Tag Archives: Federalism

Is American Federalism conducive to liberty?

In new Mercatus research, Dr. Richard E. Wagner, Harris professor of Economics at George Mason University tackles a fascinating question: Is the American form of federalism supportive of liberty?

His answer is a qualified ‘yes.’ Under certain conditions, American federalism does support liberty, but that very same system can also be modified resulting in the expansion of political power relative to the liberty of citizens. The question of what results from the gradual constitutional transformation of the American federalist system is a salient one for not only students of government but also policymakers.

The important conditions that determine which form of federalism prevails (liberty-supporting or liberty-eroding) are rooted in competition among governments. Today we are experiencing a very different kind of federalism than the one instituted by the Founders. For the better part of a century, the US constitution has often been amended in a way to encourage collusion among the states thus undermining a key feature of a liberty-supporting federalism.

Restoring a liberty-supporting federalism first requires a deeper diagnosis of the American federalist system. Dr. Wagner develops that possibility through a very engaging synthesis of public choice theory, Austrian and new institutional economics.  Student of Dr. Wagner may be familiar with many of these concepts, developed in his public finance books including Deficits, Debt and Democracy (2012, Elgar). Rather than summarize the paper in today’s blog post, for now I encourage you to read the piece in full.

The “pension tapeworm” and Fiscal Federalism

In his annual report to shareholders, Warren Buffett cites the role that pension underfunding is playing in governments and markets:

“Citizens and public officials typically under-appreciated the gigantic financial tapeworm that was born when promises were made. During the next decade, you will read a lot of news –- bad news -– about public pension plans.”

He zones in on pension mathematics – “a mystery to most Americans” – as a possible reason for accelerating liabilities facing state and local governments including Puerto Rico, Detroit, New Jersey and Illinois. I might go further and state that pension mathematics remains a mystery to those with responsibility for, or interest in, these systems. It’s the number one reason why reforms have been halting and inadequate to meet the magnitude of the problem. But as has been mentioned on this blog before: the accounting will eventually catch up with the economics.

What that means is unrelenting pressure building in municipal budgets including major cities. MSN Money suggests the possibility of bankruptcy for Los Angeles, Chicago and New York City based on their growing health care and pension liabilities.

In the context of this recent news and open talk of big municipal bankruptcy, I found an interesting analysis by Paul E. Peterson and Daniel J. Nadler in “The Global Debt Crisis Haunting U.S. and European Federalism.”(Brookings Institution Press, 2014).

In their article, “Competitive Federalism Under Pressure,” they find a positive correlation between investors’ perception of default risk on state bonds and the unionization rate of the public sector workforce. While cautioning that there is much more at work influencing investors’ views, I think their findings are worth mentioning since one of the biggest obstacles to pension reform has been the reluctance of interested parties to confront the (actual) numbers.

More precisely, it leads to a situation like the one now being sorted out in federal bankruptcy court in Detroit. Pensioners have been told by Emergency Manager Kevyn Orr that if they are willing to enter into a “timely settlement” with the city and state, they may see their pensions reduced by less than the 10 to 30 percent now suggested. Meanwhile bondholders are looking at a haircut of up to 80 percent.

If this outcome holds for Detroit, then Peterson and Nadler’s findings help to illuminate the importance of collective bargaining rules on the structure of American federalism by changing the “rules of the game” in state and local finances. The big question for other cities and creditors: How will Detroit’s treatment of pensions versus bonds affect investors’ perception of credit risk in the municipal debt market?

But there are even bigger implications. It is the scenario of multiple (and major) municipal bankruptcies that might lead to federalism-altering policy interventions, Peterson and Nadler conclude their analysis with this observation:

[public sector] Collective bargaining has, “magnified the risk of state sovereign defaults, complicated the resolution of deficit problems that provoke such crises, heightened the likelihood of a federal intervention if such crises materializes, and set the conditions for a transformation of the country’s federal system.”

Talk on States Fiscal Health at GMU, April 21

George Mason University’s Department of Public and International Affairs is hosting Ray Scheppach, executive director of the National Governors Association, on April 21 from 4 to 6 PM for a talk entitled “The State Fiscal Situation, Health Care Reform and Federalism.” This should be of interest for most of the readers of this blog. The talk will be in Enterprise Hall on GMU’s Fairfax Campus. Continue reading

Homeland Security and Federalism

Matt A. Mayer is this week’s guest on Inside State and Local Policy, where he discusses his new book, Homeland Security and Federalism: Protecting America from Outside the Beltway. The podcast runs just over 15 minutes. Here’s a description:

Local governments have historically played a key role in homeland security that most of us living in the early 21st century wouldn’t recognize.  In this episode we discuss where and how we draw the line between homeland security functions and which are the responsibility of the federal governments and and the responsibility of state governments.

