Dean Levmore asserts that post-Katrina (and, for the most part, post-9/11), "states are neither here nor there." On the issue of natural and human-caused disasters, one might start from John Adams's assertion that "government turns every contingency into an excuse for enhancing power in itself," and then ask why, if true, the locus of power accumulation is primarily federal and not state. Aren’t the state (and local) governments captured by Adams's postulate? At one level, one might think that state (and local) governments would be more likely to aggrandize power in the wake of these events since they are closer to the situation and thus the citizenry, and are more likely to reap long-term benefits from an increased profile. After all, it is unlikely that Iowa congressional elections in 3 years will focus on Katrina, but we can be sure that the Louisiana local races will. Corporate law is another area that might help us think through the puzzle.
One can think of the recent spate of corporate bankruptcies and frauds as a similarly disruptive event for corporate America. Crudely, Enron = Katrina. Here too we see primarily a federal response. Within months of the Enron bankruptcy, Congress passed the Sarbanes-Oxley Act of 2002, which federalized many important corporate law issues that had heretofore been governed by the states. For example, section 404 of the Act mandates comprehensive (read: expensive and not sure to work) internal controls requirements without regard to differences in size and scope across firms and without regard to the substantial case law in states such as Delaware on the subject. (On the former part, one might have expected a state-law solution to internal controls to be more flexible to the needs of various firms through an enabling default rule approach as opposed to the federal, command and control approach.) A similar intrusion into state law can be seen on a range of issues from board composition to executive liability for financial reports.
The federal reaction is not surprising -- it is the same reaction we saw seven decades earlier when Congress responded to the stock market crash of 1929 (the other recent corporate Katrina) with the most far reaching business reforms in American history -- the Securities Act of 1933, the Securities Exchange Act of 1934, and the Investment Company Act of 1940, which created from whole cloth our modern system of securities regulation and replaced a patchwork system of state “blue sky” laws.
What is somewhat surprising is the lack of a coherent state response to Enron and its aftermath. Delaware, to take the most important corporate law state, did virtually nothing, despite the direct attack on their turf by the federal government. Why?
One explanation is that they were powerless in the face of federal action. If true, this would necessitate a corollary to Adams's observation -- self-enhancement increases as the relative size of the government body increases. This should worry us, as it portends a fundamental shift in power -- over time and across many legal areas -- as more "Katrinas" happen. Federalists and libertarians should not be the only ones that ask tough questions about this evolutionary arc of our government.
Another possible explanation is that Delaware is not as concerned about the federal-state power dynamic as it is about its power vis-à-vis other states. After all, Delaware is competing for corporate charters with California and New York, not Washington. (At least not yet!) Here again we see a collective action problem of sorts that keeps the various states from a coordinated and unitary response that is needed when an emergency is "national." In this world, Delaware can be expected to spring into action only when the federal government intrudes to an extent that makes state corporate charters -- and the fees, prestige, and so on they bring -- irrelevant. Even then, it isn't clear what power the Small Wonder would have in the face of a federalization of corporate law.
Whether the explanation is one of these or some other possibility, the fact remains that federal power seems to consistently take the opportunities for enhancement that we give it. This is not good or bad in itself. There are likely to be salutary effects from the Sarbanes-Oxley reforms over the long term, not to mention the arguable impact that the legislation had on consumer and investor confidence in the immediate aftermath of Enron. But even when taken in the best possible light, the fact that the reforms here and in other areas of law were (must have been?) federal is cause for concern for those who believe there is wisdom in dispersion of government power.