The Ironic Rise of State Attorneys General

For years, conservatives have made a steady effort to shift power away from the federal government to the state level. One result of this trend has been pressure in Washington to hold down budgets and staff sizes of the enforcement and regulatory agencies. For example, before the latest round of scandals, staffing at the Securities & Exchange Commission had not kept up with the explosion of the financial markets in the 1990s. Meanwhile, a string of Supreme Court decisions have chipped away at federal enforcement powers and strengthened the states.

So it should come as no surprise that, as federal oversight has been weakened, states have stepped in to fill the gap. In particular, the state attorneys general have become a potent force, taking a crucial role in cases such as the antitrust suit against Microsoft Corp. (MSFT ), the lawsuit against the tobacco companies, and the investigation of misleading advice to investors by Wall Street brokerages. The latest case: 29 state attorneys general have sued Bristol-Myers Squibb Co. (BMY ), accusing the company of illegally blocking generic versions of Taxol, its profitable anti-cancer drug.

Ironically, most activism by state attorneys general has been on the liberal side of issues--so far. That may not last, with conservative AGs starting to band together as well. The next step may be a wave of AG activism on conservative issues such as pornography and notification to communities of the presence of sexual offenders.

Such freewheeling prosecutorial activity by AGs has pluses and minuses. They can sometimes do enormous good, taking on issues that aren't receiving enough federal attention. New York State AG Eliot Spitzer uncovered e-mail that showed conflicts of interest at Merrill Lynch & Co. and triggered an SEC investigation. But state AGs can often be guilty of grandstanding and politically motivated actions, and may not have the resources to follow through as effectively as a national regulator.

Perhaps more important, an expansion of enforcement of business and financial rules at the state level is going to create tremendous fragmentation. In a global economy, it is inefficient for corporations to cope with 50 different state AGs enforcing 50 different sets of regulations. In the end, even conservatives may conclude that it was a mistake to weaken national regulation and enforcement.

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