Keynesian Federalism

by Michael Ilg*

(2019) Oxford U Comparative L Forum 4 at | How to cite this article

This Article proposes a Keynesian inspired approach for the judicial interpretation of economic federalism. Keynesian federalism is premised upon two essential features of Keynesian economics: reactivity and counterbalancing. Federal governments may require increased powers to meet modern challenges, but the judicial rationales and methods of interpretation that permit for this expansion cannot simply be replicated case after case in a way that steadily hollows out regional powers. When a federal government is able to capture increased powers of economic regulation in a federalism dispute, a presumption should arise that in the next major economic federalism dispute a decentralization favouring constitutional interpretation will be privileged. 


A perennial challenge in federal systems has been the appropriate allocation of authority between the central and the local.[1] Achieving a federalism balance is difficult because the different values represented by centralization and decentralization are fundamentally incommensurate. While the appeal of centralization often involves a tangible calculation or pursuit of advantage, as with trade agreements or customs unions, the appeal of decentralization more likely involves an intangible sense of affiliation, as with the desire for local civic participation or the historical bonds of culture. The federalism balance promises to grow only more unwieldy as many modern problems require a coordinated global response. Climate change, economic interconnectedness, terrorism, cyber crime, are but a few prominent areas where harm can be exported across borders and no state can unilaterally enforce a solution.

When the increasing logic of centralization is combined with constitutional theories of interpretation that are receptive to weighing interests and the efficacy of regulation, whether under the rubric of living constitutionalism, balancing, pragmatism, or subsidiarity, the prospect may be centralization without limit. Conversely, a categorical method of constitutional interpretation, such as Lord Atkin’s ‘watertight compartments’ of federalism[2], can certainly protect the values of decentralization from the encroachment of centralization, but is necessarily inflexible in doing so. The constant red light to adaptation of a categorical theory is no more preferable than the constant green light to centralization of living constitutionalism and the like.

A concern with unlimited centralization was recently exhibited in both the United States and Canada, when majorities on their respective Supreme Courts baulked at significant extensions of federal trade and commerce powers, upsetting the confident predictions of academics in the process. The Canadian example, a reference to the Supreme Court of Canada on the constitutionality of a national securities regulator[3], is of particular interest because of the manner in which the Court unanimously departed from the general trend of modern federalism jurisprudence to favour the strict categorical boundaries associated with the Privy Council decisions of the early Twentieth Century. This article suggests that such doctrinal switches should be encouraged as a means to help maintain the federalist balance in the face of the constant pressures toward centralization. However, rather than remaining an unpredictable and seemingly intuitive occurrence, these doctrinal switches should be given intellectual coherence and predictability. It is suggested that a more coherent basis for the judicial balancing of federalism can be found with some inspiration from Keynesian economics. This article offers a preliminary step in this regard.

A Keynesian metaphor for constitutional interpretation is constructed on two related aspects of the economic theory: namely, that it is reactive and counterbalancing. A Keynesian approach is reactive in the recognition that central governments have an essential role to play in the economy, and that this role must expand at times when private market forces threaten a downward cycle through recession and into depression. A Keynesian approach is counterbalancing in that it does not presume a uniform government role in the economy; it is instead counter-cyclical, calling for government involvement to moderate periods of economic boom and bust. The government is expansionary when the economy is in recession, and the government is in turn restrictive when the economy is expansionary.

In place of moderating periods of boom and bust in the economic cycle, Keynesian inspired federalism would aim to moderate centralization in regulation of the economy. In place of government monetary and fiscal policy, the levers of moderation are differing theories of constitutional interpretation. When more centralization is called for, perhaps in the wake of a financial crisis when there is a compelling case for new federal coordination of the financial sector, then efficiency favouring interpretations should be paramount in judicial reasoning. However, the next time there is a major economic federalism dispute, the same doctrines and reasons should not necessarily be paramount. In this economic subset of federalism, doctrine should be somewhat counter-cyclical to precedent – meaning that a major constitutional decision that provides for greater centralization should increase the likelihood that categorical interpretations will be dusted off again in the future. When a major area of economic regulation switches from regional to federal control, this should give rise to a presumption that interpretations favouring decentralization will be privileged the next time there is a major economic federalism dispute. It may well be fitting that the presumption is overcome and that a centralization favouring interpretation will carry the day again – perhaps because of how pressing an economic issue appears, or because there have been other positive decentralization developments in the interim. Just as the fiscal and monetary tools utilized at the depths of a recession should not be replicated at the heights of an economic boom, constitutional theories that favour centralization should not be used uniformly in a linear approach to precedent, but should be modulated over time and across cases.

An advantage offered by Keynesian federalism is that it may be both responsive to the efficacy push toward centralization, and the pull of categorical reasoning, which honours democratic compacts regardless of efficiency. A federation that caters only to tangible reason, at the expense of the intangible values of belonging, can quickly undermine its democratic legitimacy and may eventually be faced with the threat of succession.[4] The counterbalancing feature of Keynesian federalism avoids a major defect of other constitutional perspectives that favour centralization, which provide no limit upon what a federal government may not regulate as a matter of trade and commerce. A Keynesian approach may also facilitate long-term benefits by maintaining a role for regional differentiation, as when a more optimal regulatory model occurs through divergence from a national standard. This differentiation value of decentralization echoes the famous view of federalism as a laboratory for policy experimentation.

This initial elaboration of Keynesian federalism has two important parameters to note at the outset. First, as to scope, the cases examined are limited in origin to Canada and the United States. This selection is the result of the nature of the argument advanced. Both countries have a broad mix of constitutional doctrines that will tend to favour either the interests of centralization or decentralization at the expense of the other, and this doctrinal mix was tested in both countries in recent years by cases that posed the potential for substantial increases in centralized authority. Future research projects could fruitfully explore the extent to which other federal systems with different legal traditions, such as in civil law countries, have similar doctrinal tools at their disposal, and how the federalist balance has been adjudicated in comparison.

The second parameter is substantive in nature, in that the proposed Keynesian approach concentrates only on economic federalism and, specifically, issues associated with trade and commerce. This is for a variety of reasons. First, economic coordination has been a primary historical route to centralization, as with the New Deal or European Integration. Second, economics often provides the modern concepts used to justify greater centralization, as in the language of systemic risk, contagion, and externality. Third, the economic regulation of trade and commerce can readily yield jurisdictional disputes that are binary or zero sum in nature. If one level of government approves a pipeline and another level of government resists it, the outcome is going to either be pipeline or no pipeline. This binary or zero-sum nature of dispute is especially significant in federalism cases, for if a method of constitutional interpretation that favours efficiency or efficacy is applied as traditional legal precedent, it can permit a federal government to capture ever increasing powers. This article draws on Keynesian economics as a metaphor to suggest that issues of economic federalism need to be counterbalanced across cases, and that precedent in this unique economic subset of federalism cannot be viewed in a traditional linear fashion where the reasons of the last case are applied to the facts of the next.

An overview of Keynesian economics is provided in Part One of this Article, with particular attention paid to the reactive, counterbalancing nature of the theory. Part Two argues that constitutional approaches which characterized the Twentieth Century are no longer capable of maintaining the federalist compromise. Part Three canvasses the economic literature on federalism for insights on the advantages of jurisdictional competition. Part Four describes how interest-based constitutional approaches are suited to centralization, while categorical approaches are suited to decentralization. Part Five uses examples to illustrate how Keynesian federalism can operate as a means of balancing federalism across cases.

1. Keynesian Metaphor

John Maynard Keynes is widely considered the greatest economist of the Twentieth Century,[5] and yet his work languished for decades on the periphery of policy and academic attention until the global financial crisis of 2008.[6] Many economists had come to view Keynes’s ideas as hopelessly outdated and ill-suited to modern circumstances. Cycles of boom and bust were presumed to have given way to stability[7] under the so-called ‘great moderation,’ and a faith in the efficacy of markets had led to widespread economic deregulation.[8] The financial crisis threatened systemic financial collapse on a level unseen since the Great Depression, ending notions of perpetual stability and rattling faith in market deregulation. Keynes’s ideas subsequently enjoyed a renaissance, particularly his central prescription that government spending may prevent a crisis from descending into a full fledged depression.

This Keynesian revival was quite short-lived in most countries, however, as there was little appetite to continue with deficit spending when many governments already had huge debt to GDP ratios.[9] Some advocates for Keynesian stimulus argued that government spending was never adequate enough for the purpose. After all, it has been said that it was World War II, not the New Deal that eventually lifted economies out of recession. Although it appears in retrospect that the Keynesians were more accurate, and that the countries that fared best during the most recent financial crisis were those less concerned with debt levels,[10] the debate over austerity versus spending remained persistent. Indeed, the aftereffects of the crisis, as well as the debate over austerity, continued until the spring of 2016, with Greece’s potential exit from the Euro-zone being the prime example.[11]

Apart from the long-term merits of fiscal and monetary policy, Keynesian economics is widely considered the quintessential theory of financial downturn and crisis. It is proposed that some of the central features of Keynesian economics could serve as a promising metaphor for a constitutional theory of federalism. This constitutional metaphor would build upon the basic attributes of reactivity and counterbalancing gleaned from the economic theory.

