Big Government Federalism

Federalist Outlook No. 3 described Germany�s growing discontent with "cooperative" federalism�that is, a federalism based on revenue sharing and state administration of federal programs. German experts hold cooperative federalism responsible for a loss of political transparency, civic discontent, and the country�s difficulties in adjusting to the demands of a modern global economy. This Outlook describes America�s distressingly expansive experiments with cooperative federalism as an accommodation to interest group demands for bigger government.

Germany�s constitutional cooperative federalism is, in a precise sense, un-American. It is rooted in the intellectual and political traditions of the European federations that the Federalist Papers depict as a warning example, in gruesome and "melancholy" detail. Do not ever make governments depend on one another, Publius counseled. Instead of cooperation, the U.S. Constitution envisions political conflict and functional separation among independently constituted states and national institutions, each possessing direct authority over citizens.

Dual federalism�the most common term for that arrangement�is also competitive federalism. It limits the national government and, in the vast realm that lies beyond the national government�s reach, compels the states to compete for citizens� assets, talents, and affections. Diversity among states, interstate mobility of citizens and firms, and the disciplining force of competition on state taxing, spending, and regulating are competitive federalism�s chief attractions.

In practice, however, we have adopted a great deal of cooperative federalism. State and local governments administer an enormous array of federal programs, from the environment to education to welfare and, lately, crime control. Many state-administered programs are funded by the federal government, in whole or, more often, in part. Others take the form of conditional preemption: the states may choose to administer the federal program or else cede the field to the feds. Cooperative federalism replaces state competition and citizen choice with Washington-enforced state policy cartels and uniform regulatory baselines.

America has adopted cooperative federalism in a characteristically half-baked, interest group-driven fashion�without a clear sense of its ideological dimension, in fits and starts, in various policy arenas, and without seriously aspiring to the kind of policy coherence the Europeans associate with their politics. Cooperation has variously been defended as a means of achieving important national purposes�while still paying heed to local traditions and preferences; as the pursuit of fiscal equity among states and individuals; and as a means of redressing interstate "externalities," such as pollution traveling across state lines. None of those justifications holds water.

In 1981 the congressionally funded, bipartisan Advisory Commission on Intergovernmental Relations summarized a comprehensive review
of cooperative federalism programs as follows:

Regarding national purpose, the record indicates that federal grant-in-aid programs have never reflected any consistent or coherent interpretation of national needs. . . . Regarding fiscal equity, the record indicates that federal aid programs have never consistently transferred income to the poorest jurisdictions or individuals. Neither do most existing grants accord with the prescription of "externality" theory. . . . Regarding economic efficiency and administrative effectiveness, the record indicates . . . serious obstacles to the successful implementation of intergovernmental programs.1

The growth of federal responsibilities, the commission observed, has produced "rising levels of political alienation, an increasing atomization of national political processes, and a growing overload of major decisionmaking institutions." Cooperative federalism, the commission concluded, separates funding and program design from implementation, and political initiative and authorship from responsibility for results. Cooperative federalism thereby undermines political accountability. In the end, "no one is truly responsible," and "everyone is responsible for everything."2

The list of pathologies and phony defenses is easily extended:

� Cooperative federalism supposedly averts a "race to the bottom" among the states (meaning that com-petition for business might induce states to underprovide public goods). Putting aside the lack of empirical evidence for that proposition,3 the competitive institutional checks that allegedly create a "race to the bottom" also preclude states from adopting interest group schemes. The Founding Fathers argued that fewer "partial laws" would well be worth a lost public good here or there. Cooperative federalism, in contrast, provides interest groups with multiple opportunity and access points�and celebrates the ensuing scramble. 4

� Cooperative federalism is said to preserve flexibility and sensitivity to varying local needs and circumstances. The point of cooperative federal programs, however, is to drag states into programs they would not otherwise pursue. Cooperative federalism is thus less flexible and variegated than competitive federalism. It "preserves flexibility" only in comparison with an imagined world of wholesale centralization.

