A Federalist Fiscal Constitution for an Imperfect World: Lessons from the United States
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Description
However history assesses the Reagan Presidency, there is little doubt that it has challenged in a central way how we conduct our national fiscal policy. The old axioms of federal spending, tax, and debt policy have each been threatened by at least one Reagan Policy initiative. No less important is the Reagan challenge to our current structure of federal-state-local fiscal relations. While the core reforms of the Reagan New Federalism proposal never quite made it into law, the Reagan budgets have significantly curtailed the levels of federal support for state and local governments. Perhaps most importantly, the Reagan federalism initiatives have forced a serious rethinking of the evolutionary path of our federalist public economy, an evolution that has moved the financial and management responsibility for public goods and services steadily upward to the national level. What was once an interactive network of independent local and state governments has become an interlocking hierarchy of governmental subdivisions financed and managed to an increasing degree from Washington. The Reagan challenge has forced us to ask a fundamental question: Is this the federalist structure we really want? Any clear answer to this question requires a well-articulated view of what a federalist economy can do. In this exploratory essay, there is no reason not to ask for a first-best economy in which all resources are efficiently allocated and fairly distributed. Surprisingly, perhaps, it is not difficult to imagine a federalist public economy that can achieve these dual objectives. It is called a Tiebout-Coase public economy, in honor of the two men who first clarified its basic structure. The second section summarizes this underlying structure and describes the resulting federalist economy. The demands of the Tiebout-Coase public economy, however, are severe. In addition to the requirement that there be a perfectly competitive supply of all factors of production including entrepreneurs who provide public services, the Tiebout-Coase economy needs fully informed and mobile consumers capable of negotiating all trades of mutual advantage. Anything less than full information and perfect contracting undoes the promises of Tiebout and Coase. Yet imperfect information and imperfect contracting are realities of economic life. The Tiebout-Coase public economy is an enlightening image of the first best, but it should not become the statndard against which we judge the performance of real federalist economies with their inherent and unavoidable imperfections. Our standards should be derived within the bounds impose by real economies. The third section conjectures (it’s too early for theorems) what these standards might be, based on an understanding of the structure of one real economy—the United States today. The last section puts in perspective the present U.S. federalist economy and recent reform proposals. A few directions for reform are suggested, several of which look beyond the legislature to the possibility of judicial, executive, and constitutional implementation.
Source Publication
Federalism: Studies in History, Law, and Policy: Papers from the Second Berkeley Seminar on Federalism
Source Editors/Authors
Harry N. Scheiber
Publication Date
1988
Recommended Citation
Inman, Robert P. and Rubinfeld, Daniel L., "A Federalist Fiscal Constitution for an Imperfect World: Lessons from the United States" (1988). Faculty Chapters. 1865.
https://gretchen.law.nyu.edu/fac-chapt/1865
