Archive for the ‘federalism’ Category

My latest for Learn Liberty looks at proposals for starting an equalization program to redistribute from rich to poor states in the U.S. and finds them wanting. Due to the audience for that blog, I kept that post nontechnical and brief. I’ll reproduce part of it here and then elaborate on some of the complexities and possible counterarguments.

[C]ritics of federalism point to one big disadvantage: federalism, they say, is unfair.

This criticism particularly applies to the fiscal aspect of federalism — that is, the ability of states to choose their own tax burdens and spending levels. The argument runs like this: states have different tax bases per citizen (some are richer than others), so richer states can tax their citizens at lower rates than poorer states, offer more benefits and better public services, or both. In this view, federalism is unfair because it helps the residents of rich states and hurts the residents of poor ones.

I will argue, by contrast, that fiscal federalism actually helps people living in poor states more than people living in rich states.


But there’s a more fundamental problem with the fairness argument for equalization: it ignores migration. Presumably, we care about the welfare of actual people, not the arbitrary geographic categories they live in. In a federal system in which people can easily move across state borders, migration accomplishes everything an equalization program might, without the negative side effects.

Think about a positive productivity shock, like the emergence of a new, highly profitable industry, which raises real wages in one state. Workers will move from other states to the state with the higher wages. The increase in the labor supply will return real wages to their normal level, at which point the migration flow will stop. Those who have moved have become better off, and even those who have remained in the initially poorer states are, at the end of the day, earning just as much as those in the initially richer state. Being able to pay a lower tax rate in a richer state will only accelerate this process — and ultimately eliminate the rich-state tax advantage.


[S]ome places are just more desirable to live in than others. These places will tend to have higher home prices and rents and lower wages. Think about it: if I take some of my compensation in the form of higher amenities, I’m willing to earn a lower real money wage. For this reason, nice places to live that don’t have a lot of industry, like New Mexico and Maine, have low real wages, while places that are less nice to live in but do have industry tend to have high real wages (see figure 1).

But New Mexico and Maine residents surely don’t deserve to be subsidized simply because they prefer to take their compensation in a nonpecuniary form, just as North Dakotans and Bay Staters don’t deserve to be taxed for choosing to live in unpleasant places where the market demands their labor.


Certainly, housing regulation is disrupting equalization through migration in the United States. An equalization program that specifically punished costly states and rewarded low-cost states might discourage excessive development restrictions and get migration flowing more freely again.

But housing regulation might end up being a self-correcting problem. As people flow from high-cost to low-cost areas, eventually the latter will enjoy more agglomeration economies that promote economic growth, and the high-cost areas will start to falter by comparison. By regulating housing so strictly, residents of coastal California, the Boston metro area, and elsewhere may be digging their own graves in the long run.

The argument I’m making here about how migration is a more effective equalizer than fiscal transfers makes some simplifications.

One simplification is that the major reasons why some states have higher per person incomes than others are exogenous productivity shocks and amenities (“desirability”). But there is another important reason: different places just tend to suit workers of different skill sets. If you have access to coal deposits and navigable rivers, you might have developed a steel industry and attracted manual laborers. If you have old, prestigious universities and a seaport, you might have developed high-tech export-oriented industries and attracted highly specialized workers. The latter sort of place will tend to have higher average wages, just because the average skill level of workers is higher.

So what changes about the argument if we relax this simplification and allow states to have different skill mixes? Very little. Yes, Massachusetts can have a lower tax rate than Mississippi because it has higher-skilled, higher-wage workers. But as a result, workers will tend to migrate to Massachusetts, driving pretax wages for Massachusetts workers below where they would be in Mississippi (adjusting for cost of living). Importantly, Massachusetts could still end up having much higher average wages than Mississippi, due to a higher ratio of high-skill to low-skill labor, but the posttax income of any particular worker will tend toward equality between the two states, leaving no benefit to moving from one place to the other. You can’t get around the fact that tax differences between jurisdictions will end up being incorporated into market wages and real estate values. (In real estate economics, this process is called “capitalization.”)

Now, what happens if we assume away labor migration? This is indeed an important change, and it may well make some sense once we talk about multinational federations like Canada. Anglophones might be willing to move to any one of the nine anglophone provinces, while Francophones are stuck in Quebec. Thus, a supporter of equalization could defend the program on the grounds that it is a legitimate way of preventing Francophones from being forced to migrate to anglophone areas or fall irretrievably behind the rest of the country economically.

Still, I wonder whether places like Montreal and Quebec City do not have very different economic profiles from, say, Chicoutimi or Trois Rivieres. There is ample room for labor migration within Quebec. If Quebec itself is large enough that some parts of the province tend to do well while other parts of the province do poorly, it may not need equalization to protect itself from economic shocks.

