Freeman

ARTICLE

Borders and Liberty

Borders Create Jurisdictional Competition and Allow Diversity in Law and Community Norms

JULY 01, 2004 by ANDREW P. MORRISS

Borders play a critical role in our lives. Some of the borders that matter to us are ones we establish ourselves: this is my house and property; that is your house and property. By choosing what is mine and using the legal system to mark it off from what is yours, I create a border. While not quite as invulnerable as suggested by the maxim “A man’s home is his castle,” my property gives me a firm border against you. Borders come from property rights and are essential to a free society.

At the macro level we have political borders—unrelated to property rights, more permeable than personal-level borders, but just as important to ensuring liberty. When I drive from my home to my office, I cross the borders of multiple political subdivisions of the state of Ohio, moving from Columbia Township to Cleveland, from Lorain County to Cuyahoga County. Those borders are invisible but important. Cleveland confiscates 2 percent of my salary because my work lies within its borders (Ohio cities can levy local income taxes). Columbia Township taxes my home. Columbia does not tax my income, and so income I earn at home is worth 2 percent more to me than wages at work. Cleveland cannot tax my home, freeing me from the concern that people I cannot vote for could tax property as well as income. (Of course I also worry about people I can vote for taxing my income and assets, but at least there is a theoretical possibility of throwing the rascals out when I vote.)

These borders are all permeable: I do not need to show identification to pass across any of them and do not need to justify my purpose in moving among the various cities and towns along my drive to and from work.

Other macro-level borders are less permeable. When I walk across the U.S.-Mexican border near my parents’ home in Yuma, Arizona, in one direction I must satisfy Mexican authorities that my purpose is legitimate. In the other, I must satisfy U.S. authorities that my return is legitimate. In both directions, people with guns are standing by, ready to keep me out should I fail to satisfy them about the legitimacy of my purpose. Only the Americans with guns seem worried about who is entering the United States. They look at my identification, ask what I was doing in Mexico, and, sometimes, have dogs sniff my vehicle and belongings.

In many respects, these macro-level borders are wonderful things. Lorain and Cuyahoga counties in Ohio must compete for my family’s residence. Choosing to live where we do is related to the taxes charged by the communities where we might have lived. Investors make similar choices.

The choices by families about where to live and invest their money influence communities’ public policies. Choosing bad policies produces an exodus; choosing good policies leads to immigration of both capital and people. For example, Cleveland is trying to reverse its post-World War II decline in population by offering to exempt new construction from real-estate taxes for 15 years. Such competition isn’t perfect, of course, and only operates on the margin. Desirable locations such as New York City will be able to impose higher taxes than less-desirable locations such as Cleveland. Nonetheless, the competition offered on local taxation policy and other regulatory issues is important in restraining governments from infringing liberty.

Macro borders with competition enhance liberty. At the state and local level the only way politicians can prevent such competition is by eliminating borders. In Cleveland, “regional leaders” are pushing consolidation of local governments into one big entity as the solution to the exodus of population and investment to lower-tax jurisdictions. Fortunately, politicians’ self-interest also cuts against consolidation since it would mean fewer positions for them.


National Borders

National borders are also important sources of liberty. The Mexican border, for example, offers a choice between a drug-regulatory regime that requires a doctor’s prescription for most pharmaceuticals and one that does not. The streams of visitors to towns such as Algodones, Baja California, are not merely seeking lower prices. Some are seeking medicines unapproved in the United States; others are looking for medications for which they have no U.S. prescription, whether for recreational (such as Viagra) or medical (antibiotics) use. Mexico does not offer the pro-plaintiff tort doctrines of U.S. product-liability law, has lower barriers to entry for pharmacists, and a wide-open market for pharmaceuticals that includes openly advertised price competition. U.S. residents near the Mexican border thus have a choice of regulatory regimes for their medicine that those of us who live farther away do not. Border-region residents can buy medicines either with the U.S. bundle of qualities, restrictions, and rights, or the Mexican bundle. From the level of traffic of elderly visitors I’ve seen at the border crossing, it appears the Mexican bundle is more attractive for many.

Borders are thus friends of liberty in two important ways. First, without borders we would not have the competition among jurisdictions that restricts attempts to abridge liberty. The impact of borders goes beyond those who live near them. Pharmacists try to prevent the free sale of prescription drugs, but they would be much more successful if Mexico did not offer an alternative for at least some consumers. It is the margin that matters, and so free availability of pharmaceuticals in Mexico benefits even those of us who live in Ohio.

Jurisdictions thus compete to attract people and capital. This competition motivates governments to act to preserve liberty. Famously, for example, states compete for corporations, with Delaware the current market leader. Delaware corporate law offers companies the combination of a mostly voluntary set of default rules and an expert decision-making body (the Court of Chancery). As a result, many corporations, large and small, choose to incorporate in Delaware, making it their legal residence. (Their actual headquarters need not be physically located there.) Corporations get a body of liberty-enhancing rules; Delaware gets tax revenue and employment in the corporate services and legal fields.

