THE RACE TO THE MIDDLE.

• Author: Magnuson, William

How does federalism affect the quality of law? It is one of the fundamental questions of our constitutional system. Scholars of federalism generally fall into one of two camps on the question. One camp argues that regulatory competition between states leads to a "race to the bottom," in which states adopt progressively worse laws in order to pander to powerful constituencies. The other camp, conversely, argues that regulatory competition leads to a "race to the top, " incentivizing states to adopt progressively better laws in the search for more desirable outcomes far their constituencies. Despite their apparent differences, however, both the race-to-the-bottom camp and the race-to-the-top camp share one fundamental assumption--that federalism leads to extremes. In other words, when states compete on regulatory regimes, they inevitably race to high or low levels of regulation, hoping to outdo one another by distinguishing themselves from their peers. This Article, however, argues that both of these federalism models fail to account for another powerful dynamic that pushes states, not to distinguish themselves from the crowd, but rather to fit into it. This "race to the middle" leads states to adopt regulations that are similar, or even identical, to the regulations adopted by large numbers of other states. The resulting race to the middle causes state law to gravitate toward mediocre but satisfactory regulatory outcomes, not efficient or inefficient ones. The Article demonstrates how the "race to the middle" is driven by four interrelated factors: first, the informational benefits that accrue to states that adopt well-established legal regimes; second, the demand by constituents, and in particular corporations, for familiar regulatory regimes; third, the network effects from interoperable regulatory regimes; and fourth, the reduced risk of federal intervention that arises when states adopt mainstream regulatory structures. The Article concludes by assessing the implications of the race to the middle for theories of federalism and democratic governance.

INTRODUCTION I. THE RACES TO THE EXTREMES A. Federalism and Regulatory Competition B. The Race to the Bottom C. The Race to the Top II. THE RACE TO THE MIDDLE A. The Benefits of the Middle 1. Informational Effects 2. Familiarity 3. Interoperability 4. Intervention B. The Consequences of the Race to the Middle C. Conditions for Races to the Middle III. IMPLICATIONS OF THE RACE TO THE MIDDLE A. Laboratories of Democracy B. Tyranny of the Majority C. Voting with Your Feet CONCLUSION INTRODUCTION

How does federalism affect the quality of state law? It is a difficult question that scholars have struggled with, and disagreed about, for decades. At its core, though, the question is a simple one. States are free to establish their own laws in a wide variety of areas and thus inevitably face choices about which laws to adopt. In making these choices, states are informed by the laws in place in other states. Their eventual choices will, in turn, inform the choices that other states make about their own laws. Given this dynamic, how should we expect states to act?

Scholars that have addressed the question generally fall into one of two camps: those who see federalism as leading to a "race to the bottom" (1) and those who see it as leading to a "race to the top." (2) The race-to-the-bottom camp views federalism as creating a powerful incentive for states to engage in harmful and inefficient deregulation. According to this line of thought, state legislatures desire to attract corporations to their jurisdictions in order to increase tax revenues, create jobs, and generally improve their economies. But in order to appeal to the corporations and corporate executives that make decisions about where to locate business, states must adopt regulations that are more permissive than the regulations in force in other states. As each state adopts progressively looser regulations in order to outdo their neighbors, the resulting degradation of standards leads to suboptimal levels of regulation, whether it be in shareholder protections, (3) labor laws, (4) tax levels, (5) or environmental standards. (6)

The race-to-the-top camp sees things differently. According to this model of federalism, competition between states on regulatory structures in fact leads to better, more efficient levels of regulation. (7) While the precise dynamics of this process differ depending on the issue area, the basic argument is that if the market is functioning correctly, corporations should benefit from better regulation, not from the absence of it. After all, corporations have constituencies as well, and if their shareholders are regularly fleeced by corporate management or their employees live in polluted cities, they will eventually lobby for change (or go elsewhere). As a result, states have incentives to provide regulations that promote overall prosperity, rather than favoring the narrow interests of the few. Over time, then, states should progressively improve the quality and efficiency of their regulatory structures in order to outcompete their neighboring states.

Despite their disagreements, however, both the race-to-the-bottom and race-to-the-top theories share one fundamental assumption--that states race to distinguish their laws from the laws of other states. (8) In other words, for there to be a race upward or downward, states must seek to outdo one another, either by steadily loosening their regulations or steadily tightening them. Both theories take for granted that this dynamic will lead to ever more extreme regulatory structures.

But the assumption that interstate competition leads inevitably to differentiation overlooks another powerful aspect of interstate competition that in many-ways counteracts the races to the top and bottom. This dynamic, which may usefully be called the "race to the middle," pushes states toward regulatory schemes that are similar or identical to the schemes adopted by sufficiently large numbers of other states. The race to the middle encourages states to focus on harmonizing, not differentiating, their regulatory structures.

The race to the middle is driven by four interrelated factors, all of which provide benefits to states from adopting well-established regulatory structures already prevailing in other states. First, states that adopt regulatory structures already existing in other states benefit from informational effects about the benefits and risks of the structure. Second, the prevalence of an already-established regulatory structure provides greater familiarity and, thus, certainty to corporations and other regulated actors about the effects of the regulation on their activities, thereby increasing the attractiveness of jurisdictions that adopt that structure. Third, states benefit from network effects when they adopt regulatory structures that are interoperable with the regulatory structures in place in other states. And finally, states that adopt well-established regulatory structures that are common across the nation are less likely to face regulatory intervention from federal lawmakers.

In many ways, the race to the middle is a reassuring phenomenon. It suggests that regulatory competition does not inevitably lead to ever more extreme forms of regulation. It counteracts countervailing pressures for states to race to the bottom by deregulating at the expense of consumers and citizens or overregulating to the detriment of beneficial corporate activity. And it works to reduce the magnitude and prevalence of conflicting laws that can raise the cost of doing business across borders.

But the race to the middle is not without costs. In fact, it raises a number of new and underappreciated concerns about the nature of federalism and its effects on state competition. First, in a kind of elevated "tyranny of the majority" problem, the race to the middle may allow suboptimal, but widely adopted, regulatory schemes to crowd out more efficient, but sparsely adopted, ones. Second, the race to the middle may reduce policy innovation as states seek to engage in copycat regulation rather than acting as laboratories of democracy. Third, the race to the middle reduces the ability of individuals and companies to "vote with their feet" by leaving one jurisdiction and moving to another.

This Article proceeds in three parts. Part I examines the scholarly literature on regulatory competition and describes the conventional wisdom regarding races to the bottom and races to the top. Part II sets forth an alternative dynamic by which regulatory competition may lead to races to the middle where states seek to adopt regulatory schemes that are consistent with, or even identical to, the schemes already present in other jurisdictions. Part III concludes by outlining a set of implications of, and potential concerns regarding, races to the middle.

1. THE RACES TO THE EXTREMES

   Federalist principles underlie much of our constitutional system. (9) While the precise contours of where the national government's powers end and state governments' powers begin are the subject of vociferous debate, (10) it is indisputable that states have broad discretion to set their own laws and regulations in a variety of policy areas." This decentralized system is widely understood to promote a set of values essential to our democracy, from protecting autonomy to promoting popular sovereignty to encouraging policy experimentation. (12) One important consequence of federalist principles, however, is that state laws interact with each other, sometimes in unexpected ways. (13) Low taxes in one state may attract corporations away from states with higher taxes, but better public services may push individuals in the opposite direction. (14) Strong labor protections in one state may push corporations to relocate to states with weaker protections, but better employment opportunities may push individuals in...