Modeling the Interaction

A simple spatial model can demonstrate this process, with policy preferences for less regulation and enforcement on the right side, and for more regulation and enforcement on the left (see Figure 1). I am assuming that the “preferences” of the 50 states are normally distributed over this range, with a median state's preferences somewhat to the left of the federal coalition, though this is not necessary for this type of interaction to occur (that is, the federal action could be at the median point of all the 50 states, or elsewhere).

Point 1 represents the federal deregulatory or de-enforcement action. It could be a single decision, like Congress voting against limits on carbon dioxide emissions from automobiles or President Bush's decision to severely limit federally funded stem cell research. Or, it could be a longer-term process, such as the Securities and Exchange Commission (SEC) gradually relaxing its oversight of and enforcement over corporate accounting practices over a few years. Reacting to this specific decision or to the trend of de-enforcement, state actors develop their own regulatory initiative, which might be at Point 2. It is worth noting that sometimes Point 2 happens first chronologically, as states experiment with new regulations, though this usually means that the federal government has decided to skip Point 1 or to make it implicit. For example, in 2001, seven states adopted “do not call” laws against telemarketers that proved so popular Federal Trade Commission Chair Timothy Muris later developed a national rule limiting telemarketing, an action he admitted would have been unlikely without the states acting first.

Other examples include the California legislature approving carbon dioxide emissions limits in 2001 and New York State Attorney General Eliot Spitzer using state law to go after corporate financial fraud and accounting shenanigans. If the affected automobile manufacturers or financial firms are unable to defeat the initiative at the state level, by a combination of lobbying, legislative reversals, bureaucratic decisions, or judicial challenges, they then appeal to federal actors to preempt these state actions, which is Point 3. Given the ensuing publicity about the issues, however, they often have difficulty arguing for a position as extreme as the original federal-level status quo (Point 1) and will probably have to live with a less deregulatory outcome, if they are able to get a consensus at all for a preemptive federal standard (and, though lobbying groups tried, they were not successful in achieving federal preemption in these particular examples). One of the earlier examples was the establishment of the federal Environmental Protection Agency in 1970, after California had developed very strict air pollution regulation; automobile manufacturers found California's actions more problematic than federal regulation (Moe 1989; Carlson 2003). If lobbyists and politicians achieve no federal consensus, the various, and perhaps conflicting, levels of regulation stand.

Thus, the actions of a single state, or sometimes of multiple states, “pull” the resulting federal regulatory equilibrium to a more pro-regulatory position (see Walters 2004 on three states banding together to react in this manner to threatened federal preemption over insurance regulation). This suggests that, despite some recent consensus toward less regulation by slim majorities among federal level institutions, individual states use their power to provide a threshold level on how far deregulation and de-enforcement can go. While the left/right position described here has been the most common pattern in recent years, there is no inherent reason that this interaction could not pull regulation in the other direction, if some states preferred more deregulation than a more activist federal government might prefer. The key for this to work is that the federal government cannot or will not always preempt the states' authority to regulate in some of these areas, or such preemption is shaped partly by state preferences. In this current context of state activism, whether or not to preempt is often a theoretical dilemma for federal conservatives, who might favor both more deregulation and retention of state authority.

Given that state regulation has not “faded away” or been preempted away in recent years, and may well have expanded its role in the system through these balancing interactions, it is worth paying some attention to the specific patterns of preemptions.

The Continued Existence and Relevance of State Regulation

Different scholars and observers hold two opposing normative perspectives on state regulation. The negative view suggests that regulation largely is captured by the most powerful interests in the state who easily dominate under-staffed part-time legislatures and agencies, that states collectively “race to the bottom” in a lowest common denominator attempt to attract business investment with loose regulatory policies, and that state regulation is an unnecessary additional barrier for American firms competing in a global economy monitored enough by the World Trade Organization (WTO), EU, and other international regulations. Supporters of this position believe that the federal government should preempt state regulation as much as possible. Theoretical arguments supporting a single federal regulatory regime, and thus preemption, are that firms need consistent and stable regulation to compete in national (and international) markets, that federal regulation can incorporate jurisdictional externalities, that federal regulators can access greater analytic resources than individual states, and that national politics may be less susceptible to extreme interest group capture than state regulation.

In contrast, advocates of the favorable perspective believe that the states have improved their policymaking institutions and ability over time, that devolution has added to that strength, and that citizens now see states as the most trusted and capable partners in the American system. This implies not preempting the states, in most circumstances, unless a very strong case can be made. Theoretically, this positive perspective is bolstered by the idea that state regulation can better match policies to the preferences of their citizens and businesses, that states can act as experimental laboratories, and that they have competitive incentives to regulate in efficient ways.

