Economics

Using the States to Do Federal Bidding

stacks-of-paperThe Senate’s passage of the Dodd-Frank financial reform bill is an event too discouraging to comment upon at length. What does it suggest we have learned as a nation from the past few years of financial turmoil?

•    The failure of regulation requires more regulation.
•    Multiple layers of official oversight would be made more effective if made more numerous.
•    The financial system—in all the Byzantine complexity that thwarted official examination, market discipline, and effective internal controls—should be made more complex.

The consequences of this legislation for the financial landscape and economic efficiency will take years to play out, but there is an immediate implication that has been overlooked. I am not a lawyer, nor do I play one on television. But I do wonder if President Obama will appreciate the precedent set when he signs the bill into law. In particular, nestled in the 2,315 pages of the Dodd-Frank text is section 1042, which holds that “the attorney general (or the equivalent thereof) of any State may bring a civil action … to enforce provisions of this title, and to secure remedies under provisions of this title.” The logic presumably is that state resources can extend the reach of federal intent.

A drawback, of course, is that it is usually viewed as more appropriate if federal officials enforce federal law. To rely on state authority risks differential interpretation of the statute and unequal treatment across the states.

If this argument sounds familiar, it should. The Obama Justice Department is suing the State of Arizona precisely because its immigration law mixes federal and state responsibilities and thereby risks unequal treatment across the states.

Will the president be implicitly endorsing the Arizona approach when he signs Dodd-Frank into law? Not intentionally. More likely he will be following that more compelling governing principle of convenience. Extending the reach of big government with state resources is viewed as appropriate for policies the administration prefers and inappropriate for those it dislikes.

For a fascinating case history of the problems of state enforcement of federal regulation, read Dan Okrent’s Last Call: The Rise and Fall of Prohibition. The Volstead Act, which enforced the Eighteenth Amendment prohibition of the sale of alcohol, mixed a cocktail of federal and state authorities.

Image by digitizedchaos.

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