A Constitutional Counterrevolution
Political Transaction-Cost Manipulation Has Cost Us Dearly
OCTOBER 01, 2000 by CHARLOTTE A. TWIGHT
Charlotte Twight is a professor of economics at Boise State University. She is the author of Dependent on D.C.: The Rise of Federal Control Over the Lives of Ordinary Americans.
Given America’s carefully crafted constitutional restrictions on central government power, how is it that intrusive federal powers over the lives of ordinary Americans took root in the twentieth century? If you had just fifteen minutes to explain it to James Madison, what would you say?
Here is what I would say:
Mr. Madison—James, if I may—I am deeply saddened by the facts I must describe. You and your colleagues anticipated many things, and the product of your labors has made possible an unprecedented degree of freedom in this country for more than 200 years. But your work is now in jeopardy: liberty is being crowded out by an ever more intrusive central government. Although many others have tried to explain how this occurred, let me give you my own insight about it—admittedly only a partial explanation, but nonetheless one that identifies a key, and often overlooked, source of liberty’s increasing peril.
As I see it, here is what happened. During the twentieth century, legislators, Supreme Court judges, and executive branch officials began to perfect techniques for deflecting and curtailing people’s resistance to actions that increased the power of the central government. You and your contemporaries well understood the dangers of overreaching government and, through the Constitution, tried to limit its power. But living in a society so recently chafing under British rule, a young nation whose people yearned for freedom, it would have been difficult to imagine how America’s own elected and appointed officials—without triggering public censure and usually without amending the Constitution—might take systematic actions to erode the explicit constitutional limits on their power that you designed.
Yet that is exactly what occurred. The techniques that emerged involved a bevy of government actions sharing one defining characteristic: they increased other people’s costs of resisting government expansion. In each case, government officials made it more difficult or costly for people to perceive, or take action to resist, federal power-expanding measures. It is what I call “political transaction-cost manipulation”: government officials’ deliberate alteration of people’s costs of undertaking collective political action in matters that affect the scope of government authority.
These federal actions have included misrepresenting the nature and consequences of government action, proceeding incrementally, concealing the cost of government actions, tying controversial measures to more popular legislative bills, hiding unpopular provisions in omnibus bills, concentrating the benefits and dispersing the costs of government action, changing the Constitution through the back door of the Supreme Court rather than by constitutional amendment, and myriad analogous strategies. As I’ll explain in a minute, diverse efforts in the twentieth century to expand the federal government’s power all have involved such strategies—implying that initial public acquiescence to new government institutions often did not reflect true public consensus. Once in place, however, institutions exercising new federal powers subsequently channeled ideological change, and nurtured special interests, in ways that supported the new regime.
Consider a few examples. The first one is sure to infuriate you, James. Remember the care you took in providing for the constitutional amendment process? You wisely and deliberately made it very cumbersome, trying to assure that the Constitution’s provisions could not be altered without great effort and widespread agreement on the desirability of the changes. In short, you hoped to make it very costly for people to alter constitutionally established limits on the central government’s power.
During the twentieth century, however, the U.S. Supreme Court often served to bypass the amendment process. Increasingly, Supreme Court decisions changed the Constitution’s long-established meaning without benefit of constitutional amendment, reinterpreting the document—sometimes literally changing the definition of its words—to broaden the central government’s powers far beyond what you and the other Founders envisioned. Confronted with such unilateral action by the Supreme Court, how could people then preserve their liberty?
Of course, they themselves could seek a constitutional amendment to spell out more concretely the original meaning of the Constitution and thereby bind the Supreme Court. But the cumbersome amendment process, meant to constrain those who would change fundamental constitutional protections, then impeded those who desired to preserve the original meaning of the Constitution. In other words, the political transaction costs that you intended to be a barrier to those who desired to change the Constitution’s substance instead served as a barrier to those who desired to uphold the Constitution’s original substance. It is a classic type of political transaction-cost manipulation.
