The concept of "surplus" in The Upside Down Constitution

JB

For the symposium on Michael Greve's The Upside Down Constitution (Harvard University Press 2012).

A key concept in Mike Greve's book is the idea of "surplus." This concept helps Greve explain the political motivations for the New Deal and the way that the New Deal inverted the proper form of federal-state relations.

Greve argues that the New Deal was not, as generally believed, an increase in federal power at the expense of the states. Rather, it was an increase in government at all levels. Increases in federal power served the interests of state political elites, because it allowed them to collect more "surplus." As he points out (p. 201), "Far from trampling on the states, the expansion of federal commerce powers enhanced their capacity to collect surplus. Even the Commerce Clause, exhibit A in every account of a supposedly nationalist New Deal, was a state-friendly doctrine and a response to state demand."

The expansion of state capacities during the New Deal lead to what Greve calls "cartel federalism."  As he explains early in the book (p. 4) in this cartel version of federalism states do not lose power vis a vis the federal government. Rather, they actively collude with the federal government to maximize "surplus": States will accept increased federal power "only if the move promises to enhance their surplus capacity—very roughly, their ability to tax citizens in excess of the cost of providing public services."

In competitive federalism, by contrast, "states’ attempts to collect surplus will induce exploited citizens to exit—to 'vote with their feet.' This 'Tiebout competition' will discipline the junior governments in the same way in which market competition disciplines private producers." (p. 7)

Cooperative federalism is good for individual citizens "because it promises to reduce government abuse and exploitation all levels." But it is bad for states (or more correctly, state political elites), because they want to maximize their surplus. So states will use the federal government to form what are in effect regulatory cartels. They will do so in order "to improve their position—the `power, emolument and consequence of the[ir] offices,' in Hamilton’s words; their 'surplus,' in the parlance of public choice economists. Much like private producers in economic markets, states 'as states' seek supracompetitive returns. To that end, they need a central government that stands ready to prevent competition among states and to cartelize the political market." (p. 7)

So far, so good. But what exactly does Greve mean by "surplus?" This idea provides the central motivation in Greve's book for explaining why good states do bad things. However, the word is used in different ways in different parts of the book. As far as I can determine, the term "surplus" refers to three different kinds of phenomena:

1. "Surplus" means that states tax their own citizens for more than the actual costs of the services they provide. For example a state raises taxes of 2 million dollars and uses it to build a road, prison, or hospital that only costs 1 million.  What happens to the surplus tax revenue? There are at least four possibilities. First, it might be absorbed by government officials in the form of outright graft or bribes. Second it might be used to pad government officials expense accounts, provide them with fancy cars and nice offices, etc. Third, it might simply be wasted through inefficient management. Fourth, it might be handed off to cronies of government officials then in power or to government contractors that government elites regularly deal with.  This form of surplus is what politicians generally refer to as "waste, fraud, and abuse." Therefore we might call it "waste, fraud and abuse surplus."

2. "Surplus" means that state governments do their best to impose costs not on their own citizens but on citizens of other states. Examples would be anti-competitive regulations that give preferences to state businesses, laws that tax out- of-state residents, or laws that impose special regulatory obligations that locals can easily deal with but that hamper national concerns because of multiple and conflicting regulations in different jurisdictions. This form of surplus-- call it "externalization surplus"-- is centrally at stake in the dormant commerce clause doctrine. It was also addressed by the doctrine of Swift v. Tyson, which imposed a uniform federal commercial common law in diversity cases.  This kind of surplus does not really fit Greve's initial definition, because it is less about states taxing their own citizens (and pocketing the difference) than it is about attempting to impose costs (or gain revenues from) residents of other states and businesses that do business in more than one state.

3. Later in the book Greve uses the term "surplus" in a third way-- to refer to government programs that some citizens support but other citizens oppose.  The key moment occurs on p. 191, when Greve moves from his ex ante model to what he calls the "in-period analysis" of federalism:

I [now] abandon the autocracy assumption and substitute a more conventional assumption about state politics: democracy, or interest group politics. This move implies a change in the dissipation of state surplus: autocrats will want to spend on concubines and castles; elected officials, on constituencies. (We can be confident of this generalization because offi cials who fail to do so won’t be officials for very long.) However, state politicians will still seek to produce surplus, for the reasons that worried Hamilton and Madison: a lack of any encompassing interest (they are supposed to look to their own constituents’ interests, not those of other states or the nation), and a short time horizon extending to the protection of their tenure.

What is it that constituents want that could be so objectionable? Among other things, they might want labor regulations, environmental regulations, subsidized health insurance, government insured pensions or subsidized retirement programs, food stamps, and other kinds of laws characteristic of the post-New Deal period.

