Making Government Pay: Markets, Politics, and the Allocation of Constitutional Costs

Abstract

Instrumental analysis of private law damage remedies noncontroversially assumes rational economic actors in a market environment. A privately-owned factory forced by the tort system to internalize $1000 in pollution costs suffered by a downstream neighbor will continue to pollute if, and only if, the private benefits of the pollution-producing activity exceed $1000. At least within the law and economics paradigm, we can safely take for granted the rather strong assumptions upon which this analysis rests. No one doubts, for example, that a profit-maximizing firm will tend to ignore social costs that are not reflected in financial outflows, or that it will take account of costs that are reflected in financial flows and, perhaps, change its behavior in response. These assumptions become problematic, however, when government is substituted for the private firm in this analysis. This substitution takes place routinely in discussions of constitutional remedies such as just compensation for takings, damages for constitutional torts, and the liability or property rule represented by the constitutional prohibition against federal commandeering of state governments. Each of these remedial systems seeks to deter government, to some socially optimal extent, from violating constitutional rights by forcing government agencies to internalize the costs of their constitutionally problematic conduct. But government does not internalize costs in the same way as a private firm. Government actors respond to political incentives, not financial ones. We cannot assume, therefore, that government will internalize social costs just because it is forced to make a budgetary outlay. While imposing financial outflows on government will ultimately create political costs (and benefits), the mechanism is complicated and depends on the model of government behavior used to translate between market costs and benefits and political costs and benefits. As the paper attempts to demonstrate, for all we currently know, government cannot be expected to respond to forced financial outflows in any predictable, let alone socially desirable, way. Having reached this conclusion, the paper proceeds to explore potential justifications for constitutional cost remedies other than optimal deterrence of government misconduct. As it turns out, the efficiency consequences of paying compensation, based on the incentives and welfare of private actors, are more likely to be perverse than beneficial. And the conventional philosophical justifications for compensation, offered in terms of morality or justice, are universally problematic and contestable. Discouraged by the seeming futility of compensation in the public law context, the paper concludes by suggesting how we might go about reinventing constitutional remedies in light of the insight that government responds to political, not market, incentives.