The Commerce Clause
One example is the Supreme Court’s reinterpretation of the Constitution’s interstate commerce clause in a 1942 case called Wickard v. Filburn. As you recall, you and the other drafters gave the federal government power over interstate commerce (“commerce among the several States”) to make sure that the individual states did not erect trade barriers against one another. Commerce within the separate states, intrastate commerce, was beyond the central government’s authority. In Wickard, however, the U.S. Supreme Court proclaimed that the central government had power to regulate even the wheat that an individual wheat farmer grew on his own land, within a single state, for his own family’s consumption. The Court’s rationale was that if the farmer had not grown that wheat for his family’s consumption, he would have had to purchase wheat that might have moved in interstate commerce. Since locally produced and consumed wheat “competes with” wheat moving in commerce, this purely local activity was deemed to affect interstate commerce and thus justify federal regulation. The Supreme Court thereby threw the constitutional doors wide open, allowing the central government to embed itself into virtually any economic activity, no matter how local.
Throughout the twentieth century, this key tactic of judicial reinterpretation allowed the Supreme Court to effectively trump the constitutional amendment process that you designed. If people wanted to preserve the limits on central government power that you wisely created, the defenders of the original Constitution—not its opponents—would have to undergo the high transaction-cost process of constitutional amendment. With the deck stacked against such a costly undertaking, no amendment materialized to shield intrastate commerce or other realms from the federal government’s growing regulatory reach.
The spirit of the preceding example pervades many government actions that have eroded liberties originally protected by the Constitution. Once government officials learned that they could change the cost to others of defending their liberties, the possibilities were endless. Let me recite but a few.
Consider the federal income tax. Yes, I know that you provided that no direct federal taxes could be imposed unless they were apportioned among the states “in Proportion to the Census or Enumeration” mandated by the Constitution. But a federal income tax “without apportionment among the several States, and without regard to any census or enumeration” was legalized in 1913 by explicit constitutional amendment.
In implementing a federal income tax, government officials repeatedly increased the cost to citizens of correctly appraising and actively resisting the tax. First, it was sold to the public as a tax only on the very rich. Later, despite the government’s claim that the income tax was a “voluntary” tax system, a 1943 law required employers to take the tax money from each employee’s paycheck, before the tax was due, without the employee’s consent. This nonconsensual “withholding” of federal income taxes dramatically increased the cost to private individuals of resisting the growth of federal power. Nonpayment was no longer a feasible means of resistance to overtaxation.
Further subduing resistance, this collection method effectively hid the full magnitude of an individual’s tax payment. With passage of the 1943 withholding law, taxpayers no longer had to write a check for the full amount of income taxes due. Indeed, many came to associate the tax due date with money received from the government in the form of tax refunds rather than money paid to the government. Their tax burden thus obscured, most Americans today cannot come close to accurately stating their total federal income tax payments for the prior year.
Fundamental notions of the rule of law held sacred by your generation, James, were gradually abandoned as the federal income tax grew, with equal treatment under the law redefined to countenance treating people with different incomes—or even the same income—unequally under federal tax law. Today, with the bottom 50 percent of earners paying only 4.3 percent of the federal income taxes collected, is it any wonder that tax resistance no longer poses a viable threat to the new political power structure? With half the people paying hardly any federal income tax, the other half largely unaware of the full magnitude of their tax, and many in both categories intent on manipulating the political system to their personal advantage, a majority of the people now usually tolerate any plausible federal income-tax increase, enabling the central government’s control over resources to continue to grow. The political way to wealth thus predominates, the federal income tax now one of its primary engines.
All these measures were instituted incrementally, another transaction-cost-increasing strategy for minimizing resistance to expansion of federal power. For instance, the political feasibility of income tax withholding in 1943 was enhanced by prior legislation mandating employer withholding of payroll (Social Security/FICA) taxes, instituted by the 1935 Social Security Act. Employers and employees already had gotten used to it; with the tax withholding machinery already in place, the next step was that much easier.
Government officials used similar transaction-cost-manipulating strategies in securing adoption of that 1935 Social Security law. They were only able to gain passage of the law by tying it to other more popular programs such as needs-based old-age assistance, unemployment compensation, and maternal and child health services—thereby deliberately increasing the costs to people of resisting the power grab represented by Social Security. Through that program, the central government now takes 12.4 percent of the wages of every working American (up to maximum taxable earnings of $76,200) through a Ponzi-type system designed to make every retired American dependent on federal government checks, while preventing people from instead investing that money in private accounts for their own retirement.
