Constitutional debates swirling around the PPACA’s individual mandate have much to do with federalism. The core issue the Supreme Court is addressing is whether the federal government has essentially unlimited authority in economic policy, or whether they are yet some areas of economic policy-making (such as whether to compel commerce) exclusive to the states. As someone who believes that constitutions ought to be read according to – I don’t know – what their actual words say, I think the entire act is obviously unconstitutional. Article I, section 8 of the U.S. Constitution permits Congress to legislate in order to “regulate commerce…among the several states.” Thus, Congress has the authority to regulate interstate commerce. Not “anything that might be related somehow to interstate commerce,” plus “anything necessary and proper to any of those things.” Of course, no one on the Supreme Court, except perhaps Clarence Thomas on issues like this one, shares my judicial philosophy.
Putting the constitutional issues to one side, however, I want to address the desirability of the kind of federal system that classical liberals — and, perhaps, Justice Thomas — favor. We can summarize that federal system as follows:
- The primary regulatory authorities in the country are state and local governments.
- The economic role of the federal government is to ensure a common market: to prevent states from levying barriers to the free flow of goods, services, people, and capital, from tariffs to invidious regulations to local preferences in government procurement.
- The national court system protects basic human rights and civil liberties from infringement by federal, state, and local governments.
- State and local governments fund their activities almost exclusively out of their own resources. The federal government should not, in general, provide grants to state and local governments.
- State governments are politically autonomous, constitutionally sovereign, and independently elected. They may legislate freely within the bounds expressed above.
- State governments are permitted to form compacts to deal with externalities. For instance, states may choose to adopt uniform regulations on insurance so that companies can sell the same product in multiple states with a quicker approval process. Because states retain their sovereignty, they are free to enter and withdraw from such compacts at any time.
OK – so what are the arguments against this kind of system? (I go over some of the arguments and evidence in favor here.) One common objection to “states’ rights” is that state governments may violate the civil rights of some of their citizens. I share this concern, one reason I don’t think the term “states’ rights” is appropriate for my position; nevertheless, the concern is addressed with point 3 above. Another objection might be that problems like pollution and endangered species can cross state boundaries. Given a sufficiently small number of states, however, I do not see why they cannot contract with each other to solve their commons problems. What else?
There are two concerns about fiscal federalism that many progressives share that I take seriously: that inter-jurisdictional competition under federalism will undermine the welfare state, and that the system will lead to greater inequality among regions. The first concern derives from the argument that rich people will leave jurisdictions where their taxes are high for jurisdictions where their taxes are low. States will then try to prevent their tax base from fleeing by enacting low, flat tax rates and accordingly low spending on social welfare. Whether this is a problem or not depends on one’s ideological perspective, but it is worth noting here that among advanced democracies, fiscal federalism is not associated with lower social welfare spending.
The second argument, about regional inequality, is slightly more complicated. The argument here is that richer states can fund the same level of public goods as poorer states with a lower tax rate. Therefore, taxpayers will tend to flock to rich states, away from poor states, exacerbating the economic divide. One way to solve the problem would be to relax point 4 above and allow the federal government to give grants to poorer states to offset their disadvantage. However, it’s really an empirical question as to whether fiscal federalism disadvantages poor states. It could be that poor states can take advantage of the autonomy and policy flexibility that fiscal federalism permits in order to attract capital investment. Ireland, for instance, has chosen this course within the E.U., slashing business taxes, attracting investment, and growing their economy. Had there been a centralized, tax-harmonized E.U. in place, Ireland could never have pursued this strategy for catching up.
I have a paper on just this question forthcoming in the journal Regional Studies (PDF), and in my next post I’d like to go over the cross-national evidence on fiscal federalism and regional growth. Does the system advantage poorer or richer regions, or neither?