Joining us to discuss these issues  is Matt Mayer, CEO of Provisum Strategies and Adjunct Professor at The Ohio State University.  Matt served as the head of the Office of State and Local Government Coordination and Preparedness within the US Department of Homeland Security, and now works to help policy makers better understand how federalism is a key component of an effective homeland security strategy.  In this episode, Mayer discusses his new book, Homeland Security and Federalism: Protecting America from Outside the Beltway, which was released earlier this month and is available at Amazon.com and other book retailers.

Matt’s bio is here. His book is an excellent analysis of how and why state and local governments can and should take leadership on many aspects of homeland security and disaster preparedness.

Subscribe to Inside State and Local Policy via iTunes by clicking here.

Is the U.S. Senate Obsolete?

Syndicated columnist Neal Pierce has been writing about state and local affairs since at lease the 1970s. In a recent column, he asks, “Are State Governments Obsolete?” It might have been more appropriate to ask whether state governments actually exist — at least in the traditional constitutional sense. Blessed by the Supreme Court and other judicial rulings, state governments have become administrative appendages of the federal government.

In one area after another in the twentieth century — matters of transportation, public health, land use control, education, wildlife management, etc. — the federal government assumed powers that had traditionally been reserved to the states. States might still have an administrative role, but they are now working under a very tight federal leash.

The sweeping environmental laws of the 1970s shifted control over clean air and water to the federal government. The states were, to be sure, left to administer air and water pollution laws day to day but under federally approved programs, leaving real control in federal hands. The Endangered Species Act not only federalized significant parts of wildlife management but also asserted federal authority over large areas of state and local land use. No Child Left Behind moved a large step towards the full federalization of education in the United States.

Continue reading

Swine Flu and Federalism

As it now appears that H1N1 influenza is probably not going to be a highly lethal worldwide pandemic, we are left with an opportunity to evaluate our available response mechanisms in the event of a more serious medical threat.

As Tyler Cowen writes in his recently published issue of Mercatus On Policy, “Detecting a pandemic, instituting protective measures, and applying treatment all require the effective cooperation of many individuals and institutions…. Local health-care institutions must therefore be both free and able to respond to crises.” A decentralized response to minimizing the spread of disease is the best option that we have because local knowledge is crucial to distribute medical supplies and to spread information about treatment and prevention of illness in communities across the country.

Despite the practical need for city and regional governments to take over leadership during health disasters, the swine flu outbreak has demonstrated that around the world, national governments tend to take more activist roles during times of fear. In Mexico, President Felipe Calderon took executive action to shut down non-essential government work in Mexico City and asked to “shut their doors to reduce the spread of infection” across the country.

While this response may seem Picture of a piglet warranted, it has come at a high economic cost by cutting down productivity in Mexico during a recession.  Without President Calderon’s warnings, some municipalities may have determined that business as usual was appropriate if swine flu was not directly impacting their residents. In Egypt, a much more costly political decision is now widely judged to have been an overreaction: the Egyptian government required the slaughter of all of the nation’s pigs, even though there are no known cases of H1N1 flu in Egypt, and the virus is not spread by eating contaminated meat.  This incident exemplifies the bluntness of nationwide policy actions where local governments could have made more nuanced decisions in crisis situations.

The World Health Organization advises, “Scientific research based on mathematical modeling indicates that restricting travel will be of limited or no benefit in stopping the spread of disease.  Historical records of previous influenza pandemics, as well as experience with SARS, have validated this point.”  While the temptation to block out illnesses along national borders is strong, as exhibited by calls to close the U.S.-Mexican border during this outbreak, viruses do not recognize political boundaries, and attempting to take such action at the national level would direct scarce resources away from the local level where they could be used to treat and prevent illness on a case-by-case basis.

Thankfully, Dr. Richard Besser, acting head of the Center for Disease Control and Prevention, has so far dealt with this public health threat by emphasizing the importance of community preparedness and avoiding making any statements that could cause mass panic.

Thankfully, the H1N1 flu virus appears to be much less fatal and less contagious than the catastrophic Spanish flu of 1918 on which much of our knowledge of contagious disease management is based.  In the event of a more serious virus, the federal government can be of assistance in funding medical research and vaccine stockpiles, but dissemination of medicine and information at the local level must be permitted by a federal government which avoids attempts at micromanagement.

The Enduring Relevance of Federalism

Last week in The New York Times, Tom Brokaw wrote an op-ed questioning the enduring validity of the system of federalism that has been in place for over 200 years. He writes, “Every state and every region in the country is stuck with some form of anachronistic and expensive local government structure that dates to horse-drawn wagons, family farms, and small-town convenience.” Is this an accurate depiction, or is it the case that in many instances of failed local government, overly burdensome state and federal governments are preventing the enactment of localized solutions?

