The flawed economics of the dormant Commerce Clause.

AuthorMcGreal, Paul F.

Shhh! If you keep very, very quiet, and listen really, really carefully, you just might hear it rustling around underneath the Constitution. Like the sound of a tree falling in a deserted forest, constitutional law commentators are never sure if it truly exists. And, like people who claim to have seen UFOs, state governments swear that it exists and is here to conquer them. What is this lurking presence that so perplexes the mind? It is the doctrine of the dormant Commerce Clause, perhaps the Supreme Court's best known invocation of constitutional silence.(1) And, to continue mixing metaphors, that unseen constitutional doctrine acts like a colorless, odorless toxic gas: a silent killer of state laws affecting interstate commerce.

Exactly what is this hideous thing? In short, the dormant Commerce Clause is a constitutional law doctrine that says Congress's power to "regulate Commerce ... among the several States"(2) implicitly restricts state power over the same area.(3) In general, the Commerce Clause places two main restrictions on state power. First, Congress can preempt state law merely by exercising its Commerce Clause power.(4) Second, the Commerce Clause itself--absent action by Congress--restricts state power; the grant of federal power implies a corresponding restriction of state power.(5) This second limitation has come to be known as the "dormant" Commerce Clause because it restricts state power even though Congress's commerce power lies dormant.(6)

Generally, the dormant Commerce Clause doctrine prohibits states from unduly interfering with interstate commerce.(7) The Court has developed two tests to determine when state regulation has gone too far. Under one test, the Court balances the burden on interstate commerce against the state's interest in its regulation.(8) Under the second test, states are prohibited generally from enacting laws that discriminate against interstate commerce.(9) Over the last two decades, the dormant Commerce Clause has received much scholarly attention, with commentators either proposing refinements to the balancing test(10) or challenging the constitutional basis for the doctrine as a whole.(11) The commentators, however, generally have been kind to the antidiscrimination test of the dormant Commerce Clause.(12) Indeed, even Justice Antonin Scalia, who has argued vigorously (in dissent) that the Court should abandon the dormant Commerce Clause,(13) applies the antidiscrimination principle.(14)

Swimming against this tide, this Article argues that the Court's application of the antidiscrimination test is, in some cases, in conflict with the underlying purpose of the Commerce Clause: to protect the national economic market from opportunistic behavior by the states.(15) The Court has never held that discrimination between in-state and out-of-state commerce, without more, violates the dormant Commerce Clause. Rather, the Court has explained that the dormant Commerce Clause is concerned with state laws that both: (1) discriminate between instate and out-of-state actors that compete with one another, and (2) harm the welfare of the national economy.(16) Thus, a discriminatory state law that harms the national economy is permissible if in-state and out-of-state commerce do not compete.(17) Conversely, a state law that discriminates between in-state and out-of-state competitors is permissible if it does not harm the national economy.(18)

The Court has been careless in applying the antidiscrimination test; in many cases, neither of the two requirements--interstate competition or harm to the national economy--is ever mentioned.(19) As the Court stated just last term, these requirements have "more often than not ... remained dormant in this Court's opinions on state discrimination subject to review under the dormant Commerce Clause."(20) The reason the first requirement, competition between in-state and out-of-state actors, goes unstated is fairly obvious--in most cases (all except two before the Supreme Court), it is clear that instate and out-of-state actors compete in the same market.(21) The Court's silence merely reflects the (in)frequency with which the issue arises.

The reason the second requirement, harm to the national economy, goes unstated is more complex. The main task of this Article is to show that the Court has neglected this requirement not because it is rarely an issue, but rather because the Court has incorrectly assumed the issue away. Specifically, the Court assumes that discrimination between in-state and out-of-state competitors necessarily harms the welfare of the national economy, making the second requirement superfluous.(22) In making this assumption, the Court implicitly has adopted a neoclassical view of economics--that free competition among rational economic actors will necessarily improve the national economy.(23) Thus, the Court's dormant Commerce Clause analysis assumes that neoclassical economics best describes the position of states regulating interstate commerce.

Game theory offers an alternate view of economics and alternate set of economic assumptions that may better model the position of states regulating interstate commerce. As a close cousin of economics, game theory assumes that individuals act rationally; to economists, this means people try to maximize their personal welfare.(24) Using this assumption, game theory models strategic behavior--situations where "two or more individuals interact and each individual's decision turns on what that individual expects the others to do."(25) Game theory tries to predict how rational people will behave in strategic behavior situations.(26) Conversely, neoclassical economics assumes that rational people decide how to act based on prevailing market conditions such as price, supply, and demand, independent of expectations about how others will act.(27)

Two examples from the commercial context illustrate the difference between neoclassical economics and game theory.(28) First, consider the situation of a consumer who goes to the grocery store to buy a loaf of bread. Presumably, the consumer will evaluate the information readily available in the marketplace; she will compare the prices of the different brands along with her perception of the quality of the different brands. Based on this analysis, the consumer will decide which brand to purchase. Price and quality are impersonal forces set by the market, independent of any expectations about others' future behavior.(29) In this first example, the consumer does not act strategically--her decision is independent of any future behavior of the grocery store or the bread supplier.

Second, consider the purchasing agent for the grocery store who places orders with suppliers to stock the grocery store's shelves. In addition to price and quality, the purchasing agent will consider the future behavior of the supplier. For example, the purchasing agent will want to know whether the supplier is likely to breach a contract to supply the grocery store; such a breach would result in empty shelves and lost sales. If the purchasing agent expects a supplier to breach, then she may refuse to deal with the supplier regardless of price or quality.(30) The purchasing agent will act strategically by considering how she expects the other party, the supplier, to act.(31)

Neoclassical economics has a blind spot for strategic behavior; the theory does not address cases in which people anticipate one another's future actions.(32) Game theory tries to bridge this gap by using models--known as "games"--to predict strategic behavior. These games reveal that strategic behavior may lead the rational, freely competing actors of neoclassical economics to nonetheless act inefficiently.(33) Neoclassical economics assumes that free competition among rational actors will be efficient; game theory shows that the existence of strategic behavior undermines that assumption.

Game theory can be used to predict strategic behavior in response to legal rules.(34) In doing so, lawmakers can assess the economic wisdom of different legal rules. To illustrate this point, consider the situation of a pedestrian and a motorist approaching an intersection that has four stop signs.(35) Both the pedestrian and the motorist will act strategically: Each will want to know how the other will, or is likely to, act at the intersection before deciding how to act. If the pedestrian knows that the motorist is likely to run the stop sign, then the pedestrian will allow the motorist to pass before crossing the street. The pedestrian's prediction about the motorist's likely behavior, in turn, will be affected by the legal rules that govern the situation. For example, if the prevailing legal rules make motorists strictly liable for all injuries to pedestrians, then the pedestrian may predict that the motorist will exercise care, by stopping at all stop signs, to avoid the cost of an accident.(36) The pedestrian's decision therefore will depend on her prediction about the conduct of another person, the motorist, and the prediction is influenced by the prevailing legal rules. Game theory allows us to model such behavior as well as how legal rules affect that behavior.

This Article uses game theory to test the neoclassical economic assumption implicit in the Court's dormant Commerce Clause antidiscrimination test--that discrimination between in-state and out-of-state competitors necessarily harms the welfare of the national market. If, in some cases, states act strategically--that is, if states act in response to the anticipated behavior of other states--then the Court is wrong to build neoclassical economic assumptions into its dormant Commerce Clause antidiscrimination test. In these cases, state discrimination between in-state and out-of-state competitors may improve national welfare. The main task of this Article is to determine whether, in some cases, states act strategically; if so, game theory better...

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