Cost-Benefit Federalism: Reconciling Collective Action Federalism and Libertarian Federalism in the Obamacare Litigation and Beyond

Abstract

The lawsuits challenging Obamacare's individual mandate have exposed a rift in federalism theory. On one side of the divide is a view that the national government ought to intervene - and ought to be constitutionally permitted to intervene - whenever the states are "separately incompetent" to regulate. This is the view that Robert Cooter and Neil Siegel recently theorized as "collective action federalism." On the other side of the divide is a view that federalism exists for reasons other than efficiency of regulation and particularly that the Founders created the federal structure for the protection of individual liberty. According to this view, which the Eleventh Circuit largely hung its hat on in invalidating the individual mandate, there is inherent value to state power that ought to be preserved against national encroachments. I refer to this view as "libertarian federalism."

This Article argues that both of the extreme visions of federalism that have emerged in the Obamacare litigation rest on sound premises but that either theory taken alone would argue for the end of federalism. Collective action federalism argues monotonically for national control while libertarian federalism argues monotonically for state control. Neither theory alone is a first-best theory of American federalism, but both theories rest on important theoretical foundations. This Article argues that the first-best theory of American federalism would seek to optimize the balance between the national government’s efficiency advantages (the core theoretical underpinning of collective action federalism) and the state governments’ libertarian advantages (the core theoretical underpinning of libertarian federalism). Federalism ought to seek the optimal cost-benefit balance between state and national governance. Because that optimal balance is impossible to discern, however, and because Congress is structurally better situated to gather the imperfect information that exists about regulatory costs and benefits, courts engaged in constitutional review should (and do) largely defer to legislative decisions.

In the Obamacare litigation, all of the factors that are relevant to cost-benefit federalism have been largely overblown. The individual mandate does not create as many efficiency benefits as collective action federalists claim; it does not create as many libertarian costs as libertarian federalists claim; and it generally does not nationalize healthcare or health insurance policy as much as the litigants and commentators claim. It is a moderate and rational - if not entirely optimal - federal statute that creates some efficiencies without sacrificing much liberty. The Court therefore ought to defer to Congress’s rational judgment and uphold the statute.