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.