� Cooperative federalism is supposed to strengthen state and local self-government. Federal aid, however, now constitutes a whopping 30 percent of state revenues. The marginal dollar that drives the policy choices is usually the feds�. The recipients are certainly "governing," but they are not governing themselves.

The scholarship of the past two decades has amply confirmed the scathing assessment of the Advisory Commission on Intergovernmental Relations. While various individual cooperative programs have found defenders, no serious scholar is prepared to argue that the real existing cooperative federalism has anything to do with its ostensible rationales. The only discernible purpose cooperative federalism has served is to accommodate interest groups and political patrons who want a bigger government.

Cooperative federalism�s leaps have always coincided with American government�s growth spurts. Cooperative federalism was invented by the Progressives, who attempted to reconcile their national ambitions with their affection for local government.5 After the enactment of the Sixteenth Amendment in 1913, federal income tax proceeds provided the national government with the revenues to induce state and local cooperation in the implementation of federal policies, such as highway construction.

Cooperative federalism came into its own with the New Deal and the creation of large-scale public assistance programs. The spirit of the age is captured in�I am not making this up�the Declaration of Interdependence, signed by state and local government representatives in 1937:

When, in the course of human events, it becomes necessary for a nation to repair the fabric which unites its many agencies of government, and to restore the solidarity which is vital to orderly growth, it is the duty of responsible officials to define the need and to find a way to meet it. . . . Through established agencies of cooperation, through uniform and reciprocal laws and regulations, through compacts under the Constitution, through informal collaboration, and through all other means possible, our nation, our states, and our localities must fuse their activities with a new fervor of national unity.6

The "orderly growth" that must be pursued "through all other means possible"�what is a constitution among friends?�is the growth of government. Thirteen years later, Edward S. Corwin would identify the New Deal and its "enlarged theories of the function of government" as the principal cause of the transition from dual, constitutional federalism to intergovernmental cooperation.7

Cooperative policies and arrangements mushroomed in the 1960s and 1970s with the creation of large-scale education, welfare, and environmental programs designed and partially funded by the federal government and implemented by the states. Cooperative programs and expenditures roughly tripled between 1960 and 980.

The Reagan administration undertook a serious effort to stem the flow of money, with a fair measure of success. Despite ballooning Medicaid payments, federal funds as a percentage of state and local outlays dropped from 30 percent in 1980 to 17 percent in 1989. Thereafter, cooperative federalism promptly resumed its inexorable growth. At the end of the Bush I-Clinton era, federal grants, whether measured as a proportion of state and local funding or as a percentage of the federal budget, have returned to the all-time highs of the 1970s. (They are projected to exceed those levels in coming years.) The growth has come in the form of endless microgrants and mandates, as well as major policy commitments from the Clean Air Act Amendments to the Americans with Disabilities Act to an expensive health insurance program for uninsured children ("CHIPS"). With new programs and new money came new government agents. Paul Charles Light of the Brookings Institution estimates the federal-mandate-created work force at the state and local levels at around 4.6 million.8

Any number of theories explains why cooperative federalism promotes government growth. James Buchanan and Gordon Tullock showed that national spending on local issues will produce spending levels in excess of any citizen�s preference. Aaron Wildavsky showed that increases in government spending at all levels solve distributional conflicts among government institutions. Economists, public choice theorists, and political scientists who hate public choice theory have shown that cooperative federalism establishes and sustains policy cartels among bureaucrats (at all levels) and advocacy groups.9

Ask not what a federal subsidy can do for you; ask why it should take the form of an intergovernmental grant rather than a tax cut. So long as the citizens� interests are in harmony with the local politicians�, the effect will be the same. If a $10 federal tax cut would boost local spending and taxes by $1, a local government that reflects its citizens� interests would retain
$1 of a $10 federal grant and pass on the remainder in the form of a local tax cut.10 But, then, there is also that bridge in Brooklyn. State and local governments will invest a chunk of the federal cash in bureaucrats�that is called "capacity building" in the terms of the intergovernmental trade�and the remainder in the interest groups that lobbied for the program in the first place and will lobby for more cash in the second, third, and fourth places. This "flypaper theory"�the money sticks where it hits�explains why federal funding has been the principal reason for the stupendous growth of state and local government over the past decades.11