But let’s say it isn’t large enough. Let’s say there are economic shocks — like import competition, new technologies, and resource discoveries — that could cause Quebec either to race ahead of the rest of the country for 10 or even 20 years or fall behind for a similar length of time. Let’s say the Quebec economy is really volatile. If we don’t want Quebeckers moving out after every adverse shock (or Anglophones moving in when times are good?), an equalization program can help, right?

Possibly. But here’s another alternative: a rainy-day fund. If equalization is really supposed to be insurance against economic volatility, then don’t redistribute from rich to poor provinces, redistribute from rich to poor time periods. The provincial government itself could put away lots of money in cash or retire debt when times are good and take on debt or draw down cash when times are bad. Or if we think provincial governments aren’t competent and far-sighted enough to do this, we could have a program forcing provinces going through better-than-normal times for them to subsidize those going through worse-than-normal times, with the idea that each province comes out balanced over the long run. This insurance-type program might not have as bad incentive effects as equalization, not to mention the unfairness of subsidizing high-amenity places. Still, a publicly run insurance program for provincial budgets will likely create some moral hazard, a reluctance among provincial governments to take politically difficult steps to reduce economic volatility and therefore expected future payouts.

So there you have it. Instead of equalization programs, federal systems should facilitate equalization through migration, or when that is not possible, encourage rainy-day funds or possibly intertemporal insurance for regional budgets.

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In my latest blog post for Learn Liberty, I take on arguments against decentralizing health care policy to the states on the grounds of fiscal capacity:

So if federal ACA spending were cut or even zeroed out, why couldn’t states that like the legislation simply reinstate the same taxes and spending that the federal government currently uses under the law? If the net budgetary impact of the health care law really is zero, there is no inconsistency with state balanced-budget requirements…

[T]he federal government faces a stricter constraint than the states in one crucial respect: its total debt burden is much larger. Federal debt is already greater than 100% of GDP, leading to higher interest costs and crowding out private investment. Expanding the debt even further would only exacerbate these serious problems.

State and local debt is much lower, at about 16% of GDP. State and local governments are much more fiscally responsible than the federal government, and that’s precisely what gives them room to spend if there’s a good reason for it.

More here.

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In the U.S., states have full authority over local government. Some states strictly centralize power and leave local government little to do. For instance, Hawaii has a single school district for the entire state, so that different localities cannot choose to spend different amounts on the government schools. Michigan effectively has a similar system, because it requires every school district to spend the same amount of money per student and redistributes tax funds across districts to make that possible. Vermont has also centralized school funding.

At the other end of the spectrum, states like New Hampshire let local governments pretty much decide their own level of funding for schools and other programs (about half of all local spending in the U.S. goes toward schools), and towns differ widely. If you want to live in a low-tax, low-spending town or a high-tax, high-spending town, it isn’t terribly difficult to find one. In the middle are states like Texas, where local governments are responsible for their own tax and spending decisions, but the most important level of local government is the county, much larger than the town, and it is therefore difficult to choose where to live based on local taxes and services.

Can we measure how decentralized each state is? I’ve tried to do so. The first measure of decentralization looks at how important local taxes are compared to state taxes. It divides local taxes by state and local taxes put together. This is a familiar variable to scholars of “fiscal federalism,” and it is typically called “tax decentralization.” Here is how the states rank on tax decentralization, as of fiscal year 2011-12, the most recent year for which data on local taxes are available from the U.S. Census Bureau:

New Hampshire 0.62475539
Alaska 0.584999114
Texas 0.555497037
Colorado 0.5420195
New York 0.540915308
Louisiana 0.520062304
South Dakota 0.514664958
Florida 0.508526077
New Jersey 0.503867865
Georgia 0.502739018
Missouri 0.490816162
Nebraska 0.486587041
Rhode Island 0.483462474
Ohio 0.47233672
Virginia 0.468452418
Illinois 0.466955731
Wyoming 0.465238453
South Carolina 0.459566438
Maryland 0.451067476
Pennsylvania 0.449406333
Arizona 0.440699694
Iowa 0.437082825
Oregon 0.434834984
Kansas 0.434319401
Washington 0.431347838
Wisconsin 0.423486277
Tennessee 0.421965652
Utah 0.420621904
Maine 0.411333699
Massachusetts 0.398031363
Connecticut 0.397670719
Montana 0.389680799
California 0.387518844
Nevada 0.383740954
Oklahoma 0.383081024
New Mexico 0.382245601
Alabama 0.382121115
North Carolina 0.366066432
Michigan 0.361458412
Indiana 0.352963108
Kentucky 0.33512693
Idaho 0.325219717
North Dakota 0.312465478
Mississippi 0.306727915
West Virginia 0.29895431
Minnesota 0.282530032
Hawaii 0.258739008
Arkansas 0.220173834
Delaware 0.215201394
Vermont 0.152464302

This isn’t the only way we can measure decentralization, though. After all, some states have more “competing jurisdictions” from which a prospective homeowner can choose than others do. To get at this concept was a little more complicated. I first counted the number of county, municipal, and township governments for each state from the U.S. Census Bureau. Then I looked at what proportion of local taxes came from each level of government and created a weighted average of number of local governments for each state. So if a state had 100 towns, 10 counties, 0 townships, and towns raised 20% of local taxes, while counties raised 80% of local taxes, the formula for the weighted average would be 10*0.8+100*0.2. The formula “rewards” states for letting lower-level, more numerous governments raise more taxes.

