Monday, June 5, 2017

The Fiscal Erosion of Federalism, Part 1

This week's blog articles will all be about a topic that readers have asked some interesting questions recently. I will use a common headline and, later on, edit these blogs and publish them as a monograph. 

Blurring the Lines
The Fiscal Erosion of Federalism

One of the many brilliant features of the American Constitutional Republic is that it closely ties power to accountability. If a person is elected to have legislative or executive authority over his fellow citizens, he is also held accountable to a corresponding degree. We know this feature in many forms, one being the separation of powers ("checks and balances"), another being that we are a nation of laws, where nobody is supposed to rise above the law.

We all know that this principle has been tarnished, twisted and tweaked over the years. Formidable government powers have been amassed, especially in the hands of our president. Those powers are often used for good, but they are also misused and even abused, even to the extent of elevating some citizens above the law while others toil under the government's sometimes very watchful eye.

An often forgotten venue for softening, or blurring, the ties between power and accountability has to do with how we pay for our - admittedly - big government. Over the course of the 20th century, the federal government developed a system of federal funds that help states pay for an increasing roster of programs. It started with a very limited set of selective health programs, then expanded through highway funding into welfare and Medicaid, then we got federal funds for schools... Today, the federal government sends more than half a trillion dollars each year to the states.

Since states help fund the federally sponsored programs, Congress and the states have in effect established joint ventures where the lines of accountability and separation of government powers have been blurred, almost eradicated. 

Technically, all the programs that the states run, and the federal government co-sponsors, are voluntary in the sense that states are not legally mandated to have them. Wyoming could, if the state so decided, terminate its Medicaid program tomorrow without any legal repercussions. In practice, that will not happen, nor should it happen that way. (For reforms to Medicaid, see all my articles on how to reform that program.) But it is important to keep in mind that the state has actually entered all these programs voluntarily; since they were not imposed on the state by an overwhelming legal authority, they are also a contract that the state is free to renegotiate, or even terminate, should it find reasons to do so.

The voluntary nature of the program is a blessing when it comes to reforms, but it is also a curse at the other end, namely accountability. This issue has recently emerged in the discussion about President Trump's budget for FY2018. Since mainstream media and many Democrats have portrayed the budget as making "cuts" to Medicaid and SNAP, some state lawmakers around the country have expressed concerns that they would be the ones who have to face the public as being responsible for those cuts. 

While the statement about "cuts" in Trump's budget are false, it is correct that the blurring of lines of accountability in federally sponsored programs does have some unwelcome effects for state legislators. It is indeed correct that if the federal government would make cuts to the programs it pays for, then state lawmakers would have to make uncomfortable choices before their voters: cut spending or raise taxes and replace federal funds with in-state sourced revenue. 

In either case, theoretically Congress and the President could get away with their cuts by pointing to the states. In practice, the battle for public opinion would be as complicated as any effort at clarifying exactly where the lines of accountability and responsibility run between Congress and the state capitals. 

Can, for example, states claim that they are protected against cuts from the federal government as in a contractual relationship? Can states claim that they have the right to a certain predictability in funding because they have entered into a contract to execute those programs on behalf of Congress?

I will leave that question to legal experts. It does have fiscal implications, though: if there is a contractual relationship, then the state is entitled to a certain predictability in the federal funds it receives. That would shield states from sudden disruptions in funding - but it would also make it more difficult to reform federally sponsored programs without consent from the several states. 

If we assume that no contractual relationship exists (which, to me, after having studied this issue off and on for ten years, seems reasonable) then states are indeed at a disadvantage compared to the federal government. In effect, Congress can strong-arm states into agreeing to program reforms by threatening disruptive changes to federal funding. 

When that happens, who is really running the show? Who is accountable for whatever changes to Medicaid, school funding or other programs that emerge from such a process? 

But even without resorting to disruptive reforms, the question about blurred lines of accountability remains: who is responsible for the fact that we have a welfare state, funded jointly by the federal and state governments, that is increasingly similar to Scandinavian welfare states?
  • Is the federal government responsible, having redesigned America's welfare state from a compassionately conservative structure to an egalitarian, socially and economically transformational project? 
  • Or are the states at fault for accepting ever growing piles of cash from Congress in exchange for taking responsibility for programs that they could never have paid for on their own? 
The same questions apply, though in a less ideological fashion, to the relationships between the states and local governments. 

Over the next few days I will publish articles that analyze these inter-governmental fiscal relations from several different angles. It is a very important issue that I have myself been writing about for a good ten years (you can find one of my earliest pieces here) and I suspect I will have to continue to do so for some time...

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