Where is the transaction-cost manipulation in this program today, you ask? From the beginning, government officials got employees to tolerate this tax by claiming that it is “split” between employers and employees—that the employer “matches” the “contribution” of the employee, thereby doubling the amount paid into Social Security on the employee’s behalf. It is a lie. Although the employer does write a check to the government on behalf of the employee, economists have understood for decades that the employee actually bears most of the burden of the so-called “employer’s half” of the Social Security tax in the form of lower wages; so employees actually bear nearly the full 12.4 percent burden of the payroll tax. But most Americans today continue to believe the long-repeated lie.
Moreover, although the federal government continues to claim that people who have paid their payroll taxes throughout their working lives have a contractual “right” to their Social Security benefits, the Supreme Court long ago explicitly stated that they have no such right. There is more (for instance, people are forced to pay income taxes, unwittingly in most cases, on the Social Security payroll taxes extracted from their paychecks—money they never even received!), but I must move on.
As you can see, James, government officials no longer embrace the views of people who think as you and I do. Discussion of the original meaning of the Constitution, limits on the power of government, fundamental human liberties not “granted” by the government—many federal officials regard such perspectives as plainly anathema to their financial and ideological interests. How might the government limit the prevalence of these supposedly offensive views?
Increasingly, government officials have used public education for that purpose. As in the other cases, the relevant laws were both passed and implemented by manipulating political transaction costs. For example, federal officials leveraged the National Defense Education Act (1958) into law by means of the Sputnik scare, using false claims of national emergency to build a program that channeled federal funds to virtually all types of educational programs. Senator Strom Thurmond of South Carolina clearly identified the divergence between the rhetoric and the reality of the National Defense Education Act:
This bill . . . although it purports to be for the specific purpose of promoting the national defense, is, in actuality, general Federal aid to education . . . . [T]his bill will not appreciably contribute to the national defense. Neither the scholarship program nor the student loan program are limited in any way to persons undertaking a course of study considered to be critical to our national defense. Under either of these programs, a participating student might study social welfare work, automobile driving or, for that matter, flower arranging.
While continuing to deny the growing federal control over public education, government officials used this law and others that followed (such as the 1965 Elementary and Secondary Education Act) to influence the curriculum and thereby change the worldview of countless millions of Americans.
Engines of Propaganda
The results now dominate U.S. culture and politics. Public schools have become engines of propaganda supporting a vastly expanded presence of the central government in the lives of ordinary Americans. Deliberate reshaping of the values and ideologies of the children is thus another manifestation of government manipulation of political transaction costs, changing young people’s information costs in ways that actively curtail resistance to expanding federal authority.
Today, ideologies shaped by public schooling allow government power to continue to grow. Federal influence over the minds of American children grew enormously with the 1994 Goals 2000: Educate America Act; the National Skill Standards Act; the Educational Research, Development, Dissemination, and Improvement Act; the School-to-Work Opportunities Act; the Improving America’s Schools Act; and the 1998 Workforce Investment Act. In securing passage and acceptance of this legislation, political transaction-cost manipulation was again an important tool. Ordinary Americans were encouraged to perceive these laws as strengthening the academic rigor of public schools. Yet underneath that veneer of appealing rhetoric, the new laws established federal powers and policies that contravened the wishes of many affected communities, weakened the academic rigor of public schools, and accorded the federal government increasing influence over the education, ideological orientation, and career paths of American children.
Under the rubric of “parental assistance,” Goals 2000 even required federal grant recipients to fund “Parents as Teachers” and “Home Instruction for Preschool Youngsters” programs, defined to include “regularly scheduled personal visits” with parents of preschool children by government-supported “certified parent educators.” The federally promoted slogan embracing “outcome-based education” turned out to denote social outcomes desired by federal authorities, not academic outcomes desired by parents.