The most parsimonious theory of cooperative federalism�s political, interest group@enhancing dynamics rests on a modest premise of rational voter ignorance: even the most conscientious citizen must occasionally take his eyes off the politicians and mow his lawn. Since cooperative federalism systematically exploits that ignorance, the spirited, sorely missed Aaron Wildavsky described it as an intragovernmental conspiracy against citizens. Public choice theorists have developed compelling accounts of the conspiratorial dynamics, to which I now turn.12

Suppose that the members of interest group Z want X, with X denoting child care, housing, wind farms, or anything else that costs more than Z members are willing to pay. Z will attempt to persuade the government to make some suckers, technically known as "citizens," foot the bill. Suppose further that there are many more non-Zs than Zs, so that federal legislation is out of the question. Ours being a vast, diverse, heterogeneous country, however, Z will find some state, usually New York, where Z can prevail.

Since non-Z New Yorkers do not like the imposition and might wander off to more hospitable states, New York will, in some combination, attempt to make other states likewise provide X, transfer a portion of the costs, and persuade its voters that X is not a choice for which politicians can be held to account but rather a legal obligation. Thus, New York and other X-providing states will join Z�s campaign for national intervention.

Now, as before, most federal legislators would vote against X if the full costs appeared in the federal budget. They will, however, vote for X if the costs are hidden in state and local budgets. Interest group Z and New York would like federal funding; but if the votes are not there, they will take an unfunded mandate as the best they can get. Here, we have cooperative federalism�s essential features: rank redistribution, financed through hidden and therefore excessive taxation. As for the costs and burdens, the feds will blame the locals and vice versa. Citizens can no longer finger the culprits, much less vote them out of office.

Will the rational state official endorse the transfer of full spending and policy authority to the federal government? Only as a last resort. As a first resort, he will join hands with sister states and with prospending lobbies to demand federal funding. In that way he gets to purchase Z members� votes and good graces with federally subsidized dollars. Our politician will find a willing ear in federal legislators, who will prefer some form of cooperation both to a wholly national program (which would entail full responsibility for costs and potential failures) and to no program at all.

Notwithstanding the public, governmentally manufactured impression that the states are drowning in "unfunded mandates," such mandates are in fact very rare. Most federal mandates are accompanied by federal funds that are sufficient to induce X-providing jurisdictions to surrender control over their programs and to induce previously anti-X jurisdictions to accept a federal mandate.

Federal funding is nice for state and local politicians. It does nothing, however, to remedy accountability and hidden-tax problems and may in fact exacerbate them. Citizens will experience the grant as a subsidy to their state, without being able to trace the portion of their federal tax bill that is devoted to the program in question. The grant will typically amount to less than the full cost of the program and thus will provide the illusion that the federal government is offering a lot for little money. Here, as in the unfunded mandate case, the states that must provide the "missing" funds will be unable to persuade voters of the link between their state tax bill and the federal failure to provide full funding. Program responsibility continues to be shared and hence obscured.

It makes no difference whether the federal program is mandatory or "voluntary." Even if the states can reject federal funds as a matter of law, they will be unable to bolt: each state�s voters will be compelled to pay a portion of the federal funds, irrespective of the state�s participation.

In addition to more money, our rational state politician will demand more "flexibility"�in other words, a block grant with broad rather than narrow, categorical restrictions. Block grants, however, again exacerbate cooperative federalism�s agency problems. Instead of implementing federal mandates that, at least ostensibly, reflect national priorities, state officials fool around in a federally financed playpen. What is gained in flexibility is lost in accountability and responsibility.

