Once upon a time, local governments accounted for the lion’s share of economic policy-making in the United States. Before World War I, not only was the federal government’s economic policy-making activity strictly limited to areas such as international trade, management of federal lands, trust-busting, and food and drug regulation, but state governments themselves were also internally decentralized. In 1913, local government own-source revenues (revenues raised autonomously by local governments, thus excluding grants) as a percentage of total state and local revenues (including federal grants to state and local governments) stood at a whopping 82%, according to my calculations based on historical Census Bureau data. If we assume that revenues track economic policy activity closely, this figure implies that four-fifths of all state and local economic policy activity occurred at the local level.
Today, of course, local governments are quite limited in their economic policy autonomy, with the most important remaining policy role left largely to local governments being K-12 education. Local revenue decentralization (the variable described in the last paragraph) was just 38% in 2008. This chart shows the evolution of local revenue decentralization over time for the U.S. as a whole:
So who killed local autonomy in the U.S.? The answer is: Depression-era state and federal governments, with an honorable mention to World Wars I and II, the Great Society, and state supreme courts (more on that in a bit).
In 1927, local revenue decentralization (LRD) still stood at 73%, nearly twice the level it is today. By 1932, near the nadir of the Depression, that had fallen to 68%. Under “that man in the White House,” the pace of centralization accelerated, as within two years LRD was at 59%, dropping further to 49% by 1940, not far from where it is today. To be fair, state politicians like Huey P. Long deserve some share of the blame or credit, depending on one’s perspective, for their attempts to set up state-level mini-New Deals. The federal role in centralization largely has to do with the expansion of federal grants to state and local governments, reducing the importance of autonomous revenue sources. The point is that within the space of about a dozen years, the U.S. political economy was transformed from one of extensive decentralization and robust local autonomy to one of federal dominance.
The remaining centralization episodes include the periods between 1940 and 1946 (-3% LRD), 1961-1969 (-6% LRD), 1971-1977 (-5% LRD), and 1991-1995 (-3% LRD). The latter two periods are probably associated with state supreme court decisions mandating state aid to local public schools, which in states like New Jersey and Vermont have been associated with noticeable jumps down in LRD. The escalation of the War on Drugs under Nixon, with its concomitant federal grants to local police departments, might also account for the 1970s trend. The 1960s centralization almost surely has to do with the expansion of the federal welfare state, which partly crowded out the pre-existing safety nets set up by local governments.
Why does the demise of local autonomy in the U.S. matter? In my view, the diminishing importance of local government helps account for the decline of turnout for, and public attention to, local elections, allowing rent-seekers to dominate the local electorate and loosening constraints on public officials, who all too often dabble in graft because they expect little punishment from local voters. Local autonomy also allowed much more latitude for citizens to choose a favorable policy regime to live under by moving from one jurisdiction to another. Under a fully centralized system, the only way to choose a substantially different policy regime is to leave the country altogether.
States still differ somewhat in the latitude they offer local governments. As of fiscal year 2008, LRD ranged from 52% in Nebraska to 13% in Alaska. In general, LRD is higher in larger-population states, because they are more likely to have large local governments with powerful politicians able to defend their prerogatives — as well as economies of scale in local provision of services. However, the historical data show that we have a very long way to go indeed to restore any semblance of pre-New Deal fiscal decentralization anywhere in this country.