Economic Regulation

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ECONOMIC REGULATION

In the field of economic policy, the composite constitutional powers of American governments—federal, state, and local—are extremely broad. Granted that governments may not implement economic policies that would violate the guarantees of the bill of rights or a few other constitutional limitations, within these spacious constraints there is little that governments may not do. But what they must or should do is more complex. As to macroeconomic policy, whose main instruments are monetary and fiscal, powers amount virtually to duties, for government could not function without taxing and borrowing, nor could the economy run at all smoothly if government declined to issue any money or take any steps to control its value. (See borrowing power; monetary power; taxing and spending power.) Just how these essential functions should be carried out is a matter of art and of debate, but few contend that the functions need not be carried out at all. However, as to microeconomic policies—those identified by usage as the substance of "economic regulation"—constitutional powers have not been regarded as inescapable duties. Although governments may intervene directly to regulate prices, wages, quality of products, and various other aspects of markets, they need not do so. Wages, for instance, have been regulated at some times but not others, in some occupations but not all, and so as to set minima but not maxima. In short, economic regulation is constitutionally optional.

Nonetheless, American governments have always practiced economic regulation, albeit in varying forms and degrees. Moreover, they have always been considered to possess broad authority to regulate, even if during a relatively short interval at the beginning of this century the federal courts invalidated a few particular forms of economic regulation without, however, casting doubt on the legitimacy of most other forms. This historically continuous practice of economic regulation shows that American governments were never dogmatically addicted to laissezfaire, notwithstanding a broad though sometimes faltering preference for private enterprise, and that the Constitution, as intended, written, and interpreted, is not a manifesto in favor of laissez-faire.

Before the civil war, the constitutional authority of the states to carry on any and every form of economic regulation was seldom questioned. And this acceptance was not for want of regulations to question. On the contrary, state and local governments set the prices to be charged by wagoners, wood sawyers, chimneysweeps, pawnbrokers, hackney carriages, ferries, wharfs, bridges, and bakers; required licensing of auctioneers, retailers, restaurants, taverns, vendors of lottery tickets, and slaughterhouses; and inspected the quality of timber, shingles, onions, butter, nails, tobacco, salted meat and fish, and bread. This very incomplete list attests to an intention to exercise detailed control over the operation of markets, especially (though not only) those that have since been characterized as providing "public services" and those thought to be morally dubious because of association with usury, betting, intoxication, or excessive jubilation.

In the few instances before the Civil War when such regulations came before its eyes, the Supreme Court roundly affirmed their constitutional propriety, always provided (for so the issues arose) that the state's legislation did not collide with the federal commerce power. So in gibbons v. ogden (1824) john marshall referred to "the acknowledged power of a state to regulate … its domestic trade" and to adopt "inspection laws, quarantine laws, health laws …, and those which respect turnpike roads, ferries, etc." In the license cases (1847), roger b. taney defined the state police power as "nothing more or less than the powers of … every sovereignty … to govern men and things," including commerce within its domain, powers absolute except as restrained by the Constitution. Again, in cooley v. board of wardens (1851) the Court upheld the constitutionality of a state law requiring ships in the port of Philadelphia to employ local pilots, and further regulating the qualifications of pilots and their fees. Only one notable judgment of the time, by the highest court of New York, seems on casual reading to cast doubt on a state's regulatory power. In wynehamer v. people (1856) that court invalidated a law prohibiting the sale, and even the possession, of hard liquor on the ground that the statute acted retroactively and thus fell afoul of the due process clause in the state's constitution. The Justices agreed that a prohibition law framed to operate prospectively would lie entirely within the legislature's power, and the only Justice who expressed reservations about outright prohibition went on to say: "It is … certain that the legislature can regulate trade in property of all kinds." Long and widespread practice throughout the country confirmed that state legislatures can indeed regulate the terms and conditions not only of trade but also of production, as well as entry into various occupations—though courts repeatedly insisted that the states' police powers, broad though they were, must be limited by profound constitutional antipathy to arbitrary action, such as that instanced by Justice samuel chase in calder v. bull (1798): "a law that takes property from A. and gives it to B."