Surely some of these laws might be badly administered, and they might lead to waste, fraud, and abuse. But that is not why Greve objects to these laws. His objection is that they discourage competition between states. In these cases, he explains, the "surplus" is not handed out to families or cronies of government officials. It is handed out to constituents. Therefore we might call this form of surplus "constituent surplus."  As Greve puts it elsewhere: "The New Deal Constitution is solicitous of the states as states—that is, the interest of the political class in accumulating surplus. It thereby unleashes factions (now more charitably called “interest groups”) to clamor for a share of the surplus." (p. 13)

At this point, Greve's theory of competitive federalism becomes especially controversial. Greve has defined the concept of surplus so capaciously that it runs together things that most reasonable people oppose (waste, fraud and abuse, unjust and inefficient discrimination against outsiders), and things that not everyone will oppose and many will support: the various programs, regulations and benefits provided by the modern regulatory and welfare state.

Put another way, is Greve correct that "waste fraud and abuse surplus," "externalization surplus," and "constituent surplus" are all versions of the same phenomenon?

This is the point in the argument at which the baby may get thrown out with the bathwater. What Greve calls constituent "surplus" others might call legislation in the public interest. Greve's conception of surplus offers a familiar nod to public choice theory: In a pluralist democracy, concentrated interests gang up on the powerless (here businesses) to extract rents from the deserving (or the productive).  It sounds suspiciously like the revenge of the dreaded 47 percent all over again.

Greve's model glosses over some potentially important distinctions. The "concentrated interests" pressing politicians may turn out to be the broad mass of the public; the powerless businesses may themselves be powerful, concentrated and motivated political interest groups; and the "rent-seeking" in question may provide basic procedural and substantive protections against overreaching, social insurance, key infrastructural investments, or other valuable public goods.

To make his argument plausible, Greve will have to offer a theory of unjustified "constituent surplus" that plausibly distinguishes government action that is in the public interest from action that is not. If the production of "constituent surplus" is simply any departure from laissez-faire policies, then the analysis starts to become question begging.

This is not to say that Greve can't rise to this challenge. It is simply that he hasn't really attempted to do so in this book. And until then, readers are left to wonder what he is really claiming and how far to take his arguments.

A second point flows from the idea that what Greve calls "surplus" is being delivered to constituents. A state is not an "it"; it is a "they," or perhaps more correctly, a set of contrasting "they's" in perpetual competition with each other for political power. Greve alludes to this point when he identifies states with the political class or political elites (p. 13). But the membership and ideology of this class may change over time, and especially in a polarized political system, political elites may not have a uniform set of views. It is by no means clear that state political elites are uniformly interested in business-harming cartelization in the way that Greve suggests. If state political elites are allied with (or captured by) the business community, they may behave quite differently.

A good example is the decision by Governor Rick Perry and other Republican governors to forgo the expansion of Medicaid for the state's poor and uninsured citizens.  Greve's analysis allows us to view the Medicaid expansion in Obamacare from a different and more jaundiced perspective.

From this perspective, Obamacare was not an assault on the sovereignty of the states-- it was a racket that greedy state governments willingly sought in order to increase their "surplus." States cleverly used the federal government to elicit  taxpayer dollars to fund health care for their poorest citizens-- those up to 133 percent of the poverty line.  Even better, the government promised to pay 100 percent of the health care costs incurred in the early years of the program, gradually decreasing to a 90 percent reimbursement, which is still much higher than the federal reimbursement for the existing Medicaid program.

The Medicaid expansion was enforced by a threat to withdraw all existing Medicaid funding. In NFIB v. Sebelius, the Supreme Court struck down this leverage. It held that states must have the opportunity to stay in the current Medicaid program (which deals with indigent elderly, children and disabled) without participating in the expansion.

Even so, it was widely expected that the promise of what Justice Elena Kagan called "boatloads" of money would act as a sufficient incentive to join the new program. States that chose not to opt in would lose out: If they wanted to fund health insurance for their poor, they would have to do so on their own nickel, while all of the federal tax money for the new program would go to the poor in other states.

And yet, several states, all headed by Republican governors, have so far resisted the siren song of the Medicaid expansion. If state governments are simply Grevean rent-seeking missiles (I hereby copyright that phrase!), this course of action would make little sense.  Rick Perry and other Republican governors should be slobbering for the federal cash. Instead, he is refusing the money, and he believes that he will reap political rewards for doing so. Conversely, if he did come out for the Medicaid expansion he might face  considerable opposition within his own party, including a primary challenge.

What explains this state of affairs? Why is this state politician not joining with the dreaded state health insurance cartel? I think that the reason is not so much a refutation of Greve's thesis as a clarification of it.

