Chapter 1:
Constitutional Issues and Economic Policy
I. Market versus Command Economies – The Big Policy Picture
The function of any economy is to organize the production, distribution, and
consumption of goods and services. This organization of society always consists of some
mixture of two extremes – a pure market economy and a pure command economy. In
their unadulterated forms, neither of these two extremes exists in reality. The market
economy allows individuals to freely form alliances where possible with other people in
society to accomplish the goals of production, distribution, and consumption. In this
system, people do what they want. By contrast, the command economy has an imposed
structure implemented by a centralized totalitarian government that decides all economy
activities. In this system, people do what they are told to do.
Market economies are sometimes called capitalist economies, while command
economies are often referred to as communist economies, but this kind of categorization
is not exact and often leads to confusion.1 Much of the history of mankind has been a
long story of conflict between those who support a greater use of market mechanisms
and those who support greater command by government.
People who advocate greater involvement of markets in the economy generally
emphasize the freedom and diversity of choice and productive features of their system.
People who advocate greater command aspects for the economy emphasize the fairness,
stability, and safety of their system. These ideals are laid out in Table 1 and it is important
to remember that they remain ideals. The choice of exact mixture along the
(Wikipedia) In the United States, a plebiscite is typically known as an initiative
when originating in a petition of ordinary citizens, and as a referendum only if it
consists of a proposal referred to voters by the legislature. A plebiscite can be
considered a kind of election and is often referred to as such in the U.S. (an election
literally means a choice). In other countries, the term election is often reserved for
events in which elected representatives are chosen.
spectrum between these two ideal systems is ultimately a political matter.
1
In the US this
The first part of F. Hayek’s highly influential book Road to Serfdom is devoted to showing that fascism and
communism are much the same. Although Hayek did not do this, one might argue that pure libertarianism and
anarchy are much the same, as well.
political choice is made through representative democratic institutions and elections. At
times plebiscites are also used to make decisions on specific issues.
Table 1. General Perceptions of the Advocates of Ideal Economic Systems
Market Economy
Pros
Cons
Command Economy
Pros
Cons
1. Free
1. Unstable
1. Safe
1. Dictatorial
2. Diverse
3. Productive
2. Unfair
3. Wasteful
2. Stable
3. Fair
2. Unproductive
3. Drab
II. The Constitution as a Solid Foundation for Policy
In the United States, there have always been political fights over the extent to which the
government can legitimately become involved in economic affairs. The final ratification
of the US Constitution in 1789, later amended by the Bill of Rights in 1791, resulted in a
Federal government that in theory would be limited to enumerated powers, rather than
having broad dictatorial powers. That is, any power not delegated by the Constitution
was to be reserved to the states, or to the people (see the 10th Amendment, proposed by
James Madison and ratified December 1791). This meant that the Federal government
could not claim powers at its own discretion and would therefore be limited in what it
could control, acting mainly to regulate the private economy. Even this regulation as
such would be limited to actions between states and to foreign commerce. This follows
from a very important part of the Constitution, one that continues to generate
controversy today, known as the Commerce Clause (see Article I, Section 8, Clause 3) . In
particular, the Commerce Clause allows Congress to regulate commerce among the
several states, meaning that if commerce is taking place exclusively within the state, then
the Federal government had no power to regulate it.
The Commerce Clause was relatively easy to interpret in the late 18th century, but as the
country grew and the states became more integrated, it became increasingly difficult to
distinguish trade that was being carried out exclusively within a state from that which
involved outside interaction of one form or another. This is especially true during the 19th
century American westward expansion and even more so with the increased
globalization of the country during the twentieth century. Nevertheless, conservative
(Wikipedia) The Commerce Clause is an enumerated power listed in the United
States Constitution (Article I, Section 8, Clause 3). The clause states that the United
States Congress shall have power "To regulate Commerce with foreign Nations,
and among the several States, and with the Indian Tribes."
constitutional scholars over the years have continued to adhere to the view that trade
within a state should not be regulated by Congress.2 Important challenges arose when
the railroads began to link parts of the country together. Also, constitutional issues arose
over the regulation of trade on the waterways separating various states. These and other
challenges have continued down to today.