Initial government responses to the onset of the Great Depression tended to hew to traditional assumptions on the need to maintain balanced budgets and allow for a market correction to occur. According to the traditional or classical view, after a harsh adjustment period, gluts in supply would be cleared, weaker firms would disappear and equilibrium would be restored almost naturally. These classical assumptions were not only shown to be flawed, but could also be credited with exacerbating the problem sparked by the stock market crash of 1929[12] (along with trade protectionism that provoked retaliatory measures worldwide).[13] The initial policy response to the Depression was informed by classical economics, in the belief that markets would overcome short-term blips in the business cycle and naturally return to equilibrium. This equilibrium of efficient inputs and outputs was also assumed to equate to full employment.

In his masterpiece General Theory,[14] Keynes rejected the classical view of equilibrium at a constant state of optimal price and full employment. While accepting that the classical view may hold in some circumstances, Keynes argued that it was not the natural or constant position.[15] It was believed that in the long-term equilibrium would be achieved despite periodic downturns or interruptions within the business cycle. In response to this belief, Keynes famously quipped that ‘in the long-term we’re all dead.’[16] Keynes’s revolutionary insight was that severe and unpredictable economic events in the short term may actually result in an equilibrium that is suboptimal, in which productive resources are not utilized nor re-invested, so that involuntary unemployment rises. Keynes railed against what he saw as the classical model’s adoption of Say’s Law,[17] which he characterized as the ability of supply to create its own demand – or that a glut of supply of one good must be countered by unmet demand for another. Keynes’s fundamental point of departure from classical theory and Say’s Law was that effective aggregate demand could be lessened by independent interpretations of uncertainty, and did not have to find a balance elsewhere.

Keynes’s insight on this disequilibrium between demand and employment was based in part on the recognition of what would be referred to as the ‘stickiness’ of prices and, in particular, wages.[18] Rather than showing immediate flexibility in response to demand, wages could remain relatively fixed. Wage inflexibility could persist for various reasons, chief among them being employment contracts, labour unions, and also worker psychology: many people would likely view performance of the same work for less money to be insulting. It is hard to imagine that many firms would experience reduced demand on Monday of ten percent and on Tuesday would have similarly reduced labour costs. Instead of some artificial sense of fluctuating wage rates, as if between 7.8 and 8.3 from Monday to Tuesday, the decrease in external demand for a firm’s goods or services would likely result in lay-offs. Lay-offs in turn are likely to affect aggregate demand in a greater way than some ideal wage renegotiation, because one laid off worker may spend less in the aggregate than a small group of workers who each shoulder an equal percentage of the wage reduction.

Saving in the face of uncertainty is an understandable human response, and it was captured and theorized by Keynes in a remarkable way. Keynes drew out the paradox of saving, or thrift,[19] in which a fixation on saving one’s money may be prudent in isolation, yet if everyone follows the same instinct to save in a miserly fashion, the exchange economy will suffer and every one’s savings will collectively be lessened or rendered worthless. Keynes’s adamance on this point is reflected in his claim that it was a citizen’s patriotic duty to spend. The saving propensity of course applies not only to households, which may view surrounding lay-offs as reason to spend less, but also to firms, which are generally more quick to lay-off than to rehire.

In threatening economic times, when the basic economic contribution that one provides may no longer be desired by others, uncertainty overcomes probability. Another of Keynes’s unique points of recognition was the distinction between uncertainty of the unknown and the probability of a contemplated event coming to pass. The latter probability is a common type of market condition and bet, while the former condition of complete uncertainty is likely to chill a marketplace through cautious inaction.

Arguably the least prominent feature of Keynes’s work is the most useful as a constitutional metaphor. Attention commonly attaches to Keynesian economics as the theory for downturn and crisis, and the role of the state, whether via monetary or fiscal policy, that crisis entails. Less popular, however, is the other side of crisis: the subsequent recoil of public expenditure that counterbalances government stimulus spending once the economy returns to growth. This counterbalance feature is less prominent because it has largely gone unrealized. Politicians have proved notoriously unwilling or unable to exercise economic restraint in the balanced fashion contemplated by Keynes so as to run surpluses in times of prosperity. Paul Krugman, the popular public face of Keynesianism in recent years, noted that demands on government do not ease but actually may increase in a boom, “more air traffic to control, more homes to protect from forest fires.”[20] The idea that governments would run a surplus in better times to account for a built up deficit may simply have been naiveté on Keynes’s part, but as a constitutional metaphor, this notion of counterbalancing is arguably quite appealing.

If Keynes departed from the faith placed by classical economics in economic ripples naturally returning to equilibrium, he did not depart from the notion of equilibrium altogether. Government intervention would be needed when ripples became waves, as if the addition of water supply would calm the tumult. Later the added excess water would need to be siphoned off in times of tranquility so that it could be available for the next storm. Without this subsequent recouping of funds or resources the long-term viability of the Keynesian prescription is weakened. When confronting the last financial crisis some governments shrunk from stimulus spending because of the debt burdens they were already carrying.

If the New Deal ushered in the first Keynesian consensus, what is remarkable about the second that followed upon the financial crisis of 2008, is how short-lived it was. After a round of stimulus that was criticized as too meager for purpose, Keynesian deficit spending was quickly displaced by austerity and the perceived need to cut spending.[21] Austerity was especially prominent (and controversial) in the priorities pursued by Germany amongst its European partners. While the financial crisis was the most substantial economic downturn since the Great Depression, the disparity between the governmental reactions to these two monumental economic crises was extraordinary. The New Deal response to Great Depression produced the modern welfare state, while the short-lived Keynesian consensus after the most recent financial crisis barely registered at all. The disparity partly reflects a perceived incapacity: specifically, a perception amongst political actors that accumulating further public debt was unsustainable. This view of fiscal exhaustion arguably finds a related parallel in the exhaustion of federalism doctrine and theory.

The late Nineteenth century was charactized by a relatively laissez-faire approach to the economy with minimal regulation, and, therefore, there was much room for the growth of government regulation throughout the Twentieth Centery. By the turn of the Twenty-first century, however, the previous trajectory of centralization cannot be continued without completely undermining the federalist balance altogether. As a sign of a certain exhaustion with economic centralization it is perhaps telling that no fundamental financial system reforms have followed the crisis.[22]

2. Peering into a unitary abyss?

2 (a) Domestic Externalities and the Logic of Centralization

Professor Jack Balkin began an article on the U.S. Commerce Clause by proposing that “a good test for the plausibility of any theory of constitutional interpretation is how well it handles the doctrinal transformations of the New Deal period.”[23] Without the New Deal transformation, Balkin wrote, “we could not have a federal government that provides all of the social services and statutory rights that Americans have come to expect.”[24] While one might question the justification of constitutional doctrine based on the amount of government spending that people have come to enjoy, there is no doubt a strong element of realism to Balkin’s framing. Fundamental shifts in constitutional doctrine occurred to permit the rise of the modern administrative state, and it is difficult to imagine a return to the outline of 19th Century laissez-faire government.

The New Deal doctrinal transformations arguably reached a high-water mark in cases that expanded the conception of trans-boundary trade, and, therefore, the federal power to regulate the activity in question. The most famous (or infamous) case in this line was Wickard v Filburn;[25] in which an Ohioan farmer was fined for growing more than the federal established maximum amount of wheat. Wickard claimed that the wheat was not intended for any marketplace but would be consumed on the farm. The wheat would not even leave Wickard’s property, much less enter interstate commerce. Nonetheless, the U.S. Supreme Court held the federal government’s penalty was a legitimate exercise of its commerce powers.[26] The Court reasoned that if other farmer’s behaved as Wickard had, and grew for personal use instead of buying and selling in the marketplace, then it could threaten the federal Government’s objective of supporting the price of wheat by limiting its supply. Growing more than the government allotment could indirectly effect market price, and thereby interstate commerce, as it would increase supply. While Wickard’s actions did not directly affect supply, they could notionally lessen demand, and, therefore, indirectly threaten the Government’s valid national objective.

A Canadian parallel followed in the Queen v Klassen,[27] in which the Manitoba Court of Appeal stepped away from longstanding Privy Council precedent to endorse the federal government’s ability to mandate the sale of wheat by farmers to a wheat board exclusively. Bora Laskin, who would later serve as Chief Justice of the Supreme Court, wrote approvingly: “The Klassen case has now given a direct rebuff to the proposition advanced by Duff J., and, in so doing, it has taken the line long ago adopted in the United States in dealing with similar marketing problems and exemplified by… Wickard v Filburn.”[28] Cases such as Wickard and Klassen set a modern path for centralization, in which a local transaction or activity is framed in light of national interest within an uncertain global marketplace; and the individual action that when multiplied could undermine the central authority’s attempts at providing stability. A cumulative view of individual behaviour is essential in connecting the local act with the national interest, and follows the basic logic that if others behaved as the single farmer who opts to consume rather than only sell, or tries to sell elsewhere at a different price, then it would frustrate the regulatory scheme that depends on covering all participants uniformly.