Then I thought about the decision of a homeowner in choosing a government to live under. Typically, your general location is set by where you have a job, say, a metropolitan area. But there may be several jurisdictions in that metro area to choose from. So I divided the “effective number of competing jurisdictions” described in the last paragraph by the state’s privately owned land area in square miles and multiplied by 100. So the resulting variable is the effective number of competing jurisdictions per 100 square miles of privately owned land. Higher values mean there is a lot of choice among governments.

Here is how the states come out on this variable measuring choice among governments:

New Jersey 5.619216533
Massachusetts 4.644661232
Pennsylvania 4.458726121
Rhode Island 4.016477858
Connecticut 3.634408602
Vermont 3.315789474
New York 2.934484963
New Hampshire 2.529344945
Wisconsin 2.189851779
Illinois 1.823655675
North Dakota 1.699505873
Delaware 1.586429725
Ohio 1.522032431
Maine 1.515194346
South Dakota 1.21988394
Missouri 1.105963152
Iowa 1.092652689
Indiana 0.972491305
Michigan 0.968708835
Kentucky 0.818674996
Minnesota 0.789141489
Arkansas 0.724807709
West Virginia 0.709066369
Oklahoma 0.693505752
Alabama 0.684705931
Georgia 0.551970462
North Carolina 0.535369811
Tennessee 0.506450581
Maryland 0.49052107
Kansas 0.479065166
Virginia 0.475682594
Florida 0.453352937
Nebraska 0.444783283
South Carolina 0.431428983
Louisiana 0.427531008
Utah 0.382243912
Mississippi 0.375744252
Washington 0.373979057
Texas 0.326573652
California 0.301273953
Colorado 0.284535146
Idaho 0.275746556
Oregon 0.273392409
Arizona 0.094351369
New Mexico 0.087975845
Montana 0.077669113
Hawaii 0.070909413
Wyoming 0.058851844
Alaska 0.042298043
Nevada 0.036335668

In general, the northeastern states score highly, largely because of a historical legacy of strong town government.

We can multiply both variables, tax decentralization and effective number of competing jurisdictions per 100 sq mi, together to get a single measure of how decentralized each state is.

New Jersey 2.831342639
Pennsylvania 2.003779755
Rhode Island 1.941816321
Massachusetts 1.848720839
New York 1.587307839
New Hampshire 1.580221888
Connecticut 1.44529788
Wisconsin 0.927372178
Illinois 0.851566468
Ohio 0.718911807
South Dakota 0.627831517
Maine 0.623250495
Missouri 0.54282459
North Dakota 0.531036915
Vermont 0.505539528
Iowa 0.477579724
Michigan 0.350147957
Indiana 0.343253553
Delaware 0.341401889
Georgia 0.277497088
Kentucky 0.274360038
Oklahoma 0.265668894
Alabama 0.261640594
Florida 0.23054179
Minnesota 0.22295617
Virginia 0.222834661
Louisiana 0.222342761
Maryland 0.221258101
Nebraska 0.216425781
Tennessee 0.21370475
West Virginia 0.211978447
Kansas 0.208067296
South Carolina 0.198270281
North Carolina 0.195980916
Texas 0.181410696
Washington 0.161315058
Utah 0.160780162
Arkansas 0.159583693
Colorado 0.154223598
Oregon 0.118880584
California 0.116749334
Mississippi 0.115251251
Idaho 0.089678217
Arizona 0.041580619
New Mexico 0.03362838
Montana 0.030266162
Wyoming 0.027380141
Alaska 0.024744317
Hawaii 0.018347031
Nevada 0.013943484

New Jersey is the state where the taxpayer has the most choice of government. While local property taxes are generally high there, that may simply reflect the preferences of local homeowners who want to spend money on services. It would be unsurprising if there are also some local jurisdictions in New Jersey where taxes are especially low.

In general, northeastern states, which are mostly left of center and high-tax, have a heretofore unseen advantage in their fiscal systems, letting competing local governments do much or even most of the taxation, making them responsive to local property owners. Perhaps it is precisely because of that responsiveness that overall tax burdens are allowed to be high in some of these states (New Hampshire aside): homeowner voters are more content with the way government uses their tax money there.