The Progressive movement, as commonly associated with the first two decades of the
20th century, claimed arguments in the Constitution previously thought to be largely
spurious, for giving the Federal government the power to break monopolies, regulate
trade, fix prices, expropriate land, intervene in labor-management contracting, and
institute changes in taxation income (whether earned within a state or not) for purposes
of gaining revenue for war and redistributing wealth.3
By 1937 the conservative or “classical liberal” interpretation of the Constitution had been
largely rejected by the Supreme Court in favor of a new form of judicial activism which
viewed the Constitution as an evolving document having meaning that changed with the
times. Not only was it possible for the Federal government to become actively involved in
state and local economic activities, the Federal judiciary found it was possible for it to
overturn state and local civil laws. It did so by invoking “implied
2
There are indeed several schools of conservative constitutional scholars. Some scholars such as Antonia
Scalia have referred to themselves as “textualists” meaning that they are interested in understanding what the
broad meaning of the words used in the Constitution was to the people at the time. Other scholars have
thought of themselves as adherents of “original intent” such as Robert Bork who seek to understand what was
in the minds of the framers of the Constitution rather than the general meaning of the words at the time.
Moreover, the basic principle guiding textualists and other originalists is that the judiciary adjudicates rather
than legislate. Another group is known as “strict constructionists” who refuse to infer anything outside of the
actual wording of the Constitution. These groupings generally refer to methodology, since they explain how the
Constitution is to be interpreted. In addition, there is a broad philosophical grouping of “classical liberalists”
who seek to promote the greatest degree of individual free choice given the constraints of society. Beyond this
philosophical grouping are libertarians who find very few if any rights to be sacrificed to the state.
3
See Richard Epstein, How Progressives Rewrote the Constitution, Washington, D.C.: Cato Institute. 2006
(Wikipedia) Judicial activism describes judicial rulings suspected of being based on
personal or political considerations rather than on existing law. The actions of
unelected judges whose rulings invalidate the policy decisions made by elected
officials have also been described with the political epithet, judicial tyranny.
powers” under the US Federal Constitution. The Federal judiciary, rather than seeking
Congressional legislation or waiting for amendments to the existing Constitution, instead
read “between the lines” of the Constitution and found “implied powers” in these
reinterpretations. In some instances, Congress or the president were imbued with these
implied powers and could actively intervene in the economy and even peoples’ civil
freedoms.
The most blatant example of this reading between the lines was the 1973 ruling on Roe v.
Wade which found that abortion was legal due to an implied “right of privacy” which
Some US Constitutional Amendments
4th Amendment:
The right of the people to be secure in their persons, houses, papers, and
effects, against unreasonable searches and seizures, shall not be violated, and no warrants
shall issue, but upon probable cause, supported by oath or affirmation, and particularly
describing the place to be searched, and the persons or things to be seized.
9th Amendment: The enumeration in the Constitution, of certain rights, shall not be
construed to deny or disparage others retained by the people.
14th Amendment, Section1: Persons born or naturalized in the United States, and subject
to the jurisdiction thereof, are citizens of the United States and of the state wherein they
reside. No state shall make or enforce any law which shall abridge the privileges or
immunities of citizens of the United States; nor shall any state deprive any person of life,
liberty, or property, without due process of law; nor deny to any person within its jurisdiction
the equal protection of the laws.
had been substantiated, so supporters said, by previous cases utilizing inferences from
the 4th, 9th, and 14th amendments to the US Constitution. Recognizing that it would be
impossible for supporters of abortion to achieve legislative success in legalizing abortion
at the Federal level, and recognizing that a new amendment to the Constitution providing
specific reproductive rights would be impossible to be ratified by the States, meant that
judicial activism or “legislating from the bench” was the only viable course left open to
such supporters.
The choice of mixture between pure market and pure command economies in the US is
thus circumscribed by the Constitution. Any law passed by the Congress, or state and
local governments for that matter, is subject to judicial review – meaning that an
aggrieved party (determined to have standing) may bring a case before the Federal
judiciary and argue whether the law or regulation infringes their constitutional rights.