Decades later when the constitutionality of the most substantial American domestic social program since the New Deal, the Obama administration’s Affordable Care Act[29] (the Act), was challenged, the New Deal doctrinal transformation received renewed public attention. In the opinion of the vast majority of legal academics, the Act was certainly, easily constitutional.[30] As Professor Balkin noted “the idea that the Act’s mandate to purchase health insurance might be unconstitutional was, in the view of most legal professionals and academics, simply crazy.”[31] While other rationales for finding the Act constitutional, such as the general power of taxation, were raised by a small minority,[32] the main rationale by far was under the Commerce Clause.[33] The logic of centralization is promoted by a claim that free riding or other forms of market failure are contrary to the national interest. Indeed, in National Federation of Independent Business v. Sibelius, the minority reasons of Justice Bader Ginsburg justified the constitutionality of the Act by emphasizing the national scale of the health care industry and the potential for free riding.[34]

It is noteworthy that the liberal interpretation, following the logic of centralization, was in the minority on the Commerce Clause issue. Academic commentators were proved wrong in their confident predictions, on the reasons if not the result. Excusing this predictive failure might yield the usual refrain that the prediction was a correct reading of past precedent and that it was the Court that departed from established law. This is not entirely persuasive if law is to be viewed as a field capable of scholarship and assessment based on more than mere ideological preference. Aside from any legal realist tendencies confirmed by this case, the important point for the purposes addressed here is the expansion of centralization on federalism grounds of trade and commerce. Five out of nine Justices indicated that there is a limit to the logic of centralization under the Commerce Clause, and that the New Deal transformation cannot be extended out indefinitely. As Roberts C.J. wrote:

As expansive as our cases construing the scope of the commerce power have been, they all have one thing in common: They uniformly describe the power as reaching “activity.”… The farmer in Wickard was at least actively engaged in the production of wheat, and the Government could regulate that activity because of its effect on commerce. Government’s theory here would effectively override that limitation, by establishing that individuals may be regulated under the Commerce Clause whenever enough of them are not doing something the Government would have them do. Indeed, the Government’s logic would justify a mandatory purchase to solve almost any problem.[35]

The Obama administration expressly pitched that the Act was not a tax.[36] The Obama administration proposed a major overhaul of the private market, relying on insurance firms to provide coverage in line with comprehensive new rules, such as the important limits on the ability of insurance firms to deny coverage for pre-existing conditions.[37] Such a system, however, requires widespread, mandatory participation. For insurance companies to balance new found obligations to high cost and high risk clients, the healthy and low risk had to enter the system in order to render it viable.[38] Few would dispute the constitutionality of whether the federal government could pay for every citizen’s medical insurance or health care costs. But what passes constitutional muster may not be palatable politically. Ultimately, the second prong of the Government’s argument that characterized the mandate as a tax, despite the administration’s public assertions, allowed the Chief Justice to reject the justification under the Commerce Clause and yet still save the Act, and avoid the spectacle of another 5-4 split on ideological lines for what could be the hallmark piece legislation of President Obama’s tenure.

Beyond the politics of surrounding the characterization of the Act and the individual mandate, the tense lead up to its passage and the Supreme Court hearing produced a unique metaphor for the positive mandate that is arguably more emblematic of the modern tensions surrounding federalism. The inflammatory hypothetical that emerged was a government requirement to eat broccoli. If the Act is justifiable constitutionally because of the scale of government investment and problems with individual market behaviour, such as not being willing or able to purchase insurance but then relying on emergency room services that are expensive and no longer preventative, then surely a person’s diet is within the ambit of externalities imposed on the public purse. If health care costs are borne by the public, then an individual’s poor lifestyle choices impose costs on others. If people may free ride by not paying into a private system and using public services as a last resort, then under a more universal or comprehensive public plan people may also free-ride by not exercising, or not exercising the same lifestyle restraint as their neighbours. This extension of the logic of centralization is germane because nearly every liberal democracy has a version of a publicly provided universal health care regime; and because of the soft paternalism that has been on the rise in which regulation seeks to ‘nudge’ individuals into making healthier choices.[39]

During Justice Kagan’s Senate confirmation hearings, she was asked whether Congress had the constitutional authority to impose a requirement for people to eat three healthy meals a day. Justice Kagan’s reply was that it sounded ‘like a dumb law,’ and that essentially the best protection against such senseless laws were the political branches of government.[40] This reply was pounced upon by libertarian advocates who produced a Reason TV short documentary, Wheat, Weed, and Obamacare,[41] which became something of a judicial meme.[42] The broccoli example was used by Justice Vinson in arguably the most commented upon Appellate decision en route to the Supreme Court. And finally, the vegetable analogy played a prominent role in Justice Roberts’s reasons, helping to distinguish health care from Wickard and stressing the uniqueness and potential danger of a positive requirement to act under the Commerce Clause.[43]

Kagan’s comment, as opposed to Roberts’s decision, aligns with other liberal scholars in viewing a broccoli mandate as constitutional per se, but surely protected against by the basic democratic presence of elections.[44] The constitution does not prohibit all arbitrary or oppressive mandates, such as a 100 percent income tax, the argument goes, but the prospect of facing the electorate does. This is sensible enough, but it does reveal a resemblance to unitary forms of government, even those based on convention and unwritten constitutions, in which elections are the greatest check on power. This form of constitutional check, that ‘there are elections after all,’ may not be as appealing in systems where federalism is based upon a compromise between groups or peoples that may form vastly unequal voting blocs.

The ascendant reading of American federalism since the New Deal has been extremely generous to the growth of federal powers, but this has stuttered of late. A liberal progressive reading of federalism indicates that the only limit on the logic of centralization should be the electorate, while a libertarian or conservative view seeks a constitutional limit that can be ascribed to the commerce clause, however inflated its modern scope has become. Ultimately it may be that peoples within other federal systems, even if they are liberal ideologically or by political affiliation, would favour the approach of the American judicial conservatives due to its ability to support regional and cultural differences.

2 (b) The Daunting Global Logic of Centralization

In 2011’s Securities Reference,[45] the Supreme Court of Canada also had the opportunity to consider a significant federalism issue, and also managed to confound expert predictions in doing so.[46] As the United States was an outlier amongst developed countries in not having a centralized health care scheme, so too is Canada an outlier amongst advanced economies as being without a central securities regulator.[47] For years commentators and experts had bemoaned this antiquated and inefficient position.[48]

Over decades the Supreme Court of Canada gradually relaxed the categorical borders within Canadian federalism, which were based on Lord Atkin’s ‘water-tight’ compartments of provincial competencies,[49] in favour of a more flexible and overlapping conception of ‘cooperative federalism.’[50] A major step in this modernizing trend toward flexibility was the Court’s receptivity to considerations of efficacy and the efficiency of regulatory alternatives, which, unsurprisingly, has tended to result in centralization. As Professor Jean LeClair observed, in recent decades the Court has steadily favoured the interests of efficiency over those of diversity, in part to facilitate Canada’s participation in international trade agreements and other vehicles of international coordination.[51]

The financial crisis forcefully recalled the basic economic interconnectedness dangers that underlie and support the federal compromise. This interconnectedness has been expressed in the terminology of systemic risk, in which a crisis of confidence in one institution can quickly spread to other institutions that otherwise were assumed sound. This collapse in confidence can undermine institutional viability and the ability to meet obligations in a matter of hours, as with a bank run, and can threaten the collapse of an entire financial system. Improved monitoring of information, the standardization of financial industry practices and clarity on disclosure in investment attributes are some regulatory means that may lessen the waves of uncertainty that may cascade through a system.[52] The common means of response to contagion, following Keynes, is a substantial infusion of government funds to prop up vulnerable or linchpin institutions or assets. Since single-branch financial institutions are largely confined to history and holiday movie classics, the instability of systemic risk is rarely a purely local emergency. As such, there may be good reason why every industrialized country except Canada has a national securities regulator.

The rationale for the federal government to assume authority over the regulation of Canada’s securities markets appears compelling considering that systemic risk is a substantial modern problem and the contagion effects in the global economy have only increased in amplitude. Given that Supreme Court precedent had so clearly moved toward the incorporation of efficiency rationales when contemplating national regulation of the economy in such areas as competition, it is unsurprising that the great majority of legal commentators expected the proposed national regulator to be found constitutional.[53] The great majority of experts were wrong in this case as well. The result was not only unexpected by many legal experts, but the fact that it went unanimously in the opposite direction of expert predictions only added to the disorientation.

On one level, the federal Government’s argument was poorly timed and not presented persuasively. Systemic risk is a prominent global concern, and the Court, somewhat grudgingly, acknowledged that a central regulator could more effectively address this challenge.[54] However, it could be said that the worst time to make an argument that depended heavily on systemic risk as a justification for centralization was in the wake of a financial crisis in which Canada had fared much better than most other OECD countries. Canada’s relative stability can be credited in large part to its relatively conservative financial sector oversight. Key pillars in this picture of relative resiliency are clearly federal competencies, such as the banking industry, and Canada’s outlier status when it comes to securities regulation did not serve as a Trojan horse for instability.

Also problematic for the federal Government’s case was that the proposed scheme was optional.[55] A voluntary, selective coverage model severely diminishes the urgency of a centralization solution. As with the New Deal price support regimes, or Obamacare, the need to centrally impose participation on everyone is a strong component in justifying the extension of central powers in the national interest. Furthermore, the voluntary scheme largely duplicated provincial schemes already in place.[56] It is as if a park ranger service used evidence of a dramatic increase in forest fires to seek greater regulatory powers over campsites. A reasonable arbiter may agree that increased fires is a pressing concern but may reject the increase in ranger authority if the evidence indicates that the fires were largely the result of draught and lightning, and that the ranger was not proposing to limit campfires in any event.