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Constitute.org is a useful website designed by political scientists to let researchers search for and compare constitutional texts on particular topics. Here for instance is a search on secession clauses. Although one of the site’s creators, Zachary Elkins, says that 22 states contemplate some process for state divorce, only three constitutions expressly authorize some part of the country to secede: Ethiopia, Liechtenstein, and St. Kitts and Nevis. Ethiopia lets each people or nationality secede by a supermajority vote of its legislature, Liechtenstein lets each commune secede (I believe this was an addition of the 2003 constitution), and St. Kitts and Nevis lets Nevis secede by a supermajority referendum vote.

In addition to these, Britain’s Northern Ireland Act of 1998 lets the majority of Northern Irelanders decide to join the Republic of Ireland, and the constitution of Uzbekistan lets Karakalpakstan secede with the consent of the Uzbekistan government.

It would be interesting to see how many states define themselves as “indivisible,” thus tying a government’s hands and preventing it from authorizing secession. A search on the term brings up some irrelevant cases, but 72 constitutions contain the term.

By the way, the Prince of Liechtenstein is a moderate libertarian, and their constitution is fairly consistent with the philosophy. Check out his book on the topic.

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The Cato Institute has conducted a new poll of Americans’ attitudes toward federalism. Apparently Americans have become much more favorable to federalism and decentralization over the past 40 years.

The Cato Institute commissioned YouGov for the poll. They asked respondents questions about which level of government should have primary control over each issue area, using the exact same wording from a Harris poll conducted in 1973. This method allowed them to see how Americans’ attitudes have evolved over the past 40 years. On 10 out of 11 issues, Americans were more favorable to state or local control in 2013 than they had been in 1973 (the bars in this graph represent the percentage of Americans favoring primarily federal control over that issue):

cato poll

A majority of Americans still want primarily federal decision-making over national defense, Social Security, and cancer research. Two of those three seem to make a great deal of sense: cancer research is a global collective good, and national defense, by definition, is a national collective good. “Prison reform” and “drug reform” are the two issues on which Americans’ attitudes have moved most significantly toward decentralization. A large majority of Americans now think housing, transportation, education, welfare, prison reform, health insurance, and drug reform, in that order, should be primarily state and local issues. Only on education have Americans become more centralist, and that change is so small as to lie within the margin of error.

Another compilation of surveys suggests that a majority of Americans also want primarily federal decision-making over immigration, stem-cell research legality, protecting the border, protecting civil rights, protecting civil liberties, abortion laws, creationism in public schools, and food safety, in descending order. Most Americans also think paving roads, providing job training, law enforcement, running courts, providing pre-K to low-income children, unemployment, gay marriage, and gun control should be primarily state and local issues.

These results are consistent with those of other surveys, which have tested Americans’ views on particular issues. A 2012 CBS News poll found that 69% of Americans preferred that the states handle marijuana policy, while only 27% preferred that the federal government handle it.

What’s interesting is that on all these issues on which the study reports a partisan breakdown, even drug laws, Democrats are more in favor of federal control than are Republicans. Decentralization has emerged as a very starkly partisan wedge issue.

Growing support for decentralization in the U.S. does not necessarily mean that decentralization is a good idea or that it will happen, of course. As my review of Daniel Treisman’s recent book acknowledges, decentralization can have its pitfalls. Yet within the American context of largely market-preserving federalism, greater decentralization on many of these issues will (more…)

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Since the Scottish independence referendum, the Scottish National Party has seen its membership treble and its poll ratings climb. This boost to pro-independence forces after their referendum failure departs from the script established in previous referendums on autonomy or independence. After the failed 1979 referendum on devolution (due to a turnout requirement – the measure got a majority of votes), the SNP fell back in the polls. After the successful 1997 referendum, the SNP gained in the polls, even though devolution was a Labour-implemented project. After the 1980 and 1995 failed referenda, the Parti Quebecois declined a bit in the polls.

So what’s going on? The biggest reason for the SNP’s gains may be that “Yes” and even some “No” voters in the referendum want to make sure that the Westminster parties follow through on their pledges for even greater devolution. Alex Salmond once said, “It’s only SNP votes that concentrate the minds of Labour.”

To a point, the logic makes sense. The British parties are contesting for power at the center, and party leaders are unlikely to devolve power away from themselves if they can at all help it. A credible secession threat is useful for eliciting concessions.

At the same time, though, there has to be some (more…)

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This paper of mine is now available online in Constitutional Political Economy. It empirically investigates competing theories of how fiscal federalism constrains government. The main conclusion is that different federal systems conform roughly to different theoretical models, with the U.S. – a bit surprisingly – coming closest to “market-preserving federalism.” Some of the early findings from this paper were blogged here at Pileus some time ago.

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