Cases may be brought before Federal district courts (more than one at a time is possible)
and the ruling made at this level can under certain conditions be appealed at the Federal
Appellate level. After having reached a decision at the appellate level and if the case is of
sufficient merit and importance, it may be heard on further appeal by the Supreme Court
of the US. It is not possible to further appeal the decision by the Supreme Court, but it is
possible for the decision to be overturned or reversed at a later time by the Supreme
Court itself or by amending the Constitution.
(HowStuffWorks.com) Overturning a Supreme Court decision is very difficult. There are
two ways it can happen:
--- States can amend the Constitution itself. This requires approval by three-quarters of
the state legislatures -- no easy feat. However, it has happened several times.
--- The Supreme Court can overrule itself. This happens when a different case involving
the same constitutional issues as an earlier case is reviewed by the court and seen in a
new light, typically because of changing social and political situations. The longer the
amount of time between the cases, the more likely this is to occur (partly due to stare
decisis).
This is precisely why that abortion advocates in the US are fearful of a heavily weighted
conservative Supreme Court, since it might result in a reversal of Roe v. Wade, among
other laws. There have been at least 10 major cases where the Supreme Court has
reversed a prior decision.
The constitutionality of a law or regulation is the starting point for deciding how the mix
between market and command economies is decided in the US. The US Constitution was
written to protect the individual or a minority from a majority, which might use the
instrumentalities of government to oppress the individual or minority. It is as Justice
Antonin Scalia says; the Bill of Rights (i.e. the first 10 amendments to the US Constitution)
is actually undemocratic since it does not embrace majority rule.4 But, it does this
precisely to protect the individual from the majority by limiting what majority through
the government can do.
III. Types of Economic Policies
The government has a wide array of tools under the Constitution for affecting economic
outcomes. However, it is not true that each tool is equally effective. In order to choose the
appropriate tool of policy, we need to have measures of effectiveness. For example, the
recent so-called Great Recession of 2008-2009 has brought into question the issue of
whether monetary policy can be very effective at pulling the economy out of the
doldrums. It has also sparked a sharp disagreement over whether or not the
Bush/Obama fiscal stimulus packages were effective at combating recession. It has
raised the question of whether or not the US needs to forcefully confront China over its
manipulation of its currency.
The government affects the economy by the following means:
(1) Taxation and Other Instruments of Raising Revenue
(2) Government Spending and Transfers
(3) Government Regulation of Private Business, Prices and Markets
(4) Control of the Money Supply
(5) Border Control and Immigration
(6) Treaties, as well as Membership and Commitments in International Organizations
(7) Government Ownership and Management of Business and Productive Factors
(8) Collection, Processing, and Publication of Economic Statistics and Information
The above list is not completely exhaustive, but will do for our purposes. Economic
policy must be designed for each of the items in the list above, subject to the limitations
present in the Constitution.
In general, it will be important to distinguish between policies that are
4
Justice Scalia made this comment during a discussion program sponsored by the Supreme Court Historical
Society March 23, 2010, which was recorded by CSPAN and is available for viewing.
(a) efficient or inefficient
(b) rules-based or discretion-based
(c) permanent or transitory
(d) predictable or unpredictable
(e) time consistent or time inconsistent
(f) unilateral, bilateral, or multilateral
(g) local, state, or federal
In addition, policies are often “scored” by organizations such as the Congressional
Budget Office (CBO) to determine how they may affect the deficit or debt or some other
important economic variable now and in future years. Policies may often be judged
“revenue neutral” if they do not significantly alter the revenue stream to the government.
Policies should be judged on the basis of how they affect all generations and not simply
the current generation. This is sometimes called inter-generational accounting.
These are highly technical points and are difficult to quantify precisely. For most people,
policy is judged as being either market oriented or command oriented. For most people,
the real question is how deeply should the government be involved in the economy? For
example, should the government be determining the provision of education? Should
important industries such as water and power be owned by the government or should
they be owned by private interests? Should alternative energy firms be subsidized by
the government? Should the Federal government support the price of sugar?5 These are
just a few examples of the basic dilemma policymakers and voters face regarding optimal
policy decisions.
5
House Bill H.R. 1385 sponsored by Rep. Joseph Pitts (R – PA16) seeks to repeal the sugar price support
program and marketing allotments for sugar, and for other purposes.