A telling indication of the Court’s fundamental concern, and ultimate direction, was raised in oral argument by Justice Lebel, a strong supporter of provincial autonomy. Lebel’s concern was that if the federal Government’s argument were followed, it could essentially lead to cental control over any largescale economic matter.[57] The Court ultimately signaled, no doubt unwittingly, an impasse in doctrine, for even Justices who were generally sympathetic to a strong centre were clearly disconcerted by the prospect of following the logic of centralization when it meant the federal capture of an entire cross-section of the financial system. The important revelation is the doctrinal lurch that the Court produced. Where following the tide of efficiency would have suddenly opened a wide and limitless field for centralization, the Court moved against the modern doctrinal tide and grasped at older doctrinal safeguards. [58]

3. Rethinking the federalist balance

3 (a) Economic Perspectives on Federalism

Considering federalism from an economic perspective may help to sharpen the advantages of decentralized regulation and identify some of the key attributes in keeping the federalist balance stable over time. Beyond looking at federalism as primarily an exercise in political compromise, in which local power is surrendered up for the benefits of collective action in a larger geographical unit, economics scholars (and political scientists using economic methods) have concentrated on the ways in which federalism is in the economic self-interest of both citizens and politicians. By concentrating on the efficiency gains of decentralization, economics scholars questioned widely held assumptions on the greater efficacy of centralization; a skepticism that still has yet to be shared by many in the judiciary and legal academy.

The economic literature on models of federalism is vast, and sees many branches of economic study intersect, including public finance, new institutional economics, public choice theory, and information economics. For the present purposes, the scholarship associated with the moniker of fiscal federalism will be addressed. Fiscal federalism, in its so-called ‘first generation’[59] arose in the 1970s as part of a wider skepticism about the general efficacy of government involvement in the economy.[60] Post World War Two optimism on government coordination was tied to the ascendency of Keynesian economics and was associated strongly with Richard Musgrave and his monumental work on public finance.[61] Key elements within this Keynesian consensus were the need for the central government to provide fiscal stability for the macro economy and to supply public goods for which there would be insufficient ability or incentive to be provided regionally. The role of centralization as an answer to market failure, in which goods are undersupplied because of concerns that others will free-ride, remains a chief justification for constitutional extensions of central government authority, as displayed in the Affordable Care Act litigation.

A main insight of fiscal federalism is that certain public goods or services, or indeed regulation in general, are best left to local control when the benefits are located primarily within a single jurisdiction or there are no serious spillover effects.[62] Greater efficiency will tend to occur with decentralization because local officials are best able to tailor the provision of public goods and services to meet local characteristics. This is a basic informational advantage of decentralization, in which those situated closer to the local circumstances are likely to make a more prudent and responsive decision.[63] The homogeneity of centralization may tend toward the under or oversupply of public goods in some locales and regions, given differences in makeup and current needs. In this fashion, fiscal federalism continues a line of thought associated with Hayek’s classic work on the threat of centralization to the information aggregating function of markets.[64]

An important addition to the assumption of efficient decentralization is provided in the potential for jurisdictional competition. A famous model on the potential behaviour of jurisdictional subunits within a federation was Tiebout’s ‘pure theory of local expenditures,’ which posited that jurisdictions would compete over a mobile citizenry in order to attract a greater tax base.[65] A mobile citizenry could effectively ‘vote with their feet’ and reward jurisdictions for offering an appealing regulatory and public good mix. Tiebout’s suggestion effectively equates to a market in regulatory and governance design, in which citizens are consumers who reward municipalities as if they were firms that offered a more appealing set of products or services. This attribute of jurisdictional competition adds a further layer to Brandeis’s famous metaphor of the states as ‘laboratories of democracy.’ Here, the first layer of decentralization permits for policy experimentation. The informational gains of policy-maker proximity allow for more informed experimentation, and jurisdictional competition provides the mechanism by which experimentation is encouraged. To paraphrase a saying on the nature of patents, federalism can add the fuel of regulatory competition to the fire of democratic experimentation. There are certainly other significant elements in fiscal federalism, but jurisdictional competition is the most germane to this investigation.

3 (b) From First to Second Generation Fiscal Federalism

The first generation of fiscal federalism provided important insights, but persistent questions or difficulties remained. For one, it should be recognized that the market benefits flowing from decentralized jurisdictional competition remain difficult to quantify or substantiate empirically.[66] Furthermore, the first generation of fiscal federalism was influenced by pioneering models from Tiebout[67] and Oates[68] that tended to presume that government officials were benevolent in their furtherance of the public interest.[69] This presumption of benevolence may not be a credible, or at least complete, picture of public official motivations. Public choice theory, in particular, provides a contrary perspective of officials as self-interested maximizers, who seek to consolidate or extend their political power, often at the expense of the wider public they nominally serve.

In a manner more consistent with a view that takes into account self-interested politicians and bureaucrats, ‘second generation fiscal federalism’[70] focused on the systemic attributes that ensure the maintenance of the federalist balance in the face of political competition and the rent-seeking behaviour of political actors.[71] For example, under the label ‘market-preserving federalism,’ Weingast argued that an essential feature of a stable federal system, and the market benefits that come with a constrained government, is that public officials have sufficient incentive to preserve decentralized powers.[72] It is not constitutional structure alone that determines the federalist balance, because these clearly fluctuate under judicial interpretation, but it is rather the incentive felt by government officials to try and preserve the powers of other, offsetting government branches or institutions. Rodden and Rose-Ackerman are critical of ‘market-preserving federalism’ and other fiscal federalism approaches that build upon Tiebout, for focussing overly on demand while ignoring the supply pressures of politics.[73]

The protective aspect of fiscal federalism is significant for confronting the potential for central governments to overwhelm and capture the powers of regional jurisdictions. In the simplest fashion, a government official would have an incentive against regulatory capture whenever the perceived gains of authority or decision-making would result in countervailing losses in political power: for example, through a decreasing in overall state revenue or an increase in political instability. Interestingly, this system of restraint is said by Weingast to be detectable in historical examples that are not necessarily federal in political structure, such as in eighteenth-century England and, in recent decades, in China.[74]

The recognition that federalism is not a static object, in which the efficient level of governance can be assessed and then permanently set, is a useful lesson offered by fiscal federalism.[75] Nonetheless, Oates also acknowledged the spectre of inevitable centralization: a sentiment shared by precursors William H. Riker and, much earlier, De Tocqueville.[76] Fiscal federalism provides an interesting insight on the advantages of jurisdictional competition, and it may be useful to consider how judicial theories of constitutional interpretation can be similarly balanced in competition.

4. Theory in competition

Theories of constitutional interpretation are obviously influential in framing how new and unforeseen issues are handled. In most federal systems—be they national or supra-national—there is surely a genuine desire on the part of many policy-makers and jurists to preserve the federalist compromise, and to not wittingly undermine it. For example, in many countries with federal systems, a primary axis of politics may be cultural, so that a liberal progressive, in terms of political affiliation, might nonetheless reject a central government’s liberal progressive policy because it involves an expansion of federal power.

Debates over originalism versus living constitutionalism may garner more attention, but it is arguably the divide between categorical reasoning and balancing that is the most consequential for issues of federalism. Kathleen Sullivan described the opposing positions thus: “Categorization is the taxonomist’s style – a job of classification and labeling. … Balancing is more like grocer’s work (or Justice’s) – the judge’s job is to place competing rights on a scale and weigh them against each other.”[77] While balancing may invoke ancient metaphorical connections with law and justice, categorical reasoning certainly was more foundational in the development of modern federalism in the United States. As noted by Professor Aleinikoff, when Chief Justice Marshall decided his foundational decisions on federalism, it was largely from a categorical basis.[78] Similarly, when Canada’s nascent federalism was interpreted by the British Privy Council, categorical reasoning served to set the boundaries between federal and provincial, and effectively constrained the growth of central government powers.[79]

Categorical reasoning is definitional in nature. If a constitution mandates that liquids belong to a local jurisdiction and solids are under central authority, then the task for a court in this jurisdiction is to determine what classification best describes a new material. The social consequences of the definition can, theoretically, be ignored in such a categorical analysis. A categorical view of federalism is similar to originalism in that it is essentially contractual in nature. It is the reading of a political bargain at the founding of constitutional order that is authoritative, not the judicial assessment of regulatory efficacy. Categorical reasoning may thereby act as a bulwark against centralization by excluding concerns of relative effectiveness, efficacy, or the efficiency of a particular constitutional arrangement. As with Lord Atkin’s metaphor of a federal ship with watertight compartments, the structure is set and essentially invariable regardless of changing conditions.[80]

