Federalism as a Device for Reducing the Budget of the Central Government
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Description
The U.S. Constitution incorporates built in tensions of economic federalism, enumerating certain powers for the central government while reserving others for the state. The historical resolution of these tensions has a complex political and economic history. Given the substantial inertia that is built into the U.S. federalist system, it is not surprising that the current set of economic responsibilities has evolved only slowly during the past two centuries. The historian Harry Scheiber (1966) has identified four stages in the development of federalism in the United States: (1) a period of dualism (1790 1860) in which the states and the central government had comparable responsibilities; (2) a period of centralizing federalism (1860 1933), when federal responsibilities grew; (3) a time of cooperative federalism (1933 1964), which marked a substantial growth in social programs arising out of the Great Depression; and (4) a period of creative federalism (since 1964) in which the federal government has taken an active role in the problems of state and local governments. The period of creative federalism was spurred by the support for programs of revenue sharing from the federal government to the states by economists Walter Heller and Joseph Pechman (Perloff and Nathan 1968). In today's environment of large budgetary deficits, it is difficult to imagine that a crucial argument for a broad based program of unrestricted grants to states was the fear of "fiscal drag"—that the automatic growth of federal revenues under a progressive personal income tax would otherwise lead to excessive fiscal surpluses. The Heller Pechman plan, substantially modified by Congress and the executive, ultimately became the General Revenue Sharing Program, the heart of President Nixon's New Federalism in 1972. A decade later, in January 1982, it appeared that a new period in federal relations would begin when the Reagan administration proposed to reverse the trend toward the centralization of financing of government services The Reagan proposal sought to return to states and localities all financial responsibility for income redistribution (Aid to Families with Dependent Children, i.e., AFDC, and food stamps) as well as control over more than sixty federal programs targeted to low income households, including education, community development (e.g., water and sewer programs), transportation, and social services. This was to be accomplished in part by a cut in specific grant programs and in part by the consolidation of other programs into a single block grant program. Perhaps most important, the Reagan federalism initiatives forced a serious rethinking of the evolutionary path of the public economy, which had moved financial and managerial responsibility for public goods and services steadily up to the national level. Although the core reforms of Reagan's New Federalism proposal never became law, the Reagan budgets significantly curtailed the levels of federal support for state and local governments. This curtailment was bifurcated: federal support for spending on local goods and services declined dramatically, but support for distributional programs, especially those involving health care, increased substantially over the past decade. The issues that have divided the Clinton administration and the 104th Congress mirror those of the Reagan initiative in many ways. Rather than marking a reversion to the New Federalism of the 1980s, the current debate may well signify the beginning of a new period of retrenchment in American federalism. The debate puts the presumptions of our entire federalist system under scrutiny and asks whether the current structure of responsibilities is appropriate now. A coherent discussion of the issues that surround the federalism debate requires a well articulated view of the goals of a federalist economy. Section 2.1 provides an economist's perspective of the essential ingredients. On the basis of economic efficiency, we suggest that governmental functions should be centralized if the decentralized alternative would create substantial spillovers that are unlikely to be remedied through bargains reached among the affected governments. Further, to the extent that externality creating competition rather than cooperation is the rule, the imposition of national standards can be desirable. Finally, we suggest that a third nonefficiency criterion can be important. When a substantial portion of the population believes that certain fairness principles should apply to all, the imposition of centralized national norms, affecting all citizens, may be appropriate. Section 2.2 discusses some normative implications of our federalism perspective for intergovernmental fiscal relations. We explain why federalism principles suggest a strong, but not necessarily exclusive, role for the central government in overseeing distributional programs. We believe that the current federalism debates involve two distinct but related features. In section 2.3 we discuss the first issue: the growth of mandates and the opportunity that a change in mandates provides for the federal government to cut its budget. The second issue—the structural changes in intergovernmental grant programs corresponding to a shift in responsibilities from the federal government to the states—is the focus of analysis in section 2.4.
Source Publication
Fiscal Policy: Lessons from Economic Research
Source Editors/Authors
Alan J. Auerbach
Publication Date
1997
Recommended Citation
Quigley, John M. and Rubinfeld, Daniel L., "Federalism as a Device for Reducing the Budget of the Central Government" (1997). Faculty Chapters. 1855.
https://gretchen.law.nyu.edu/fac-chapt/1855