Block-grant federalism�s principal effect is to drive up the cost of government. Suppose that Republicans introduce a $45 billion education bill, with funding conditions that emphasize "performance" and "consequences" for underperforming school districts. Democrats counter the offer with a $55 billion proposal, with categorical funding conditions written by and for the National Education Association and its members. If Republicans and state and local lobbies hold firm on "flexibility" and "local control," the NEA will eventually accede to a block grant. The NEA will, however, discount the value of the grant by the likelihood that the states will divert the money�some of it will accidentally hit students instead of unionized teachers. The legislative equilibrium point is a block grant somewhere in the range of $70 billion.#13

Over the past two decades, cooperative federalism has, as noted, grown�and changed its form. The prevailing trend has been from mandates to block grants�that is, the devolution of policy authority, but not revenue responsibility, to state and local governments.

The last challenge to cooperative federalism dates back to the first Reagan administration, which undertook a serious effort to disentangle intergovernmental relations. The centerpiece of Reagan�s "New Federalism" campaign was the so-called welfare swap: the federal government would assume full funding responsibility for Medicaid in exchange for the states� assumption of full responsibility�including revenue responsibility�for other welfare programs, principally what was then Aid to Families with Dependent Children.

By threatening to align political and fiscal responsibility, the swap struck at cooperative federalism�s heart. That proved fatal. Without giving Marion Wright Edelman the time to cart the usual orphans to the Capitol steps, state and federal politicians quickly made plain that they had no intention of taking full responsibility for anything. Congress never considered the plan.

The Reagan administration�s cutbacks in aid to state and local governments, coupled with a tightening of the regulatory screws for many federal programs (especially Medicaid), led to a furor among state and local governments over "unfunded mandates." The Republican Party eventually settled on a program of "devolution" that is embodied, for example, in the 1995 Unfunded Mandates Reform Act, the 1996 welfare reform, and the block granting of several federal programs, including Medicaid. After initial skepticism and resistance, the Clinton administration and the Democrats in Congress also discovered block-
grant federalism�s virtues. Federal funds for cops
and teachers, for school repair, for battered women�s shelters, and for countless other purposes have come with more strings than Republicans would have liked. The disagreements, however, have been over details, not principle.

The bipartisan enthusiasm for "devolution" has to do with three pervasive features of American politics: localization, enhanced social and economic mobility, and an increasingly sharp but narrow ideological divide at the state and federal level, played out under conditions of relatively loose budget constraints.

Localization. Most of the issues that citizens now care about, from crime to education to suburban sprawl, are local in nature. President Clinton had splendid ideas as to where children should go to school and what they should study, eat, view, and wear. (Remember his endorsement of school uniforms?) All that, though, is the stuff of school board or Parent Teacher Association meetings. Domestic violence is distressingly common, but it is not�as the Supreme Court has instructed the feds�a federal civil rights or interstate commerce problem. Short of turning America into France, national politicians can do little except to profess deep concern, toss money on the street, and call it devolution.

Going Mobile. In a competitive federal republic, the citizens� ability to vote with their feet disciplines subordinate governments. The power of exit rights increases as the cost of exercising them falls, and, over the past decade, those costs have plummeted. Unlike refineries or manufacturing plants, dot-com and software companies can move with relative ease in search of a hospitable environment. The Internet has not created sales tax avoidance, but it has put that option within the reach of additional millions of consumers. Increased wealth has enhanced citizens� mobility. State governments respond to those trends by lobbying for a larger share of federal revenues and�to compensate for the relative loss of revenue autonomy�a larger role in the implementation of federally financed programs. "Give me more money and leave me alone" is the average governor�s federalism agenda under any circumstances, but it gains particular urgency in times of increased citizen and corporate mobility.

Ideology. The 2000 election has confirmed highly suggestive evidence of an increasingly sharp cultural divide among states and regions. Increased heterogeneity helps explain the increased popularity and generosity of federal block-grant policies, especially in areas with pronounced cultural and ideological implications, such as education, welfare, and crime. Homogeneity among states tends to produce unfunded mandates: each state will have a sizable Z constituency to lean on fence-sitting legislators. But if New York has a lot of Zs and Oklahoma has very few, Oklahoma will have to be bought.

A variation of that argument suggests that block-grant federalism responds to a sharp but narrow ideological division at the national level, coupled with relatively loose budgetary constraints. Under public and media pressure to "do something," legislators monetize ideological disagreements.