Categorical reasoning may act as a bulwark to centralization, as it did in Canada’s years guided by the Privy Council,[81] but it necessarily does so at the expense of flexibility and adaptability. Watertight compartments cannot be reordered mid-voyage. Given the considerable difficulty in, and therefore rarity of, amending the constitution in many federal systems, it is perhaps unsurprising that past categories are found by successive generations to be too constricting to be either effective or to allow sufficiently responsive governance. Whereas categorical reasoning ignores efficacy, balancing embraces it. Unsurprisingly then, balancing has been on the rise in recent decades to become the predominant approach to constitutional adjudication in many liberal democracies. Hence the use of the epithet ‘the age of balancing.’[82]

The rise of balancing may be explained in part by the growing recognition (at times explicitly codified constitutionally) that in modern liberal democracies protected values are bound to come into opposition. An additional, though less overt factor in the rise of balancing may also be attributed to the increased receptivity of the judiciary to the use of social science methodologies, especially those derived from economics, to address questions of law and policy. When courts balance two protected values that are in competition it produces a form of constitutional cost-benefit analysis. The challenge in federalism disputes, however, is that the balancing calculation will very often favour the interests of centralization. Consider the principle of subsidiarity, which when applied to constitutional law generally calls for decision-making to be conducted on the governance level closest to the issue upon which there is a capacity to act.[83] Under Article 5(3) of the Treaty on the European Union, the Union may only intervene if “the proposed action cannot be sufficiently achieved by the Member States… by reason of the scale or effects of the proposed action.”[84] Notably, there is explicit room for considerations on relative regulative capacity, which is quite a slippery discretionary assessment. Subsidiarity has been equated with balancing,[85] and like balancing opens the judicial enquiry to consider regulatory efficacy and efficiency.[86] And like balancing, the application of subsidiarity has also witnessed near constant centralization. As the record of subsidiarity thus far indicates, even when the scale is initially set to favour decentralization, the exercise of balancing tends to end up on the side of centralization. Apparently, when efficacy enters into the equation of judicial analysis it overwhelms the commitment to decentralization. It is likely how the relative interests represented by centralization and decentralization present themselves for judicial estimation that explains this perennial drift to the centre.

The advantages of centralization can be more readily expressed in a tangible and foreseeable manner, while those of decentralization are more likely intangible and uncertain. Many people value deeply the bonds of family, community, and the past, even if these groupings are often involuntary and the product of chance. How is possible to compare the value of family, community, and the sense of shared history with the value of economic advantage? Or what of civic life and public virtue? Entire strands of political philosophy are occupied with the value and importance of commitments to civic life, providing a set of political virtues that are either formative for individuals or desirable as social ends in themselves. Regardless of whether the decentralization advantage is conceived of as an attribute of communal affiliation or of civic participation, it is likely to be unquantifiable in comparison with the benefits of centralization. It is no doubt appealing for some to live amongst others who share the same language and culture. It is no doubt fulfilling to attend a local council meeting and air one’s voice in debate. But the value of civic life may be inherently variable between individuals. The person who loves meetings gets more utility out of civic politics than the recluse who avoids people, for example.

Unlike communal or civic value, the general advantages of centralization are easier to identify, for there is often greater capacity and cost saving when resources and regulations are coordinated. Regulating anti-trust is likely more effective and sensible on a national level considering that the anti-competitive behaviour of a firm can spread through multiple jurisdictions in which the firm operates. Having multiple separate investigations and suits would be wasteful as a matter of process, with higher costs of coordination and duplication. But the total amount of economic harm for the society may also increase if the penalization of a firm’s anti-competitive behaviour is diminished due to ineffective or inconsistent enforcement.

The advantages of decentralization are significant but difficult to quantify. There are potentially tangible benefits to decentralization as well, including the proximity to information and the proximity of political decision-makers to citizens. Decentralization also offers the advantage of diversity, in which variation in regulatory regimes has the prospect of yielding improved systems. While proximity to information is admittedly a tangible concept, diversity is a more contingent or speculative value. The efficiency gains of uniformity can be presented immediately, but diversity may or may not yield a countervailing gain. There is a possible future benefit with diversity, though it is of unknown quality and degree.

It is perhaps understandable that centralization may tend to win out consistently over time given how the resolution is framed and how new issues will tend toward the center. It has been argued that judges are ill-equipped for such cost-benefit constitutional analyses, by reason of limited resources, practical constraints, and expertise.[87] The scales of federalism are balanced between incommensurate values, and even principled commitments to decentralization will often prove difficult to promote in a meaningful way. It is proposed that a meaningful balance can instead be promoted if traditional structures of jurisprudence are relaxed for economic federalism disputes, and that a balance is pursued across cases, not just individually within each case.

5. Keynesian federalism

5 (a) Keynesian Events

Keynesian economics is inextricably associated with financial crisis, and so too would the constitutional metaphor for Keynesian federalism be directed at significant constitutional events that are economic in nature. Keynesian federalism would not require the constant calibration of federalism decisions, and not every success for centralization or decentralization interests would need a subsequent accounting or counterbalance. Many decisions endorse the doctrinal status quo or tweak it in a minor fashion only. Still other decisions promote an overlap of jurisdictions or cooperative federalism, and do not produce a significant gain for centralization and loss for decentralization in a zero-sum fashion. Keynesian counterbalancing would only be triggered when a federal authority captures significant new economic powers or jurisdiction from a regional government.

As indicated above, Keynesian federalism is only suggested for matters of economic regulation in the traditional rubric of trade and commerce. However, an added qualification is that a Keynesian event likely yields a binary or zero outcome – as when only one level of government can regulate the pipeline or the securities transaction – and that outcome significantly shifts established powers. To clarify, while federal powers over new developments or technology may further centralization, this is not applicable within Keynesian federalism, for there has been no capture of an existing economic power held by another level of government. Under Keynesian federalism, not all centralization counts, nor does all centralization have to be accounted for. Similarly, in the rare circumstances where there is consensus on greater centralization, then there would once again be a degree of centralization for which Keynesian federalism would not apply. As a practical matter, Keynesian federalism would not apply to centralization by consensus for the simple reason that it is not a matter of constitutional law if there is no disagreement and therefore no legal dispute. However, it should be stressed that in federations with strong regional and cultural differences, nearly every federal initiative that encroaches upon regional powers would likely be resisted, if only as a matter of principle.[88] Additionally, if the centralization by consensus is the product of federal funding, as with health care in Canada, no matter how much federal funding may come to dominate a field, this does not mean that a regional government has surrendered its exclusive jurisdiction. This centralization by consensus is bought by funding and it is constitutional because it is done with the consent of the controlling regional jurisdiction.

The Securities Reference would surely have qualified as a Keynesian event had the federal Government succeeded. In the Securities Reference, an industry and form of transaction historically falling within exclusive provincial responsibility would have been absorbed as a federal competency for reasons of global interconnectedness and the awareness of systemic risk. It was a clear Keynesian event involving the potential capture of a territory of regulatory powers by one level of government at the expense of another. Others have also described the Court’s approach as confronting a zero-sum game.[89] The federal Government failed to establish a new jurisdiction precisely because the Court was not convinced by the Government’s arguments on necessity. Suppose that the federal Government’s case was stronger on the merits and that centralization was deemed constitutional, then this would have entailed a notable loss to provincial powers. Under a traditional approach to federalism jurisprudence, there would be further precedent for efficiency-based constitutional interpretation, and a signalled responsiveness to systemic risk style arguments.

The other example from above, the Affordable Care Act, presented a Keynesian event as well: not simply because of the scale of the Government initiative but because of the reasoning. There is an important step in moving from Wickard and the negative restrictions on crop usage to the positive requirement to purchase health insurance (or eat one’s vegetables). Arguably of still greater importance is the economic reasoning used to justify the constitutionality of the Act under the Commerce Clause. The harm imposed on others, whether characterized as an externality or as a spillover effect, is due to a government-backed requirement to provide essential health care. The social cost to society occurs only because emergency rooms must provide urgent care. By extension, an externality, and justification for national regulation, can be made if individuals are able to offload costs unto others in the midst of a widespread government-backed public service. If nearly everyone participates to some extent in a public school system, then those who emigrate and work abroad are robbing the public of the positive externalities of their skills that were enriched by government investment.

A simpler example of a Keynesian event, alluded to earlier, would be a pipeline that crosses a regional boundary. In Canada, this is presently a federal competency, but these projects are often contested. Were the provinces to capture, or at least circumscribe this federal jurisdiction, then this would qualify as a Keynesian event. A further hypothetical example of a Keynesian event in the Canadian context could be the federal Government’s attempt to regulate real estate transactions involving foreign buyers. If Canada’s long feared housing market bubble were to burst, and subsequently a national standard for real estate transactions involving foreign buyers were proposed, then this would undoubtedly be a zero-sum capture of exclusive jurisdiction from the provinces by the federal Government. As with the pipeline example, the real estate transaction would move from one level of government to another in a zero-sum fashion.