Federal officials have used similar tactics to gain increasing power over Americans’ medical care. Culminating a decades-long incremental process, passage of the original 1965 Medicare bill was accomplished only by tying the legislation to politically irresistible Social Security benefit increases, once again increasing the costs to private individuals (and legislators) of resisting the measure. As the quest for expanded federal power over people’s medical care continued, the same transaction-cost-increasing techniques were employed again and again. The 1996 Health Insurance Portability and Accountability Act (HIPAA), for instance, tied popular provisions increasing the portability of people’s health insurance to unpublicized requirements for a “unique health identifier” for each American, to be used in conjunction with an HIPAA-mandated uniform national electronic database of personal medical information. The 1996 act empowered the federal government to require detailed information, at its discretion, regarding what lawmakers called “encounters” between doctors and patients. As a result of HIPAA provisions misleadingly labeled “administrative simplification,” doctors now may be required to divulge detailed health information regarding patients’ physical and mental health for inclusion in the national electronic database, identified by each patient’s unique health identifier. Swayed by the appealing political rhetoric that accompanied the 1996 bill, most people embraced it, only to be startled two years later when the U.S. Department of Health and Human Services began to implement the mandated unique health identifier.
Equally alarming is the systematic surveillance of ordinary Americans now being carried out by the federal government, also largely a product of political transaction-cost augmentation. For instance, when Congress passed the Bank Secrecy Act in 1970, misrepresentation again was instrumental. How could people know that this innocuous-sounding bill contained provisions requiring banks to make permanent copies of the checks, deposits, and other financial transactions of each and every bank account holder? Detailed portraits of law-abiding individuals were thereby created at the behest of the central government.
Similarly, by increments, the federal government authorized widespread federal, state, and local government use of Social Security numbers (SSNs), even though they were approved in 1935 only when officials assured Americans that the numbers would be used exclusively to identify their Social Security accounts. During the 1980s and 1990s, a docile citizenry further acquiesced as the federal government, by increments, required parents to get SSNs for very young children—now even newborns—in order to claim them as “dependents.” SSN-based dossiers now can be developed on young children, tracking them from infancy forward through newly authorized federal databases describing their educational experiences, medical histories, future jobs, financial transactions, the very fabric of their private lives. Imagine the power thereby put in the hands of federal officials, and the diminution of Americans’ freedom to speak their minds without fear of government reprisal. It is no longer the country you envisioned, James.
As your generation so well understood, people in a free society must decide how much power to cede to the central government, where to draw the line between the private and public spheres. Your generation allowed the central government but little power, influenced as you were by ideologies of liberty and by awareness of the personal costs of expanded central power. My generation, by contrast, ceded enormous power to the central government, having lost ideologies of liberty through public education and by long-standing exposure to an extensive government presence in their lives.
In my view, James, one overarching mechanism making this transformation possible has been government officials’ manipulation of political transaction costs. In each case that I have studied in detail—Social Security, income tax withholding, Medicare and its progeny, public education, government data collection, even asbestos regulation—government officials seeking new federal powers have deliberately increased the cost to private citizens of understanding the proposed measures and taking political action to resist them. The particular transaction-cost-increasing strategies have varied, but they all have served to reduce or deflect resistance to the growth of government.
Some years ago I developed a taxonomy of these strategies showing that government manipulation of political transaction costs falls into two broad categories: manipulation of private agreement and enforcement costs (meaning the costs to individuals of reaching and enforcing collective agreements on where to draw the line between governmental and private spheres of action) and manipulation of information costs relevant to people’s decisions regarding where to draw that line. Both categories involve the creation of what I call “contrived” political transaction costs.
As you can see, all the examples given above fall into these broad categories. One type of agreement and enforcement cost identified in the taxonomy involves “unilaterally changing the locus or scope of government decision-making authority in ways that shift the transaction-cost burden entailed in effectuating or forestalling change in the role of government.” It sounds cumbersome, but you get the idea: the Supreme Court’s unilateral expansion of the Constitution’s interstate commerce clause, sidestepping the constitutional amendment process, is a prime example in this category. Income tax withholding and the purported “splitting” of the payroll tax described above involve a type of information-cost manipulation captured in the taxonomy as “forms of taxation that change people’s perception of the tax burden imposed on them.” Incrementalism, such as that practiced in increasing the federal government’s power over public education and health care, is shown to be a separate form of government manipulation of political information costs. And the use of mellifluous-sounding titles for hurtful legislation is an example of information-cost manipulation involving “semantic efforts to alter public perception of the costs and benefits of government activities.” I promised that this would take just fifteen minutes, so I can’t describe all the categories and examples that I have suggested elsewhere. But the main point is clear.