In either case, there is no denying the continued importance of state regulation. The states regulate up to 20% of the American economy (Teske 2004). Though regulatory expenditures represent only a small percentage of state and federal government budgets, regulation forces private actors to spend considerable monies. About one-third of state agencies mainly address regulatory issues. Into the 21^st century, states retain their role as the only regulators of business activities like corporate chartering, insurance, workers compensation, and occupational licensing. Preemption of these activities would require a major change in assignment of regulatory responsibility (though partial preemption of state insurance regulation may be coming, as a result of the convergence of the financial industries, accelerated by the Gramm-Leach-Bliley Financial Modernization Act of 1999 (113 Stat. 1338)). States share some regulation with the federal government, usually along the constitutional intrastate/interstate division, as in telecommunications and electricity, and with a few areas of transportation. Some preemption has occurred in these industries, but important elements of regulation remain at the state level. States implement specific federal regulations in areas like occupational safety and environmental policy, where they sometimes have authority to go beyond federal standards, to try different implementation approaches to meet these standards, or to address problems not handled by federal legislation. States have some overlapping jurisdictions with the federal government in discretionary enforcement areas like consumer and financial regulation. These last two arenas provide the most examples of the interactive federal/state preemptive pattern.

In my own research, and in reviews of the broader literature, I have found that industry capture and regulatory “races-to-the-bottom” are legitimate concerns about state regulation, but that most areas of state regulation are actually characterized by contested interest group environments within which state institutional actors often make independent policy choices (Teske 2004; Gerber and Teske 2000). The most influential state institutional actors are legislators and bureaucrats. Governors have also been trying to centralize their control over state regulatory agencies.

While state regulation continues to be important, the patterns of preemption vary by regulatory type and sector.

Ex Ante Structural Regulation Versus Ex Post Enforcement

Recent regulation of price and entry in some markets, or ex ante structural regulation, has generally been characterized by partial or complete federal preemption of the states, often through explicit legislation with a deregulatory goal. At the same time, federal “de-enforcement” of ex post regulation, often involving reduced enforcement efforts by agencies headed by presidential appointees, rather than Congressional legislation, has been resisted by the states, often successfully, as in the pattern noted above.

In the sphere of ex ante regulation, the federal government preempted state efforts to regulate transportation industry prices and entry, specifically and statutorily in airline deregulation in 1978, state railroad deregulation in 1980, state intercity busing deregulation in 1982, and state trucking deregulation in 1994. While preempting the states, the federal government largely stopped its own economic regulation of these industries, even eliminating the Civil Aeronautics Board in 1978 and the Interstate Commerce Commission in 1996. The federal government also preempted much of the states' ability to regulate prices and entry in financial industries; for example, after the savings and loan associations' (S&L) crisis of the late 1980s, they prevented the states from chartering S&Ls. Congress also preempted state restrictions on interstate branch banking in 1994 and later preempted state oversight of mutual funds. As Congress relaxed the separations between different kinds of financial firms in the 1999 act, they set up a greater possible role for federal regulation over the insurance industry, the oldest and perhaps most important industry only regulated by the states. While federal officials have not preempted state telecommunications and electricity regulation as much, with the Telecommunications Act of 1996 (110 Stat. 56) Congress preempted some state regulation, and that act and the Energy Act of 1992 opened the door for further state deregulation. Congress and federal agencies have not pushed deregulatory preemption further in these two critical industries in part because local incumbent firms still face only limited competition.

Thus, when Congress decides that federal deregulation is appropriate, it can either “incent” the states to deregulate as well, or, backed by sufficient legal precedent, preempt them outright. Indeed, the federal goals have at least been consistent, because as these federal deregulatory and preemptive actions decreased the power of states over many areas of economic regulation, they also decreased the federal role as much, or even more.

While there are significant political and theoretical differences between the kinds of economic, ex ante regulations that have been deregulated substantially and the kinds of information and risk regulation associated with ex post forms of enforcement, Presidents Reagan and George W. Bush, and the 1994 Republican Congress' “Contract with America,” lumped them together with “big government” and tried to reduce enforcement by cutting budgets and centralizing their authority over agency rulemakings. In response, many organized labor, environmental, and consumer groups resisted these attempts, and they often used the states as a form of venue shopping to achieve their goals. In many ways, this reversed the traditional “state's rights” politics that conservatives had embraced in the past to resist progressive federal initiatives. These regulatory activists have found considerable success in shaping policies in several states, including, but not limited to, California, New York, and Massachusetts.