At first glance, Greve's thesis would suggest that all of the Republican politicians at the state and the federal level who opposed Obamacare were not really serious. They were just kidding us. Secretly, deep in their heart of hearts, they really wanted the money all along. If so, they had a pretty funny way of showing their  preferences. And if they were all in on the game all along, it would be a political trick of massive proportions unlike any seen in the nation's history.

A better way of understanding Greve's point is that the long run trend of state politicians will be to accept social welfare programs like Obamacare. But even that is not correct.  For at least one major political party has consistently been opposed to the expansion of these and similar programs in recent years-- the Republicans.   So we need to complicate Greve's model in order to give a different account of how state politics works and what incentives state politicians face.

The political elites who control the Republican Party are not likely to be the beneficiaries of Medicaid. Nor are most of the voters in the Republican gubernatorial primary. In order to be reelected governor, Rick Perry and other Republican politicians must please these constituencies. Many business organizations who donated to Perry's campaign also opposed Obamacare in general and the Medicaid expansion in particular. It is true that many people in Texas may be harmed by the state's failure to take the Medicaid money, but most of the people adversely affected by lack of access to health care either don't vote or don't vote Republican.

Rick Perry is not taking the Medicaid money because he is particularly politically virtuous, or because he is willing to sacrifice blood and treasure in the name of competitive federalism.  Rather, he is not taking the money because state governments are controlled by different elites at different points in time, who respond to different constituencies. Sometimes state governments want to engage in what Greve calls cartels, but sometimes they do not.

There is another complication. It is possible that, once we fix the baseline that defines "surplus"--and exclude legislation in the public interest--some governors are actually engaged in extracting surplus from their poor and middle class citizens by supporting legislation (or other government action) that benefits their most wealthy constituents at the expense of other citizens. Greve's model of state cartelization suggests that states will move toward regulatory cartels that promote only certain types of policies: policies that protect local businesses at the expense of national businesses, and thereby sacrifice economic growth to please parochial in-state constituencies.

But this need not be the case. Some state politicians may push hard to limit redistributive programs, repeal  regulations of business, give unnecessary sweetheart deals and special tax breaks to businesses, and hinder the provision of public goods at both the state and national levels. They may do so because the most powerful constituencies in their state are a different kind of concentrated constituent interest: business interests--including national businesses and national trade organizations who contribute generously to political campaigns.

In particular, state politicians may push for policies that favor business interests and sacrifice education, health care, the environment, investments in infrastructure, or other public goods. These policies may impose considerable harm on many individuals within the state. (They may also sacrifice long-term economic growth in order to please current concentrated interests.) Greve doesn't call such pro-business policies an extraction of "surplus" that distributes from the poor and the middle class to the wealthy.  But depending on the baseline of rights or expectations that we start with, such policies could be viewed precisely that way.  (Following Greve's model of in-period federalism, this would be an account of how interest-group pluralism eventually moves from democracy to plutocracy). If we start with different assumptions about what surplus is and how legislation extracts surplus, we would get a different version of Greve's competitive federalism; it would likely produce a very different set of conclusions and have a very different political valence.

But to return to my previous point: I am not arguing that Greve is wrong that states engage in policy cartels. But they may not always do so, depending on how national politics, national parties (and national money) are organized. They may find it politically efficacious to support certain types of de-regulatory policies that benefit national as well as local business interests.

It is possible that, in the long run, Texas will find staying out of the Medicaid expansion simply unacceptable politically. I predict that this will happen just about the time when the demographics of the state change sufficiently that Democrats are once again competitive for most state-wide offices and Texas Republicans must moderate their positions if they want to hold onto power.

But if and when this happens, I do not think it is because only at that point was the Texas political machinery finally captured by concentrated interests whereas before--in the good old days of pro-business Republicans like Rick Perry--it was not. Rather, I would say that the vector sum of interests-- and the corresponding incentives of political elites who were able to gain power--changed. (Moreover, the mere fact that an interest wins in pluralist democracy does not mean that it must be a concentrated minority that does not deserve victory. It may now simply represent a majority.)

Greve's model relies on fairly simple assumptions in order to show basic tendencies. That is well and good as a starting point. A more complicated model, however, should take into account some of the effects I have just described-- the ambiguity of the concept of "surplus," the multiple contending parties and ideologies within a single state government, and and the feedback effects between national politics, political parties, and state politics.

[Update: Shep Melnick's review of The Upside Down Constitution (unfortunately still behind a paywall) has an excellent discussion of the concept of "surplus" in Greve's book, and also makes a number of other good points as well.]




Posted 4:31 PM by JB [link]