Mr. Madison, we are losing the liberty for which your generation committed their “Lives . . . Fortunes, and . . . sacred Honor” in part because government officials have perfected techniques for reducing effective resistance to liberty’s erosion. Those techniques characteristically have entailed government manipulation of political transaction costs. Today, no matter how many angry citizens call radio talk shows, few take serious political action to oppose government’s expanded role, in part because of the artificially increased personal costs of so doing. Federal officeholders, in turn, continue to find the strategy appealing because it frequently enables them to obtain results they want without resort to overt coercion, relying instead on changing people’s individual incentives to resist.
No conspiracy underlies these developments. Rather, they reflect personal incentives (political, economic, and ideological) impelling self-interested federal legislators, Supreme Court justices, bureaucrats, and other executive branch officials to create transaction-cost barriers for people who hold different political views.
Mr. Madison, a constitutional counter-revolution has occurred, without a shot being fired, and with barely a whimper from an increasingly ill-educated populace. Unfortunately, the longer it endures, the less the likelihood of liberty’s restoration, owing to the ideological changes that accompany long-standing exercise of expanded government power. As the twentieth century ends, let us hope that government-spawned transaction-cost barriers to liberty-restoring change have not permanently tipped the scales against the freedom that we both hold so dear.
- Transaction costs, in the more traditional setting of economic markets, include contract negotiation and enforcement costs that are attributable to the multiparty character of market exchange. The political analog of market exchange is collective political action that alters the role and scope of government. Political transaction costs, as that term is used here, therefore denote transaction costs borne by individual decision makers (such as voters or legislators) in undertaking collective action that alters the effective power of government—costs of reaching and enforcing collective agreements that define the role and scope of government. To individuals, political transaction costs comprise all their costs of perceiving, and of acting on their assessment of, the net costs of particular government actions and authority. Alternatively, such political transaction costs could be labeled “constitutional-level” transaction costs, as I have done elsewhere, to emphasize their influence on the nature and extent of government authority over private decision-making tolerated by the public. For a more complete discussion, see my “Government Manipulation of Constitutional-Level Transaction Costs: A General Theory of Transaction-Cost Augmentation and the Growth of Government,” Public Choice, Vol. 56, No. 2, pp. 131-52 (1988).
- Flemming v. Nestor, 1960. See also Helvering v. Davis, 1937.
- U.S. Senate, Committee on Labor and Public Welfare, National Defense Education Act of 1958, Senate Report No. 2242, 85th Congress, 2nd Session (August 8, 1958), p. 51.
- See Thomas Sowell, Inside American Education: The Decline, the Deception, the Dogmas, (New York: Free Press, 1993), pp. 36-37, 296-97; John R. Lott, “An Explanation for Public Provision of Schooling: The Importance of Indoctrination,” Journal of Law and Economics, Vol. 33, pp. 199-229 (1990); and Paul A. Cleveland, “Economic Illiteracy,” Ideas on Liberty, April 2000, pp. 32-33.
- Charlotte Twight, “Channeling Ideological Change: The Political Economy of Dependence on Government,” Kyklos, Vol. 46, No. 4, pp. 497-527 (1993).
- Charlotte Twight, “Evolution of Federal Income Tax Withholding: The Machinery of Institutional Change,” Cato Journal, Winter 1995, pp. 359-95.
- Charlotte Twight, “Medicare’s Origin: The Economics and Politics of Dependency,” Cato Journal, Winter 1997, pp. 309-38, and “Medicare’s Progeny: The 1996 Health Care Legislation,” The Independent Review, Winter 1998, pp. 373-99.
- Charlotte Twight, “Federal Control Over Education: Crisis, Deception, and Institutional Change,” Journal of Economic Behavior and Organization, December 1996, pp. 299-333.
- Charlotte Twight, “Watching You: Systematic Federal Surveillance of Ordinary Americans,” The Independent Review, Fall 1999, pp. 165-200.
- Charlotte Twight, “From Claiming Credit to Avoiding Blame: The Evolution of Congressional Strategy for Asbestos Management,” Journal of Public Policy, Vol. 11, No. 2, pp. 153-86 (1991).
- Charlotte Twight, “Political Transaction-Cost Manipulation: An Integrating Theory,” Journal of Theoretical Politics, Vol. 6, No. 2, pp. 191-218 (1994).