Matt Yglesias

The Peril of Fiscal Federalism

James Suroweicki has an excellent item in the current New York about how pro-cyclical state government budgets are exacerbating the recession and impeding Washington’s efforts at recovery. If I have a complaint with the piece it’s that, like a lot of writing about America’s screwy political institutions, it’s framed in a way that makes it sound as if maybe what we do used to make sense and only recently has become pernicious:

If you came up with a list of obstacles to economic recovery in this country, it would include all the usual suspects—our still weak banking system, falling house prices, overindebted consumers, cautious companies. But here are fifty culprits you might not have thought of: the states. Federalism, often described as one of the great strengths of the American system, has become a serious impediment to reversing the downturn.

I think the reality is that America’s strong version of federalism—some kind of administrative decentralization is necessary in such a large country—has always been problematic. The whole point of writing the Constitution in the first place was to weaken the super-strong federalism of the Articles of Confederation. And even with a stronger central government in place, the main role of federalism was to make it more difficult to wipe out large-scale chattel slavery. The fiscal aspects of federalism prevented fiscal policy from being effective during the Great Depression. With slavery vanquished, federalism once again reared its head as a staunch defender of Jim Crow. Federalism is the genesis of the incredibly pernicious United States Senate, about which I’ve already said plenty.

Strong federalism is even the enemy of sensible decentralization. Since the states are “sovereign” and represented as such in the Congress, there’s no way to reorganize America’s administrative subdivisions no matter how anachronistic they’ve become. Thus some states, like California and Texas, have grown to immense proportions while other states (Wyoming, e.g.) are tiny and shrinking. And we can’t set up sensible administrative units that might reflect how people’s lives are actually lived. Hoboken and Manhattan are in totally different jurisdictions even while New York City can have its local transportation ideas foiled by state legislators from Rochester. Some parts of the DC suburbs are involved in the governance of Norfolk and other parts of the DC suburbs are involved in the governance of Annapolis, but there’s no level of government at which DC and its suburbs can collaborate on common issues.

Now in practice it’s not clear what we can do about any of this. But it’s always been a problem.

The Trouble With State Government

I was talking to a libertarian-minded fellow at the Kaufman Foundation conference I was attending on Friday, and he asked me something like why does all this big government stuff have to be done at the federal level? Couldn’t we leave it all up to the states? That way there’s be a kind of “policy competition”—states could try different things, people could leave policy regimes they didn’t like, and we could see what works:

The most obvious problem with this proposal is that in the areas where the case for government activism is the strongest, it just wouldn’t make sense to take action at the level of a small sub-unit of a large economically integrated country. Rhode Island can’t regulate air pollution since it can’t help air wafting in from neighboring states. And Kentucky can’t do macro stabilization policy—there’s too much economic leakage into the rest of the country.

But probably the more profound problem here is that it doesn’t seem to work in practice. In the context of the normal political debate, I obviously come down on the big government side of the equation. But at the same time, I wouldn’t disagree with the observation that there are some elements of our economy that are badly over-regulated. It’s much more difficult to start or expand a business than it should be and this is one of the reasons why our economy has gotten so dominated by cookie-cutter chains that have enough scale to amass expertise and legal clout needed to navigate this thicket. There’s more occupational licensing than their needs to be. There’s too much regulation saying that buildings have to be short, or can only occupy so big a percentage of the lot, or have to have so many parking spaces. At the same time that I think the country’s overall policy dynamic is too tilted toward the automobile, the actual vehicle registration process is weirdly cumbersome, and the rules governing auto dealers are positively insane.

But all this malfeasance is done by state and local governments.

Rather than the small scale of the units leading to better policy via competition, what seems to me to happen is that the lack of public attention paid to policymaking at the state, county, and municipal level leads to much more pure interest-group capture than you see on the federal level. Not that interest groups don’t have a lot of clout in federal politics. But the relatively competitive nature of elections and the relatively bright spotlight shown on national politics puts a check on these things. At the state level, bad policy really runs amok. So I wind up being skeptical that you could really improve much of anything even in those areas when I think the libertarian perspective is broadly correct by devolving more authority downward.