DMI Blog

Harry Moroz

Federalism And Its Discontents

Europe’s financial woes have led many across the Atlantic to look longingly at American federalism. Washington’s capacity to come to the rescue of its ward states in times of economic collapse is considered an antidote to the conflicting political, economic, and financial motivations that are pulling Europe apart.

It would certainly be politically taxing for President Obama to bail out, say, California, just as it proved difficult for Chancellor Merkel to commit assistance to Greece during local elections in Germany. But the taste of sour grapes that non-Californians would experience would be subsumed by the concrete reality that the political vibrancy of the United States guarantees the financial health of each of its states. The mere fact that Congress constantly funnels money to state governments – and so can quite easily do so in an emergency – means that the fiscal woes of any state are in part the responsibility of the federal government.

Yet, the United States has made only so much progress in assisting its own struggling dependents. The stimulus package funneled significant sums to state governments, preventing hundreds of thousands of teacher layoffs and more severe service cuts. But state budget gaps will be over $100 billion in each of the next two fiscal years. Exacerbated by shortfalls in city and local government budgets, this will mean lost jobs, poorer education, poorer health care, and less mobility as public transit systems raise fares and cut service.

We know that state budget gaps could cost the United States 900,000 jobs (the entire stimulus package created between 1.8 million and 4.1 million jobs). We also know the best mechanisms for minimizing these budget gaps and dealing with their consequences: the Local Jobs for America Act would target aid to local governments to prevent layoffs; the Public Transportation Preservation Act would provide operating aid to transit agencies to restore service cuts and prevent fare increases; and direct education assistance would prevent teacher layoffs.

But in the midst of the Great Recession, we have pushed aside the argument that the federal government should and must protect state and local governments and the services they provide simply because they provide these services. We are in fact bombarded with reasons why we should feel just fine with service cuts and rarely, if ever, do we stop to consider the public purpose of those services.

Instead of embracing the benefits provided by government, in the United States much as in Europe (though for different reasons) fiscal federalism has been endorsed as an economic accelerant rather than a public good. This is particularly dangerous as the economy recovers, the stimulus runs out, and revenue streams strengthen once again: we will be left with a rump state and local public sector and struggle to explain why we needed a robust one in the first place.

The fear, it seems, is that an argument for public intervention might be too successful: we just might end up with thriving state and local governments that actually get credit for creating the conditions for prosperity. This, of course, would be unacceptable.

Harry Moroz: Author Bio | Other Posts
Posted at 1:26 PM, May 26, 2010 in Economy
Permalink | Email to Friend