Come to think of it, "devolution" itself is a way of papering over ideological rifts. Unlike the Reaganite commitment to disentanglement and dual federalism, which implies a set of libertarian, small-government values, "devolution" is consistent with a broad set of political values.14# Confused conservatives think devolution means federalism. Third Way politicians get to fund their constituencies, while crowing over "reinventing government" and the smallest federal government since the Kennedy administration! (All the bureaucrats, as noted, are safely hidden in state and local governments.) Unreconstructed liberals can accept devolution, since it promises to maximize the aggregate revenues and coercive capacity of government at all levels. The political debate narrows to a squabble over the terms of federal-state cooperation�funding levels and the desirable scope of state and local discretion in administering federal programs. The fundamental choice between intergovernmental cooperation and state competition disappears from view.

Arresting the sprawl of cooperative federalism is a task of some urgency�and difficulty. Skeptical of centralized government, citizens still demand better schools, better health care, clean air, and cheap electricty. Cooperative federalism feeds off and nourishes those conflicting impulses and fiscal illusions. It is, in Wildavsky�s excellent phrase, "centralization with a human face": we are from Washington, D.C., and we are here to help you states, and cities, and school boards, and citizens. Republicans sing from that sheet as lustily as do Democrats. What they lack in collectivist ambition, they make up in states� rights sentimentalism.

The difficult task of revitalizing a real, competitive federalism�even in the face of the political attractions of its evil cooperative namesake�will occupy the AEI Federalism Project and future Outlooks. For now, and for ease of reference, we put this issue�s conclusions in bold italics:

Cooperative Federalism Equals Government Growth. Its very end is the growth of government in its most corrosive form. We can double the Pentagon�s budget without seriously affecting the texture of American politics and civic life. We cannot expand cooperative federalism without making government exponentially less transparent and accountable and (hence) more meddlesome, intrusive, and corrupting.

Federalism Is Too Important to Be Left to the States. Numerous reasons induce state and local governments to demand federal intervention, including the much maligned unfunded mandates. The notion that the National Governors� Association will support real, competitive federalism is approximately as realistic as the idea that the NEA will support school choice. The states� demand for federal intervention, not federal oppression, is federalism�s central problem.

The Forms of Cooperation Let Fools Contest. Beltway quarrels over funding formulas, mandates, block granting, or the scope of the states� residual regulatory autonomy under federal programs hold great interest for bureaucrats, interest groups, and policy wonks�and none for citizens. The forms of intergovernmental arrangements merely concern the relative bargaining position between government actors, not the citizen�s position vis-�-vis the intergovernmental conspiracy. Any form of cooperative federalism will reduce policy variation among the states, deprive citizens of the benefits of diversity and choice, produce hidden and therefore excessive taxation, reduce political transparency, obscure political responsibility, and facilitate political blame shifting.

Cooperative Programs Will Fail. They will do so regardless of their objects, terms, and subject matter. A system that is built for the purpose of obscuring accountability cannot be held accountable. A system that is constructed for the purpose of hidden taxation and interest group maintenance will absorb virtually any amount of money to no net effect. Political reforms must separate government functions and align political with fiscal responsibility. That means disentanglement, not devolution.

Federalism Is about Constituencies. It is not about organization charts, states� rights, or the sanctity of the Tenth Amendment. Cooperative federalism is about accommodating interest groups. Federalism reform is about limiting their ability to obscure program costs and about subjecting their governmental opportunity points to competitive discipline.

With that final observation, we may at last have stumbled upon a powerful political incentive, and perhaps a political force, for federalism reform. State and local bureaucrats, teachers� unions, welfare workers, environmental advocacy groups�these are cooperative federalism�s principal beneficiaries. Would it be controversial to note that they are not exactly core Republican constituencies? And would it be too much to call a "devolution" agenda that sustains those interests ill-advised and possibly suicidal?

Would-be federalism reformers must appeal to low politics. There is nothing low, however, about mobilizing low politics for higher, better purposes.