Observers first noticed this balancing effect of regulatory federalism during the Reagan administration. In the 1990s, President William Clinton moderated the federal reduction in regulatory enforcement, but the political power and explicit anti-regulatory agenda of the 1994 Republican-controlled Congress continued to make regulatory activists wary of federal activities, so they pressed on with state efforts. For example, in health care, pro-regulatory groups pressured several states to adopt patient's bills of rights and prescription drug laws during the 1990s, when Congress would not enact such bills. After 2000, skepticism from pro-regulatory activists accelerated, maintaining their focus at the state level, especially as several powerful Bush regulatory appointees publicly argued for reductions in regulatory enforcement.

Regulatory activists have utilized three state-level institutions to advance their policies—legislatures, state attorneys general (SAGs), and, in about half of the states, citizen initiatives. For example, in the late 1980s, 20 state legislatures considered various forms of nutrition labeling, action that was preempted by the passage of the Nutrition Labeling and Education Act of 1990 (104 Stat. 2353), as food manufacturers feared facing 50 different standards, and succeeded in implementing Point 3. Similarly, in the early 1990s environmental groups pressed 21 state legislatures to pass laws requiring plastic six-pack connectors to be biodegradable—business groups then pushed Congress to press the EPA to develop uniform national biodegradable rules in 1993, again succeeding in Point 3 preemption that was more regulatory than initial federal actions.

While legislative action is important, the expanded activities of SAGs now play the most critical role, as exemplified best by New York's Spitzer. Observers note: “His assault this year on the seamier habits of leading brokerage houses has vaulted him to another plane, a national figure with a higher profile than many governors and senators. Fortune magazine put him on its cover in September, branding him ‘The Enforcer’” (Perez-Pena and McGeehan 2002). Traub (2002, 39) wrote: “Spitzer and other attorneys general are filling a void that was intended, by the anti-Washington right, to be filled by the marketplace—by, say, self-regulating Wall Street businesses—not by other legal actors like state A.G.'s.” Spitzer's aggressive regulation of financial, brokerage, and insurance firms prompted later SEC and New York Stock Exchange investigations and led these firms to (unsuccessfully) seek federal preemption of Spitzer's actions.

Spitzer is not the only aggressive SAG in recent years: six SAGs challenged in court the Bush administration's proposal to relax environmental standards for upgrades of industrial facilities, 29 SAGs sued Bristol-Myers over the blocking of a generic drug alternative to BuSpar, eight SAGs sued the U.S. Department of Energy over relaxation of appliance energy efficiency rules, and nine SAGs insisted on a tougher U.S. Department of Justice antitrust settlement with Microsoft in 2003. SAGs piggy-back on the popular product liability movement, taking on cases against big national corporations perceived to have deep pockets. Nearly two-thirds of SAGs are Democrats, many seeking to build name recognition to run for governor, and they are collectively building upon the foundation of their stunning 1998 victory against tobacco firms (Provost 2003). Business groups have recognized their disadvantage in dealing with SAGs; they recruited and funded candidates successfully so that 10 of 15 SAGs elected in November 2002 were Republicans.

In the half of the states that have the citizen initiative, regulatory activists have sometimes employed it. California's Proposition 65 on food labeling in 1986 started the national debate on that topic, leading to the 1990 federal labeling act. California's 2004 initiative on stem cell research is leading to what some have called a mini National Institute of Health, funded by taxpayers in our largest state, though the research will have national (and global) implications.

Future Implications

Despite deregulation and globalization, to paraphrase Twain: “the death of state regulation has often been greatly exaggerated” (Teske 2003). While the federal government has preempted much state authority over structural economic regulation in the last 25 years, state social regulatory activists keep re-enforcing other areas. Federal de-enforcement of social regulation prompts varying forms of state re-enforcement, which in turn often leads back to business' lobbying for preemptive “liter” regulations. States have added “balance” to the system, where some expected further “checks” on regulatory growth. States may also be setting a threshold on how far deregulation and reduced regulatory enforcement will go, even with a conservative coalition firmly in control of federal government institutions.

A number of regulatory topics may soon fall into this federal/state preemptive pattern, including predatory lending practices, Internet privacy and identity theft, genetically altered food, workplace ergonomics and repetitive stress illnesses, and insurance agent licensure requirements. Not for the first time in American history, federalism is proving to be a complicated structure, with sometimes surprising equilibrating effects. Strange political bedfellows are also being created, as progressives who see no prospect of elected federal institutions supporting their policies in the near future now favor strong state's rights, while a conservative coalition on the U.S. Supreme Court questions whether a number of federal regulations actually apply to the states.