Two Brookings Institution scholars, Bruce Katz and Jennifer Bradley, responded to Brokaw with a letter to the editor, supporting his claim that in order for the federal-state-local relationship to remain functional, all three levels of government need to have the flexibility to adapt to changing demographics and technologies. Katz and Bradley point out that, where once most people lived and worked in small towns, today the workforce is heavily concentrated in metropolitan areas.  (Katz, Bradley, and others at Brookings have previously written about this issue.)

In their letter, however, Katz and Bradley point out that in some cities federalism is functioning well where proximate municipalities are working together to address the common needs of their residents.  They cite Denver, Louisville, and Portland as cities that have successfully “developed transportation and land-use strategies that reflect the true metropolitan scope of economic and social life.” The cooperation of authorities throughout these metropolitan regions demonstrates that some issues relating to city life are common across the areas surrounding cities, and attempting to handle these issues locally would lead to poorly integrated solutions.

While transit issues are an obvious area in which in makes sense for townships within a metropolis to collaborate, current work of the Neighborhood Development Department in Boston shows us that city governance can implement successful programs that function at the most localized level. The NDD is taking innovative, localized action against the current mortgage foreclosure crisis. Although the foreclosure rate in the city has risen dramatically over the past years, it is doing much better than other cities of comparable size, according to American Public Media’s Marketplace.

Why is this? The city has found that the appropriate level to deal with this challenge is the block level, offering assistance on a case-by-case basis because foreclosures affect each block differently. Mayor Thomas Menino developed a Foreclosure Intervention Team to provide mortgage counseling to potential home buyers and assistance available to homeowners in danger of foreclosure.  In places where rates remain high despite these efforts, the city is providing special services such as increased police presence to monitor vacant buildings and street improvements to make these areas attractive to new buyers or tenants.

Boston’s Neighborhood Development Department demonstrates the beauty of federalism in a world that is constantly changing.  All policy issues are different and need to be dealt with accordingly; although our basic system of governance has not changed since the nation’s founding, it does remain adaptable to the needs of the day, contrary to Brokaw’s assertion.  To make the best possible use of taxpayers’ resources, state governments should allow their municipalities the freedom to take advantage of economies of scale where they exist and to allow for creative, location-specific solutions where top-down management would be stifling.

A brewing awareness

People don’t generally think about the governmental framework in which they live. It’s assumed like oxygen.  But change that framework drastically enough, and things learned and forgotten from history textbooks develop a live pulse.

Federalism, as a point of common discussion, is relegated to Constitutional Law, economics and political science journals. It’s the stuff policy people and academics pour over.  But not lately, as Randal Barnett writes at the Wall Street Journal, tea parties and sovereignty amendments speak to a growing awareness of profound structural change in the relationship between the federal government and the states.  The ceding of local and state control to the federal level is not a new story. The debate over this changing relationship dates to the 19th century, but given the size and kinds of spending in the last several years, rounded out by the stimulus and budget of recent weeks, and a threshold is perceived.

For three different policy takes: an interesting solution offered by Greg Mankiw back in October, would have given the governors more discretion in accepting funds – they could elect to pass it on to citizens, rather than expand programs. The Brookings Institute suggests following Germany, a federalist system, in applying transportation funds. Chris Edwards of CATO has done work on how federal aid erodes state budget autonomy.

Seasteading, Tiebout, and Federalism

One of the most interesting things about state and local policy research is that localities are engaged in (admittedly imperfect) competition with one another. The Tiebout hypothesis, proffered by Charles Tiebout in his famous article “A Pure Theory of Local Expenditures,” suggests that in federal systems state and local governments compete with one another: if you don’t like the public services provided by your town or state, you can move to another one that provides a basket of public goods and services (and tax structures) more to your liking. People vote not only with ballots but with their feet.

It raises interesting questions for the future of the Tiebout model that sovereign nations may be forced at some point in the not-too-distant future to compete more for their citizens’ fealty.

The Seasteading Institute has been getting some significant attention recently, with a write-up in Wired magazine and an event next week at the Cato Institute. (The executive director of the Institute, Patri Friedman, will be speaking; Patri is the son of libertarian thinker David Friedman and grandson of Nobel laureate Milton Friedman, thus I suspect making the Friedmans the first family to have three generations speak at Cato.) The Institute proposes, in short, that in the near future it will be possible to create communities on the seas that are not the province of any (currently existing) sovereign country. (More on seasteading from Tim Lee at ArsTechnica.)

This has radical implications for governance and federalism. In our future life aquatic, to what extent will the Tiebout model begin to apply to nation-states? Will seasteading force countries to relax their own immigration standards? Will this increase the quality of national governments as competition increases?

Of course it’s impossible to predict, but it has interesting ramifications for the future of research on federalism and public policy.