Nor was this broad scope of the police power curtailed by decisions following shortly after the ratification of the fourteenth amendment in 1868. In the slaughterhouse cases (1873) the majority of the Supreme Court upheld a Louisiana law that closed down all slaughtering inside New Orleans, confined it to a designated area outside the city, and gave a single private company the right to operate a slaughterhouse there, despite the complaint by butchers that the statute, by depriving them of part of their usual trade, violated the privileges and immunities and due process clauses of the Fourteenth Amendment. The Court concluded that the police power undoubtedly authorized regulation of slaughtering, and that the prohibitions imposed on the states by the amendment should not be interpreted as a limitation on reasonable exercises of the police power.

A broadly similar view prevailed in Munn v. Illinois (1877), which concerned the validity of a statute fixing the maximum charge to be levied by grain elevators in Chicago. Against the defendants' plea that the ceiling thus set on their earnings effectively deprived them of property without due process, Chief Justice morrison r. waite marshaled the long history of adjudication prior to 1868: "It was not supposed that statutes regulating the use, or even the price of the use, of private property necessarily deprived an owner of his property without due process of law." The word "necessarily" signaled a departure from the majority's blunt assertion in Slaughterhouse that due process should not box in the police power. Instead, the Court adopted in Munn the pared-down principle that states could, without offending against due process, regulate the prices of some kinds of business, "those affected with a public interest " or, as later usage had it, public service businesses. The tempting inference, that ordinary, "private" businesses are immune to economic regulation, though lent plausibility by some hints in the text, is not confirmed by any forthright judicial statement. (See granger cases.)

The "affectation with a public interest" doctrine, though frequently invoked by courts in support of state regulation of railroads and public utilities, did not always carry the day. The first notable deviation, not only from Munn but from the longer previous tradition, took place in allgeyer v. louisiana (1897). In question was Allgeyer's right to buy marine insurance from a New York company despite a Louisiana statute prohibiting out of state insurance companies from doing business there without a license. While conceding the state's power to regulate or even to exclude insurance companies domiciled in other states, the Court concentrated on every American citizen's privilege to pursue an "ordinary calling or trade" and, in the course of it, to make such contracts as might be useful and proper. By interfering with a person's exercise of that privilege, the Court unanimously held, Louisiana had abridged the Fourteenth Amendment's guarantee of liberty and property. To believe, however, as the decision's admirers and detractors alike have believed, that the Court thus read a sweeping freedom of contract into the Fourteenth Amendment, so as to equate all economic regulation with denial of due process, is to ignore a vital passage in the opinion, where rufus peckham declared that the police power of a state "cannot extend to prohibiting a citizen from making contracts … outside the limits and jurisdiction of the State, and which are also to be performed outside of such jurisdiction." Cavalier disregard of that essential qualification has made the Allgeyer opinion seem what it was not. If further evidence were needed, it was supplied by the Court's decision one year later in holden v. hardy (1898), where the majority of seven upheld an act of Utah regulating the hours of labor in mines and smelters, without any suggestion that mines and smelters are businesses affected with a public interest, and notwithstanding considerable interference with freedom of contract.

Supposedly initiated by Allgeyer, the triumph of "economic due process" or substantive due process—a triumph never fully consummated—was supposedly completed by lochner v. new york (1905). Inasmuch as the Supreme Court there struck down a statute that limited the work of bakers to sixty hours a week, the decision could be so represented. But a close reading of the opinions, including the dissents, leads to the sounder conclusion that the statute was invalidated because, while purporting to be a measure for the public health, it adopted means that (in the majority's view) had no reasonable relation to that end, or alternatively because it was really an effort to interfere in the bargaining between master and employee, an effort lying outside the proper scope of the police power as constrained by the due process clause.

