Consideration of legislation creating the Consumer Financial Protection Agency in the Financial Services Committee this week has reignited debate about the proper role of state authority in regulating financial institutions. The debate features some strange ideological stances, with progressive Democrats arguing in favor of weak federal authority to preempt (read undermine) state regulations and Republicans, taking up the stance of the Bush administration which oversaw federal preemption of state mortgage laws, preferring federal supremacy.
These positions seem to turn our normal conception of Democrats and Republicans' views on states' rights on its head. However, Democrats have been increasingly willing to embrace state - and local - governments as partners rather than adversaries in both oversight and in substantive policymaking.
Financial services regulation. Progressives have argued, quite rightly, that state regulation of predatory lending and, longer ago, of interest rates protected consumers more effectively than the federal government. They now want to permit state regulation to trump weaker federal regulations established by a new Consumer Financial Protection Agency.
Health Care. One of the compromise measures being tossed around Washington would establish a public option which states could opt out of (or, perhaps, opt in to). This would give state governments significant authority over the direction of health care in their states. The idea was first suggested by Delaware Democratic Senator Tom Carper and then given a nod of approval by New York Senator Chuck Schumer.
Education. Despite the stimulus package's enormous investment of federal resources in the Department of Education, one of Arne Duncan's consistent themes since assuming his post as Education Secretary has been incentivizing state and local efforts to improve education outcomes. Indeed, the second portion of the Department's stimulus funds, the Race to the Top program, consists of competitive grants to states that develop their own innovative programs to improve education quality.
Marijuana. In a shift from the Bush administration, the Justice Department announced this week that it would not pursue drug cases against individuals who are in compliance with state laws permitting the medical use of marijuana.
Urban Policy. As the Obama administration begins to rework urban policy onto the federal agenda, the Domestic Policy Council and its Office of Urban Affairs have put particular emphasis on finding and helping to replicate city policies that work well. Stimulus funds, for instance, helped support Kansas City's Green Impact Zone, an initial foray into the administration's livable communities initiative.
On one hand, Democrats' ideological "weakness" on states' rights is simply a recognition that the federal government has neither the time nor the resources nor the awareness necessary to police all the important actors in the financial, health, and education sectors. On the other hand, the release of additional regulatory authority, particularly in the financial sector, to states makes the financial industry less capable of influencing regulatory outcomes. Goldman Sachs might have secret meetings with Hank Paulson in Moscow, but would find it much more costly to have secret meetings with state bureaucrats in all 50 states.
In fact, Democrats' apparent flip-flop on states' rights is no flip-flop at all. The Bush administration's embrace of federal authority had only less government and less regulation as its goal. Democrats, in contrast, seem to have chosen state authority when policy achievement and a quickened pace to the improvement of constituents' lives are their ends. Perhaps this is too charitable but, in any case, the return to a belief in governance is refreshing.