Dealing with the Devil

Bargaining with the State, by Richard A. Epstein, Princeton, N.J.: Princeton University Press, 322 pages, $35.00

Richard Epstein's Bargaining with the State is intended to be the flip side of his 1985 book, Takings: Private Property and the Power of Eminent Domain. While Takings was concerned with reining in the government's regulatory, eminent domain, and taxing powers, Bargaining examines government in its role as dispenser of favors: subsidies, tax breaks, welfare, highways, limited liability for corporations, professional licenses, government jobs, unemployment benefits, and grants for the arts, medicine, and the humanities, among other things. The book is a rather unruly collection of topics that Epstein valiantly seeks to tame into something approaching theoretical consistency. He is undoubtedly right when he writes that this topic lacks the "dramatic sweep of a takings analysis." As he wryly observes, Takings is a tough act to follow: "Once the New Deal has been declared unconstitutional…it is hard to do it a second time."

Epstein is mainly concerned with the dispensation of largess by the state when it finds itself in a monopoly situation. For him, the purpose of constitutional law is to "maximize overall [welfare] by the maintenance of competitive markets." If the state's power to dispense benefits goes unchecked, the "social surplus" achieved in open markets will be dissipated by "bargaining games" that waste scarce resources on buying political indulgences or manipulating the political system. Hence, bargaining by the state—its power to contract and to grant—ought to be subject to as much scrutiny as takings, regulation, and taxation.

Bargaining is an attempt to come to terms with the welfare state while trying to find a constitutional way of restraining its excesses. Considering the Supreme Court's hostility or indifference to economic liberties since the New Deal, this is no easy task. What Epstein comes up with is a fairly thin reed that often does not seem up to the challenge: the doctrine of unconstitutional conditions, which holds that the government may not require individuals to surrender their constitutional rights in exchange for government benefits. Developed in the 19th century, this is a relatively obscure legal tenet, which might explain how it managed to survive the Supreme Court's onslaught against the constitutional clauses that deal with economic liberties.

The unconstitutional-conditions doctrine emerged from controversies over state powers of incorporation. Corporate charters created a new form of ownership that bestowed limited liability on firms, a privilege they could not have bargained for in an open market under traditional contract, tort, and property law. Scandals abounded when the states exercised their powers in a discriminatory manner. Epstein notes how wasteful selective incorporation can be because it fritters away the social surplus from incorporation in bidding wars and intrigues that benefit only the government officials controlling the process.

One temptation for the states was to extract onerous conditions from out-of-state corporations. In exchange for the privilege of doing business within certain states, these "foreign" corporations were made to pay discriminatory taxes or waive their constitutional rights to the use of federal courts in cases involving parties from different states. The Supreme Court created the unconstitutional-conditions doctrine to prevent states from imposing conditions of this sort. The states could bar "foreign" corporations, or they could allow them to enter on equal terms with their own corporations, but they could not condition entry on the forfeiture of rights.

In the "foreign" incorporation cases, one can clearly see the "paradox of unconstitutional conditions." The state has the greater power to withhold or grant a benefit but not the lesser power of granting the benefit with unconstitutional conditions attached. In the 1920s the doctrine spread from the incorporation arena to state regulation of public roads and highways, where it served to check disproportionate taxes on interstate trucking (exacted in exchange for the privilege of using state roads).

Epstein wishes to pierce the veil obscuring the true nature of such bargains. Although people consent to them because they will be better off as a result, he argues that the deals include coercive conditions that should not withstand constitutional scrutiny. Since the people are better off, however, they are unlikely to challenge the conditions.

Epstein is thus tackling Leviathan with an admitted "second-best doctrine," with few and reluctant plaintiffs, and with a smattering of obscure cases covering disparate issues. And, to make matters worse, the unconstitutional-conditions doctrine appears nowhere in the Constitution. It is entirely a result of judicial construction.

Epstein recognizes these problems. At the beginning of the book he laments that this approach is far from ideal. By the last few chapters, those dealing with welfare and educational benefits, he acknowledges that the unconstitutional-conditions doctrine often will not help resolve the issues under discussion. He expresses increasingly heartfelt regrets that the Supreme Court has buried the economic-liberty doctrines that explicitly limited the state's coercive bargaining powers.

Still, the methodology that Epstein employs in Bargaining has one advantage over the one he used in Takings: its foundational consistency. While the opening, theoretical chapters of Takings combined a natural-rights principle with a utilitarian, social-surplus maximization principle, Bargaining jettisons natural rights and fully embraces the law-and-economics paradigm of Pareto superiority, wealth maximization, prisoner's dilemma games, transaction costs, strategic bargaining, and externalities. But Epstein buys this theoretical consistency at a rather steep price, for natural-rights arguments at their best have the virtue of clarity, leading the theorist to pellucid conclusions in all but the most exceptional "lifeboat" cases. Bargaining, by contrast, is a messy enterprise, a point the author himself concedes. One gets the sense that Epstein is not very pleased to be writing this book, which lacks the ringing conclusions of its illustrious predecessor.

If one wishes to read Epstein at his best, yet still in his law-and-economics mode, I strongly suggest his Forbidden Grounds: The Case Against Employment Discrimination Laws. In that work, the economist's tools work splendidly and lead to conclusions that natural-rights libertarians would in almost all instances find appealing. In contrast, libertarians will find Bargaining much less satisfying. Epstein begins his argument from a libertarian "baseline," but he concedes the primacy of government and the legitimacy of the welfare state, which can only be curtailed, not eradicated.

These assumptions lead to some strange conclusions. Epstein describes taxation, for example, as a "set of implicit state offers," and he takes the fact that all activity does not cease as confirmation that people prefer economic activity with taxation to no activity at all. I would think what it demonstrates is that people prefer taxes to death.

Yet even with these defects, Bargaining's undertow, in a wiser age, would sink the welfare state. Epstein's complex, often brilliant, sometimes obscure arguments demonstrate that the post-New Deal regime violates a fundamental tenet of constitutional order, the prohibition of forced transfers from one individual to another. Compulsory redistributions are the animating principle of the welfare state. With the Constitution's clauses in defense of property rights eviscerated by the Supreme Court, there are slim pickings left to those who wish to recover the old principles and the free-market order that flourished under them. Lamentably, the doctrine of unconstitutional conditions can do little to change this desiccated constitutional landscape.

Ellen Frankel Paul is deputy director of the Social Philosophy and Policy Center and professor of political science and philosophy at Bowling Green State University.