That the Lochner decision did not undermine economic regulation was demonstrated three years later in muller v. oregon (1908), when the Supreme Court (with only one new member) upheld a restriction on hours of work of women as a reasonable means of achieving the proper end of public health, and was demonstrated again in bunting v. oregon (1917), where the statute applied to men as well as women and to overtime wage rates as well as to hours. In adkins v. children ' shospital (1923), however, the Court once again sailed closer to the Lochner tack, when it disallowed a minimum wage law. Nevertheless, despite the Lochner-Adkins line and reliance on decisions before, during, and after the brief era of laissezfaire activism, many states continued to pass and enforce laws regulating the conditions of labor as well as other economic relations, especially after the onset of the Great Depression.

The older line of interpretation, temporarily obscured but not reversed, was restored to predominance by the Supreme Court's decision in nebbia v. new york (1934). Here, while apparently relying on Munn v. Illinois (1877), the Court effectively reversed it by holding "that the private character of a business does not necessarily remove it from the realm of regulation of charges or prices." Indeed, the Court went on to say that it had upheld an extensive variety of economic regulations, a statement the accuracy of which it vindicated by citing some hundred precedents that it had laid down during the three or four decades earlier. A further step toward closing the Lochner episode was taken in west coast hotel v. parrish (1937); and the final (at least until the present) bit of punctuation was supplied in united states v. carolene products company (1938) when the Court committed itself not to invalidate regulatory legislation unless the law's irrationality offended against due process or it otherwise contravened specific constitutional guarantees such as those in the Bill of Rights.

Meanwhile, economic regulation by the federal government had been undergoing a roughly parallel development. Substantively it was less extensive, because until about the Civil War economic activity within the several states far outweighed that which crossed the boundaries of any state, because the federal government spent less and did less than state and local governments, and not at all because the federal government was more attached than were state and local governments to laissez-faire. Ample evidence to the contrary is afforded by the protective tariffs so vigorously advocated by alexander hamilton and henry clay and so widely supported, by the subsidies granted to transportation facilities in the name of internal improvements, and by close regulation of ships and sailors involved in interstate and foreign navigation. If nevertheless the federal government did little to implement the commerce clause during its first century, Congress's latent constitutional power was recognized and approved. When Marshall wrote in gibbons v. ogden (1824) that the commerce power "is complete in itself, may be exercised to its utmost extent, and acknowledges no limitations, other than are prescribed in the constitution," he prefigured later judicial pronouncements that the commerce power is effectively the national police power.

As might have been expected, the coexistence of two tiers of police power occasioned increasing collisions when, after the Civil War, the federal government expanded the exercise of its own power. Such collisions might have been resolved by simple-minded recourse to the supremacy clause, but that solution would not have appealed strongly to judges who remembered that the professed objective of the Civil War had been, on the one side, to protect the autonomy of the states and, on the other side, to preserve a Union (rather than replace it by a unitary state). Recollections of the crisis reinforced the traditional effort to delineate clear boundaries between the domains of the states and that of the federal government.

A striking specimen of this issue arose from the increasing efforts of state governments after the Civil War to regulate railroad rates, and in particular to prohibit what many shippers regarded as iniquitous discrimination. In this instance a railroad had charged a shipper a certain amount for sending goods from one place in Illinois to New York City while charging another shipper less for sending the same sort of goods from another place in Illinois to New York City, though the latter distance was greater than the former. This habitual practice, known as long-haul-short-haul discrimination, violated an Illinois statute. In wabash, st. louis, pacific railway v. illinois (1886) the Supreme Court decided that, although the Illinois courts had confined application of the statute to transportation within the state, the statute was nevertheless invalid as applied to contracts for continous transportation through several states, so "interfering with and seriously embarrassing" interstate commerce. The counterargument, that state statutes of this sort might be permitted to stand until the federal government might occupy the field, became moot when in the following year Congress passed the interstate commerce act, which among other things established the first federal regulatory agency, the Interstate Commerce Commission. For twenty-seven years thereafter, until announcement of the shreveport doctrine, a relatively comfortable equilibrium recognized the exclusive power of states to regulate purely intrastate transportation and of the federal government to regulate purely interstate transportation, though controversy occasionally erupted as to whether some particular regulation by one tier of government materially spilled over into the other's domain.