5 (b) Keynesian Counterbalancing

After a Keynesian moment in which a substantial shift occurs in the federalist balance at the expense of decentralization, it then remains to consider how Keynesian federalism might be applied. In the Securities Reference, the Canadian Supreme Court seemingly found that when faced with the prospect of unlimited centralization the best tool available to combat the logic of centralization was categorical reasoning. When the Court baulked at the federal expansion in the Securities Reference, Chief Justice McLachlin acknowledged that the modern trend in Canadian constitutional jurisprudence was for overlap and cooperation, but that this could not overcome the bedrock categorical federalism foundation.[90] The Court confounded most legal academic and expert predictions by reversing a modern doctrinal trend of incorporating efficiency concerns to instead dust off principles based in categorical reasoning. Indeed, the Court’s decision left some commentators wondering whether the decision boded a return to the more categorical era of the Privy Council in the early Twentieth Century.[91]

It was no doubt understandable that the great majority of legal commentators had anticipated that the federal Government’s arguments on the need for a national securities regulator would succeed, for two main reasons. First, the Court had consistently reiterated that the “dominant tide” in Canadian jurisprudence was for cooperative federalism and for the overlap of government powers.[92] Second, the Court, in General Motors of Canada v. City National Leasing,[93] had breathed new life into subsection 91(2) on Trade and Commerce, and in particular had opened the door to considerations of national importance and the efficacy of national legislative schemes. Indeed, Justice Dickson C.J. suggested a very open-ended path to centralization when he wrote: “The deleterious effects of anti-competitive practices transcend provincial boundaries. Competition is not an issue of purely local concern but one of crucial importance for the national economy.”[94] Unsurprisingly, it was observed that competition could be replaced by securities in this framing quite easily, and that the same rationale for centralization should apply.[95] However, a wide array of fields, such as education,[96] could be described as crucial to the national economy and therefore not of purely local concern. Ultimately, it was precisely this simple equation of national importance leading to federal oversight that troubled Justice Le Bel at the oral argument stage in the Securities Reference.

Many commentators, quite reasonably: i) looked to the trend of constitutional jurisprudence favouring centralization; ii) applied the reasoning of City National Leasing to the context of securities, and; iii) predicted that the federal Government would be successful in convincing the Court of the importance and efficacy of a national securities regulator. That appears to be sound legal analysis. However, it may be ill-suited to the unique sub-set of economic federalism. Keynesian federalism would instead have indicated that i) + ii) = iii) an interpretative switch. City National Leasing was a Keynesian moment, which in addition to an extension of federal powers over anti-competitive business practices, also, and more importantly, seemed to introduce considerations of national importance and legislative efficacy to factor in determinations of federal trade and commerce powers. The Securities Reference was a Keynesian moment because it promised an arguably even bolder step in the capture of national securities regulation, and it promised to endorse and affirm the national importance route to trade regulation, which had been alluded to in City National Leasing.

In 2018, the federal Government again proposed a national securities scheme, which it subtly labeled the ‘cooperative system.’ This time, however, the plan was much more narrowly focused on specific infractions and was purely an opt-in system. In short, the plan did not represent a binary ‘taking’ of provincial jurisdiction in the manner contemplated in the Securities Reference. Unsurprisingly, a unanimous Court found the plan to be constitutional in a decision replete with glowing descriptions of the cooperative trend in Canadian federalism.[97]

5 (c) Keynesian Counterbalancing – Extent

The Securities Reference resulted in an outcome that was consistent with the approach of Keynesian federalism. An interpretative shift served as an important counter-balance to centralization. Whereas before commentators predicted that the precedent of City National Leasing would support a federal capture of a provincial jurisdiction, there was insterad a unanimous Supreme Court decision that limited or dampened such an expansive interpretation. The Securities Reference decision protected provincial powers, and constitutional precedent was arguably given a narrower interpretation. Nonetheless, it could be argued that Canadian federalism was still left in an unbalanced state: the Securities Reference merely protected provincial jurisdiction but it did not account for the previous federal gain over competition law. And though this observation of an unanswered federal gain may be accurate, it should be stressed that while economic federalism is at times zero sum in nature, Keynesian federalism is not intended to be zero sum.

Keynesian economics was directed only at large scale peaks and valleys in the business cycle, and did not suggest the impossible task of monitoring micro levels of demand in order to calibrate how much every individual or firm was saving or spending at a given time. Similarly, Keynesian federalism is focused upon moderating large scale constitutional events in a similar vein to economic federalism cases: it does not prescribe the federalist balance itself, which is arguably best left to governments.

Additionally, governments, both central and local, should have the ability to anticipate constitutionality and plan around a permitted expansion. An expansive period for central power in trade and commerce should be capable of being placed in a wider context of modernization or reform. The New Deal transformation was not a single piece of legislation but rather a massive systemic overhaul and re-conceptualisation of the role of government in the economy. Modern reforms are unlikely to aspire to the scale of the New Deal, but governments should be permitted to follow transformative policy schemes that are broader than a single legislative piece. If, for instance, a country’s entire financial sector is to be overhauled in the wake of a crisis, then an organizing agency or central authority must be able to link together various related statutory elements and institutions. To have half of a scheme held to be valid and the other not because of a rigid tit-for-tat adjudication would be impractical and unproductive. Again, while economic federalism is at times zero sum in nature, Keynesian federalism is not intended to be.

Keynesian federalism involves not only the flexibility to recognize broader legislative schemes like the New Deal, but also the flexibility to keep the approach restrained and selective. Were the recommended approach to apply in a binary fashion, reversing back and forth between interpretative approaches in one constitutional case after another, it would be overly rigid, insensitive to underlying policy implications, and open to manipulation by governments. If courts engaged in a rigid approach of declaring constitutional victories based upon which side lost in the previous round, it would be open to governments to try and game the system by setting up nominal constitutional challenges in matters of no real concern, and with no real prospect of success, simply to reset the system to favour their interests for the next big case that they are truly invested in.

As Keynesian federalism is restricted to Keynesian events in economic federalism, this helps ensure that it is not a rigid tit-for-tat approach. More importantly, Keynesian federalism safeguards against both rigidity and manipulation in that it only suggests a rebuttable presumption for an interpretative switch. It is essential that courts maintain the discretion to allow for the circumstances of a case to overcome concerns for jurisdictional trends and the need for federalist balancing. The presumption for favouring decentralization interpretations in the next Keynesian event case could be overcome by a compelling need for centralization, such as the gravity of an emergency situation that centralization is intended to answer – as with the New Deal. The presumption for an interpretative switch perhaps could also be lessened when there have been other interim developments in economic regulation that have promoted decentralization by other, non-federalism means since the previous Keynesian event. For instance, a major recognition of indigenous title or self-determination may provide for significant decentralization gains, of regional or local control over a resource or economic decision-making, even if it is not framed primarily as a federalism issue.[98] This is not to suggest that Keynesian federalism should factor into the determination of indigenous rights, but rather that significant gains for decentralization could be considered within Keynesian federalism to lessen the presumption favouring an interpretative switch. The rebuttable nature of the presumptions that feature in Keynesian federalism is therefore an essential feature that ensures flexibility in the jurisprudence of economic federalism.

5 (d) Keynesian Counterbalancing – Innovation

Keynesian counter-balancing need not only be a matter of preserving regional powers, it may also be a means of encouraging regional differentiation and departures from a centralizing trend. Categorical reasoning in the style of watertight compartments can certainly serve to protect regional powers, but it is highly unlikely to provide for new jurisdictional gains. Categorical watertight departments by definition cannot expand into federal compartments. Nevertheless, it is possible for regional governments to exert new regulations within, or beneath, an area which otherwise falls under federal control, and the means by which they do so can be categorical in nature.

A potentially useful categorical tool within the Keynesian balancing toolbox is the doctrine of interjurisdictional immunity. A recent and notable Canadian case, Insite[99], demonstrates nicely the balancing potential of the doctrine of interjurisdictional immunity. Although the case does not occur within the economic field that Keynesian federalism is devoted to, it is still illustrative of the general balancing potential of this unique form of categorical interpretation. Conveniently, the Insite example emerged in Canada around the same time as the Securities Reference.

In this case, the Province of British Columbia declared a public health emergency in response to localized epidemics of HIV and Hepatitis C. A regional health authority instituted a program, Insite, which included a supervised injection site for intravenous drug use in the poverty and crime stricken Downtown East-side of Vancouver. Although the program clearly addressed a pressing issue of public health, and health is a well-established provincial division of power, the injection site would have been contrary to federal Criminal Code provisions unless a federal ministerial exemption was given. When a renewal for the ministerial exemption was not granted, the program was at odds with the federal criminal power. Normally, under the doctrine of paramountcy, when heads of power conflict it is the federal power that prevails. Nonetheless, the doctrine of interjurisdictional immunity provided a potential protection for the province’s project.

Interjurisdictional immunity is a constitutional doctrine that shields the workings of one branch of government from the effects of more general, but otherwise valid, workings of another. Historically, the doctrine of interjurisdictional immunity tended to protect only federal undertakings, and was for this reason criticized for its unequal promotion of centralization. Yet, the Insite decision presented a seemingly ideal opportunity to reinvigorate the doctrine in a way that would not only further provincial powers but also support a modern example of social policy experimentation. As Justice Huddart wrote, when the matter was before the BC Court of Appeal: “If interjurisdictional immunity is not available to a provincial undertaking on the facts of this case, then it may well be said the doctrine is not reciprocal and can never be applied to protect exclusive provincial powers.”[100]

While a majority of the BC Court of Appeal agreed on the applicability of interjurisdictional immunity, the Supreme Court declined to apply the doctrine. Chief Justice McLachlin, writing for a unanimous Court, held that the doctrine was “neither necessary nor useful” in resolving the dispute, and its “premise of fixed watertight cores is in tension with the evolution of Canadian constitutional interpretation towards the more flexible concepts of double aspect and cooperative federalism.”[101] Interestingly, just a few months after the Insite decision, in the Securities Reference, another unanimous decision of the very same Court would resist this trend of cooperative constitutionalism in favour of watertight compartments. The Supreme Court has seen to it that the doctrine of interjurisdictional immunity has become dormant as it was said to be out of step with the modern trends of cooperative federalism. However, it is perhaps desirable to keep the doctrine at hand, to be dusted off in a future economic federalism dispute, just as the outdated and colonial watertight compartments became suddenly fashionable again when the federal Government sought to capture national securities regulation in a manner that threatened unlimited centralization.

