been handled at the state level. At first, the Court was hesitant to accept this development, and it fabricated distinctions like "commerce versus manufacture" and "direct versus indirect" to preserve some semblance of the original arrangement. But as product, labor and capital markets became nationally integrated, state regulation ceased to work; in many instances it became part of the problem. Matters came to a head during the economic crisis of the 1930s, which proved beyond the competence of states to deal with individually. FDR's New Deal called for federal regulation on an unprecedented scale. After a brief but spirited effort to hold the line, the Supreme Court finally capitulated in a series of well-known decisions rendered between 1937 and 1942.7

From the vantage of 1996, these developments look inevitable and irresistible—a natural product of progress and the industrial revolution. "Natural" or not, however, it is absurd to think of restoring an 18th century understanding of federal economic power in today's global marketplace. It is also legally indefensible. There are, after all, and always have been, two sides to federalism: not just preserving state authority, but also enabling the federal government to act where national action is desirable. If circumstances change in a way that enlarges the number of problems falling within the purview of Congress, it is inappropriate to interpret the Constitution in a way that disables the federal government from dealing with them.

Nor is this analysis affected by the Supreme Court's recent, and much ballyhooed, decisions in New York v. United States 8 and United States v. Lopez.9 New York prohibits federal legislation that "commandeers" state instrumentalities to enact and administer federal programs. It recognizes the power of Congress otherwise to regulate states, and is thus inapplicable to our problem. Lopez, in contrast, does indeed suggest that there are substantive limits to what Congress can do under the Commerce Clause. But even a very aggressive reading of the opinion in that case does not disturb federal power to regulate interstate competition for businesses. Responding to its perception that Congress was too freely using the commerce power to regulate noncommercial activity for noneconomic reasons, the Lopez Court required Congress to establish a more palpable connection between federal legislation and commerce or commercial activity. Whatever line ends up being drawn here—and most experts believe that sweeping judicial revolution is unlikely—it will not affect the legitimacy of laws directly regulating interstate commercial activity for economic reasons.

This paper, published by the Minneapolis Fed for "The Economic War Among the States," a conference held in Washington, D.C., on May 21-22, 1996, is reprinted in this issue of The Region.

Endnotes

1. 22 U.S. (9 Wheat.) 1 (1824).

2. II Jonathon Elliot, The Debates in the Several State Conventions on the Adoption of the Federal Constitution 424 (1888).

3. 336 U.S. 525 (1949). See also Thomas Jackson, The Struggle for Judicial Supremacy (1941).

4. Champion v. Ames, 188 U.S. 321 (1903).

5. Hoke v. United States, 227 U.S. 308 (1913); Caminetti v. United States, 242 U.S. 470 (1915)

6. Heart of Atlanta Motel v. United States, 379 U.S. 241 (1964); Katzenbach v. McLung, 379 U.S. 294 (1964)

7. See, e.g., West Coast Hotel v. Parrish, 300 U.S. 379 (1937); NLRB v. Jones & Laughlin Steel Corp., 301 U.S. 1 (1937); United States v. Darby, 312 U.S. 100 (1941); Wickard v. Filburn, 317 U.S. 111 (1942).

8. 112 S. Ct. 2408 (1992).

9. 115 S. Ct. 1624 (1995).

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