Concerning enterprises other than transportation, it was harder to draw a neat line between what is a fixture within a state and what though within a state is visiting it as a bird of passage or, according to a habitual metaphor, "flowing" through it. This difficulty was manifested in united states v. E. C. knight co. (1894), the Supreme Court's first ruling on the sherman antitrust act. It arose from a suit asking that the courts invalidate contracts by which the "Sugar Trust" had purchased four independent refineries, so achieving an almost complete monopoly of refining. Considering that the government had attacked the contracts rather than the trust itself, that the contracts concerned factories necessarily installed within a state, and that no proof had been offered to connect the contracts with a scheme to restrain interstate commerce, the Court held that the contracts were not reached by the Sherman Act; as so construed, the act was valid. In dissent, Justice john marshall harlan objected that the nub of the case was not the sugar trust's acquisition of the four refineries but its monopolization of interstate commerce. One may suppose that, contrary to Chief Justice melville w. fuller's pronouncement that "commerce succeeds to manufacture," Harlan would have preferred to say that manufacture, when ancillary to interstate commerce, falls within federal legislative power.

Similar partitioning of state and federal domains persisted in most such decisions down to 1936, accompanied by judicial reminders that if the reach of the commerce power were excessively widened, the states would be rendered economically otiose. So in hammer v. dagenhart (1918) the Supreme Court, while agreeing that the working hours of children in mines and factories should be regulated (and in fact was regulated by every state), invalidated a federal child labor law on the ground that it would disturb the desirably "harmonious" balance between the police power and the commerce power. Similarly, when ruling in Schechter Poultry Corporation v. United States (1935) that poultry slaughterers in New York City could not be reached by federal regulation, Chief Justice charles evans hughes wrote: "If the commerce clause were construed to reach all enterprises and transactions which could be said to have an indirect effect upon interstate commerce, the Federal authority would embrace practically all the activities of the people and all the authority of the State over its domestic concerns would exist only by sufferance of the Federal Government."

That traditional view was substantially revised by National Labor Relations Board v. Jones & Laughlin Steel Corporation (1937), decided while President Franklin D. Roosevelt's Court reorganization plan was being vigorously debated. Technically the turn hinged on the Court's finding that the defendant company, besides owning steel mills and mines, owned and operated interstate railroads and water carriers and sales offices throughout the country; as the company was "a completely integrated enterprise," one in which manufacture and commerce might be said to have been completely unified, its relations with labor unions in its steelworks and mines as well as in its railroads and water carriers were properly subject to federal regulation. On a narrow view, the Court continued to adhere to the principle that state and federal regulation must coexist—as the Court took trouble to emphasize in united states v. darby lumber company (1941)—and merely found federal power applicable to "national" firms; on a broader view the Court had considerably shifted the dividing line. The virtual obliteration of the line was confirmed by wickard v. filburn (1942), where the Court upheld federal regulation of wheat farming, by reinterpreting production as well as consumption on the farm, previously understood to be inherently local, as ingredients of an "economic market" which, being national and indeed international, was properly subject to federal regulation.

Rash though it may be to suppose that one can identify historical patterns, it might nevertheless be ventured that economic regulation by the states was never impeded by laissez-faire nor, except briefly and partially, by the doctrine of substantive due process, and that economic regulation by the federal government has expanded, generally though unsteadily, as a proportion of the whole. This summary, assuming it to be accurate, does not of course endorse the logical rigor of constitutional interpretation that underlay those tendencies, nor does it prejudge their political desirability. Those who see private enterprise as self-serving and chaotic conclude that extensive economic regulation is a condition of social welfare; whereas minimalists maintain that economic regulation is desirable only in the event of market failure, that is, only in relation to enterprises that give rise to oppressive externalities or to industries that are natural monopolies. The Constitution provides ample scope for the former view but imposes no restrictions corresponding to the latter view. Despite some indications of "deregulation" in legislation and adjudication since 1960, it would be foolhardy to predict whether economic regulation will diminish or increase during the future.

William Letwin
(1986)