Interjurisdictional immunity is particularly appealing as a tool of categorical reasoning because it can encourage the type of policy experimentation and differentiation encountered in Insite. The regional health authority was confronted with a specific and local emergency and responded with a policy that was the first of its kind in North America. Although the non-economic subject matter of Insite is inapplicable to Keynesian balancing, the basic elements of a local issue and an experimental policy response could find more universal application. For example, in the real estate context it may be that one jurisdiction or region faces more urgent affordability issues than the rest of the country. If centralized policies on interest rates, banking, foreign investment, or lending rules are either unresponsive or insufficient to the local challenge, then provincial policy could seek to devise a novel solution. While the local or provincial policy experiment would likely touch upon federal powers over banking or trade and investment in some way, it may well be that the local experiment could be interpreted as appropriately falling within a core provincial competency over property and contract.

Policy experimentation is one of the hallmarks of federalism and a promising feature of regional diversity. Justice Brandeis eloquently gave life to the metaphor that federalism contains laboratories of democracy. Brandeis, writing in the time of the great depression, observed that “one of the happy incidents of the federal system” was that “a single courageous state” could “serve as a laboratory: and try novel social and economic experiments without risk to the rest of the country.”[102] It is suggested that the doctrine of interjurisdictional immunity is indeed very useful, contra McLachin C.J., because applying it to protect the local policy in Insite would have reinvigorated an aspect of federalism that fosters regional policy departures from a homogenous national standard. While the Court in Insite found that the refusal of a ministerial exemption violated Insite’s user’s s.7 Charter protections of life, liberty and security of the person, this limitation is extremely narrow. Limiting federal power when its exercise exacerbates a health emergency in a manner that threatens individual life is a compelling rationale certainly, but this is hardly a guide to economic federalism. The compelling health rationale for protecting the scheme in Insite could also have been joined with an encouraging signal to the provinces that old categorical doctrinal tools could be repurposed for a modern era to support policy experimentation and diversity across the laboratories of democracy.

6. Conclusion

No doubt many people sensibly wish to have their governments address pressing global challenges like climate change or terrorism, and yet at the same time regret the loss of local political participation and the historical differences that define communities. It is neither possible nor particularly desirable to maintain a fixed measure of balance between the interests of centralization and decentralization. Keynesian federalism cannot prescribe an ideal balance for federalism, but it does arguably offer an improved approach to balancing in the field of economic regulation. The jurisprudence of economic federalism might be improved if it is treated as distinct from other types of precedent building areas of constitutional law. A single sensible and sound decision may incrementally facilitate centralization, but when a wider view is taken it may appear that these separate sensible steps all march in the same direction, gradually undermining the federalist premise altogether.

The promise of Keynesian federalism lies in the opportunity to incorporate the pursuit of efficacy and responsiveness that sits, conflicted, alongside the desire for autonomy and difference. Keynesian federalism offers an intelligible framework for the pragmatic desire of judges to fluctuate between an efficacy-minded green light to centralization on the one hand, and the categorical red light that protects decentralization on the other. In place of doctrinal lurches that are pragmatic but only intuitive, Keynesian federalism can help ensure that judicial fluctuations between interpretive tools occur in a more principled and predictable fashion.


* Associate Professor, Faculty of Law, University of Calgary. The author thanks Professor Gerhard Dannemann, Dr. Sam McIntosh and the anonymous reviewer for their comments and suggestions.