That state’s position is no accident. At the beginning of the twentieth century, New Jersey was the market leader in corporate law. When New Jersey’s legislature made ill-advised changes to its corporations statute that reduced shareholder value, Delaware seized the opportunity and offered essentially the older version of New Jersey’s law. Within a few years, the vast majority of New Jersey corporations became Delaware corporations.

The second way that borders further liberty is that they allow diversity in law and other community norms, letting each individual find the setting that most resembles the type of society he or she desires. Everyone in Ohio need not agree on how to organize town activities: I can live in a township with few taxes and few services, and my more left-wing colleagues at the university who prefer a more interventionist society can live in Cleveland Heights, a suburb with an aggressive central-planning mentality and high taxes.

Borders prompt concerns among many people, however. Statists often worry about precisely the competition described above. In the European Union, for example, high-tax jurisdictions like France and Germany worry (correctly) that low-tax jurisdictions like Ireland will attract capital and jobs and thus create pressure to reduce taxes. In the United States, statists worry that cross-border competition will produce a “race to the bottom” in areas such as environmental protection.


Competition and Costs

Statists are correct that competition among jurisdictions will make clear the costs of the policies they promote. They are wrong when they suggest that cross-border competition is destructive of the quality of life, however. The former divide between East and West Berlin is a fine example of the impact of cross-border comparisons. East Germans could see the difference in outcomes between the two societies, and East Germany had to resort to increasingly costly and desperate measures to prevent its citizens from voting against communism with their feet. The example of West Germany did not erode the socialist regime by “unfairly” competing against it. West Germans had a higher standard of living and more freedom. Competition between the two Germanys exposed the cost of East German policies.

To prevent cross-border competition from exposing the costs of their favorite policies, unions, environmental pressure groups, and other special interests attempt to forestall it. International treaties requiring all nations to agree to particular interventionist measures are the latest means of forestalling competition. High-tax, heavy-regulatory jurisdictions in the European Union are waging just such a fight now, arguing, for example, that Ireland’s low taxes are “unfair” competition. Such agreements and treaties are merely the international equivalent of anticompetitive cartels among firms. But private firms cannot legally use coercion to enforce their cartels. Eliminating borders can thus reduce liberty by ending the competition that helps preserve it.

Of course, borders can also offer governments opportunities to threaten liberty. (But, then, what doesn’t offer governments a chance to restrict liberty?) In particular, the enforcement measures taken to secure borders are a major threat to liberty. Consider the U.S.-Mexican border. To prevent non-citizens from entering the United States across this 2,000-mile border, the United States has erected a steel wall in San Diego to divide the two countries and invested in a wide range of high-tech surveillance gear. Why? To prevent people who want to work in the United States, and who will make us better off by increasing economic activity, from doing so.

On the larger scale, we spend over $170 million a year on the immigration service, an agency whose behavior can too often be best described as “thug-like.” In its zeal to control our borders, the Border Patrol erects internal checkpoints to examine identity documents and question all motorists on highways leading from international borders. To take a minor example, I have been quizzed by gun-toting Border Patrol agents on where I was going and why I was going there—matters that are none of the federal government’s business under any circumstances—while driving on the interstate east of Yuma on the way to Phoenix, at a spot that provides a convenient chokepoint. For now, the federal agents only ask a few questions. But it is not too much of a stretch to imagine data-collection efforts that might be a real threat to privacy and freedom. Identifying those who regularly travel to border towns to take advantage of Mexico’s looser rules on medicine, for example, would be an easy next step.

As it does in other areas, the Leviathan can use crises to expand its power and reach by creating “border security” measures that also restrict liberty at home. Defending the borders of a free country from those who would reduce freedom is legitimate. But that defense must be conducted in a manner that does not destroy the liberty it is intended to protect.

In a post-9/11 world it is harder to see how to reconcile freedom and security. Markets, however, are already offering alternatives. A Cleveland startup company run by some friends, EagleCheck, is introducing a means of verifying identification without keeping records (www.eaglecheck.com). Several airlines are working on creating privately issued and verified identification documents that would speed moving through airports (and hence across borders). Credit-card companies and PayPal have greatly enhanced the ability to conduct financial transactions across borders. Given the demand for both security and liberty, it is not surprising to see markets responding in this fashion. None of these solutions is perfect, of course, but they illustrate how entrepreneurs can help provide security without reducing liberty.

Even though borders can be an excuse for reducing liberty, a world with lots of borders is nonetheless a far friendlier world for liberty than one with fewer borders. They promote competition for people and money, which tends to restrain the state from grabbing either. Borders offer chances to arbitrage regulatory restrictions, making them less effective. Without borders these constraints on the growth of the state would vanish.

ASSOCIATED ISSUE

July/August 2004

ABOUT

ANDREW P. MORRISS

Andrew P. Morriss is the D. Paul Jones, Jr. & Charlene A. Jones Chairholder in Law and Professor of Business at the University of Alabama. He is coeditor (with Roger E. Meiners and Pierre Desrochers) of Silent Spring at 50: The False Crises of Rachel Carson, forthcoming from the Cato Institute.

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