  1. As James Madison wrote in The Federalist Papers: “Not less arduous must have been the task of marking the proper line of partition between the authority of the general and that of the State governments. Every man will be sensible of this difficulty, in proportion as he has been accustomed to contemplate and discriminate objects extensive and complicated in their nature.” James Madison, The Federalist No. 37, THE DAILY ADVERTISER (Friday, Jan. 11, 1788).
  2. Attorney General for Canada v Attorney General for Ontario, [1937] A.C. 326, at p. 354.
  3. REFERENCE RE SECURITIES ACT, 2011 SCC 66, [2011] 3 S.C.R. 837.
  4. Brexit and the Catalonian referendum crisis in Spain are but the most recent manifestations of anti-centralization sentiment in Europe. In the Canadian context, the succession of Quebec is always a lingering political prospect. See, e.g., Peter W. Hogg and Wade K. Wright, Canadian Federalism, the Privy Council, and the Supreme Court: Reflections on the Debate about Canadian Federalism, UBC Law Review 38.2 (2005) 329, 345; (“In all federations, there is a high volume of rhetoric about states’ rights (or similar such ideas), but in Canada these ideas are not just rhetoric. The threat of Quebec’s secession gives the provinces more leverage in federal-provincial relations than is possessed by the states in the United States or Australia.”).
  5. Richard A. Posner, How I Became a Keynesian, The New Republic, Sept. 23, 2009;
  6. See Robert Skidelsky, The Relevance of Keynes, 35 CAMBRIDGE J. OF ECON., 1 (2011).
  7. Richard A. Posner, Keynes and Coase, 54.4 J. L. & ECON.. S31, S34-35.
  8. Sidelksy, supra note 4 at 1.
  9. Roger E. Backhouse and Bradley W. Bateman, Keynes After the Crisis, FEATURES, 43, 43-4.
  10. Paul Krugman, Keynes Was Right, New York Times, Dec. 29, 2011,; Henry Blodget, It’s Official: Keynes Was Right, Business Insider, Apr. 24, 2012,; Anatole Kalesteky, The Takeaway from Six Years of Economic Troubles? Keynes was Right, Reuters, Oct 31, 2014,
  11. See, e.g., Larry Elliott et al, IMF demands EU Debt relief for Greece before new bailout, The Guardian, (January 21, 2016);; Suzanne Daley, Greece and It’s Creditors Pummel Each Other, but Fight Is Not Over Yet, New York Times (June 19, 2015);
  12. An influential school of thought explains that much of the extent of the Great Depression was due to monetary shocks that overwhelmed a vulnerable monetary system based on the gold standard, which spread the damage worldwide. See, e.g., Barry Eichengreen, GOLDEN FETTERS: THE GOLD STANDARD AND THE GREAT DEPRESSION, 1919-1939, Oxford University Press (1992).
  13. Jakob B. Madsen, Trade Barriers and the Collapse of World Trade During the Great Depression, 67(4) SOUTHERN ECON. J. 848, 850 (2001).
  15. Alvin H. Hansen, Mr. Keynes on Underemployment Equilibrium, 44.5 J. OF POL. ECON. 667, 669-70 (1936).
  16. John Maynard Keynes, A TRACT ON MONETARY REFORM, Ch. 3, (1923).
  17. Laurence Seidman, Keynesian Stimulus Versus Classical Austerity, 1 REV. OF KEYNESIAN ECONOMICS 77, 78 (Autumn 2012).
  18. For a modernized take on stickiness, see Ben S. Bernanke and Kevin Carey, Nominal Wage Stickiness and Aggregate Supply in the Great Depression, NBER Working Paper 5439 (January 1996).
  19. Seidman, supra note 15 at 81.
  20. Paul Krugman, quoted in William Voegeli, Keynes, Krugman, and Austerity, NATIONAL REVIEW, Jan. 3, 2012,
  21. Krugman supra note 8 at 1.
  22. Roger E. Backhouse and Bradley W. Bateman, Keynes After the Crisis, 19.3 FEATURES, 43.
  23. Jack Balkin, Commerce, 109:1 MICH. L. REV.. 1, 3 (2010).
  24. Id., 3.
  25. Wickard v. Filburn, 317 U. S. 111 (1942)
  26. Wickard, at 114–115, 128–129
  27. The Queen v. Klassen, (1960) 20 DLR (2d) 406; 29 WWR 369 (Man. CA).
  28. B. Laskin, Note on The Queen v. Klassen, 37 CANADIAN BAR REV. 630 (1959).
  29. National Federation of Independent Business v. Sibelius, 567 (2012); [Affordable Care Act]
  30. See David A. Hyman, Why Did Law Professors Misunderestimate the Lawsuits Against PPACA? 2014 U. ILL. L. REV. 805 (2014)(providing a catalogue of proclamations on the certain constitutionality of the Act, especially by academics at elite law schools.)
  31. Jack M. Balkin, From Off the Wall to On the Wall: How the Mandate Challenge Went Mainstream, ATLANTIC (Jun 4, 2012),
  32. See, e.g., Jack Balkin, The Health-Care Mandate is Clearly a Tax – and therefore Constitutional, The Atlantic (May 4, 2012);
  33. Id.
  34. “Those with health insurance subsidize the medical care of those without it. As economists would describe what happens, the uninsured “free ride” on those who pay for health insurance.”567 U.S. 9 (2012). (J Ginsburg concurring in part, dissenting in part.)
  35. Affordable Care Act, 567 U.S. 9 (2012); 21-2. CJ Roberts.
  36. Balkin, supra note 29.
  37. Affordable Care Act, 567 U.S. 9 (2012); (Ginsburg concurring, dissenting in part).
  38. Id.
  39. Richard H. Thaler and Cass R. Sunstein, NUDGE: IMPROVING DECISIONS ABOUT HEALTH, WEALTH, AND HAPPINESS (2009).
  40. Josh Gerstein, Kagan’s Half-Answer on Eat Your Veggies Law, Politico (June 29, 2010);
  41. Wheat, Weed, and Obamacare, Reason TV, Aug. 25, 2010,
  42. James B. Stewart, How Broccoli Landed on the Supreme Court Menu, New York Times (June 13, 2012)
  43. “Under the Government’s theory, Congress could address the diet problem by ordering everyone to buy vegetables.” 567 U.S. 23 (2012);(C.J. Roberts).
  44. See, e.g. Ezra Klein, Amar: The most important limit, the one we fought the Revolutionary War for, is that the people doing this to you are the people you elect, Washington Post, Mar. 28, 2012;
  45. REFERENCE RE SECURITIES ACT, 2011 SCC 66, [2011] 3 S.C.R. 837.
  46. See, e.g., Poonam Puri, The Supreme Court’s Securities Act Reference Fails to Demonstrate and Understanding of the Canadian Capital Markets, 52:2 CANADIAN BUS. L.J. 190 (2012)(expressing surprise and disappointment with the Supreme Courts overly formalistic view of federalism); Jeffrey MacIntosh, Not Even Close, Financial Post, Dec. 22 2011 (noting the “overwhelming view in both the business and academic communities that the court would ally itself with the federal cause.”)
  47. Poonam Puri, The Capital Markets Perspective On A National Securities Regulator, (2010) 51 (2d) S.C.L.R. 603, 623.
  48. Proposals for a national securities regulator have a lengthy history, beginning in 1935, and have increased in recent years. For an overview, see REFERENCE RE SECURITIES ACT, pp. 847-54. There have renewed national efforts since the Reference as well. See Gordon Isfeld, Will 2015 Finally be the Year of the National Securities Regulator? Financial Post, Jan. 3, 2015;
  49. Attorney General for Canada v Attorney General for Ontario, [1937] A.C. 326, at p. 354.
  50. The move toward flexibility, and the facilitation of overlapping jurisdictions and intergovernmental cooperation, has been described as the ‘dominant tide’ of modern federalism. OPSEU v. Ontario (Attorney General), [1987] 2 S.C.R., at p. 18.
  51. J. Leclair, The Supreme Court of Canada’s Understanding of Federalism: Efficiency at the Expense of Diversity, 28 QUEEN’S L.J. 411, 422 (2003).
  53. See sources listed in supra note 43.
  57. See, CPAC, In the Matter of a Reference in Council concerning the proposed Canadian Securities Act, as set out in Order in Council, P.C. 2010-667, dated May 26, 2010, April 13, 2011 Case #33718;
  59. Y. Qian and B.R. Weingast, Federalism as a Commitment to Preserving Market Incentives, 11 J. of Econ. Perspectives 83-92 (1997).
  60. V. Tanzi, The Future of Fiscal Federalism, 24 European Journal of Political Economy 705-712 (2008).
  61. Wallace E. Oates, Toward a Second-Generation Theory of Fiscal Federalism, 12 International Tax and Public Finance 349-73 (2005); Tanzi, supra note 57.
  62. R. P. Inman and D. L. Rubinfeld. Rethinking Federalism 11 Journal of Economic Perspectives 43–64 (1997).
  63. B.R. Weingast, The Performance and Stability of Federalism: An Institutional Perspective, in Claude Menard and Mary Shirly (eds.) Handbook of the New Institutional Economics. Kluwer (2005).
  64. Friedrich A. Hayek, The Use of Knowledge in Society, 35 American Economic Review 519-530 (1945).
  65. Charles Tiebout, A Pure Theory of Local Expenditures, 64 Journal of Political Economy 705-12 (1956).
  66. See, e.g., John E. Chubb, The Political Economy of Federalism 79 Amer. Political Science Rev. 994-1015 (1985); Oates, supra note 58.
  67. Charles Tiebout, A Pure Theory of Local Expenditures, 64 Journal of Political Economy 705-12 (1956).
  68. Wallace E. Oates, FISCAL FEDERALISM (1972).
  69. Weingast, supra note 60.
  70. Y. Qian and B.R. Weingast, Federalism as a Commitment to Preserving Market Incentives, 11 J. of Econ. Perspectives 83-92 (1997).
  71. J. Rodden and S. Rose-Ackerman, Does Federalism Preserve Markets? 83 Virginia L. Rev. 1521-72 (1997).
  72. B.R. Weingast, The Role of Political Institutions: Market-Preserving Federalism and Economic Development, 11 J. of Law and Econ Org. 1-31 (1995).
  73. Rodden and Rose-Ackerman, supra note 68.
  74. Weingast, supra note 60.
  75. Oates, supra note 58.
  76. Oates, supra note 58.
  77. Kathleen M. Sullivan, Post-Liberal Judging: The Roles of Categorization and Balancing, 63 U. COLO. L. REV. 293, 294 (1992).
  78. T. Alexander Aleinikoff, Constitutional Law in the Age of Balancing, 96.5 Yale L. J. 943, 949 (1987).
  79. Hogg and Wright, supra note 4 at 346; (endorsing an observation made by Pierre Trudeau that if the Privy Council had not ‘leaned’ in the direction of the provinces, separatism would not be a threat today, “it might be an accomplished fact.”
  80. Attorney General for Canada v Attorney General for Ontario, [1937] A.C. 326, at p. 354.
  81. Hogg and Wright, supra note 4 at 346.
  82. Aleinkoff, supra note 57 at 943.
  83. Eugenie Broulliet, Canadian Federalism and the Principle of Subsidiarity: Should We Open Pandora’s Box? (2011), 54 (2d) S.C.L.R. 601, 605.
  85. Brouillet, supra note 61 at 606-7.
  86. Emanuela Carbonara, et al., Self-defeating Subsidiarity 5.1 REV. L. &. ECON. 741, 747; (noting the susceptibility of the EU Article 5(3) language on ‘scale or effect’ to economies of scale and concerns with externalities, both of which are powerful indicators toward centralization).
  87. See, e.g., Katherine Swinton, Federalism Under Fire: The Role of the Supreme Court of Canada, 55.1 LAW & CONTEMPORARY PROBLEMS 121, 136; (arguing that if the Supreme Court is to continue to consider issues of efficiency, externalities, and spill-over effects, its analysis will have to be more empirically rigorous.).
  88. See Hogg and Wright, supra note 4 at p. 346; (“Finally, every federal policy initiative is automatically contested, in the political realm and, if necessary, in the courts, by provincial leaders not only in Quebec, but in the other provinces as well.”
  89. Ian B. Lee, “The General Trade and Commerce Power after the Securities Reference,” in Anita Anand, ed., What Next for Canada? Securities Regulation after the Reference (Irwin 2012), p. 5.
  90. “While flexibility and cooperation are important to federalism, they cannot override or modify the separation of powers.” REFERENCE RE SECURITIES ACT, at p. 867.
  91. E.g., Barry Cooper, “A Return to Classical Federalism? The Significance of the Securities Reference Decision” Frontier Centre for Public Policy, Policy Series No. 129 (February 2012).
  92. Canadian Western Bank v Alberta, [2007] 2 SCR 3 (the “dominant tide” in Canadian jurisprudence favours the simultaneous operation of federal and provincial statutes, at paras 36–37).
  93. [1989] 1 S.C.R. 641, 58 D.L.R.(4th) 255 [hereinafter City National Leasing cited to S.C.R.].
  94. City National Leasing at 678.
  95. Robert Leckey and Eric Ward, Taking Stock: Securities Regulation and the Division of Powers, Vol. 22 No. 2 Dal. L.J. 250, 273 (1999).
  96. Leckey and Ward. Id. At p. 273.
  97. Reference re Pan-Canadian Securities Regulation, [2018] SCC 48.
  98. As with the Supreme Court of Canada’s landmark ruling on the recognition of Aboriginal title. Tsilhqot’in Nation v British Columbia, [2014] 2 S.C.R. 257; for a discussion of how the Court’s decision Tsilhqot’in sidestepped federalism issues, including the potential application of interjurisdictional immunity, see, e.g., Nigel Bankes and Jennifer Koshan, Tsilhqotin: What Happened to the Second Half of Section 91(24) of the Constitution Act, 1867?, Ablawg, July 7, 2014.
  99. Canada (Attorney General) v PHS Community Services Society, [2011] 3 SCR 134, [Insite].
  100. Quoted in Insite, at p. 157.
  101. Insite, pp. 168-69.
  102. New State Ice Co. v Liebmann 285 U.S. 311 (1932);(Brandeis dissenting).