The Price of Federalism according to Paul Peterson (1996) is the cost of doing business for a government when various levels (national, state and local) are segmented the bureaucracy. For him, modern federalism in the US has evolved far away from what the forefather’s originally envisioned. Today each level of government has its own independently elected political leaders and its own separate taxing and spending capacity.
Functional theory argues that the appropriate level of government should be used to provide the public services to the people. By and large, it argues that economic development policy should be managed at the state and local governmental levels, while the national government should be in charge of redistributing wealth. This is a more normative view of how government “should” operate. On the other hand, Legislative theory says that modern federal system is shaped by political needs and legislatures are responsible for its design. Politicians strive to distribute benefits and push off costs. This is a more realist argument, which focuses on the pork politics of the politicians and how much re-allocation of the national treasury is allocated for a particular locality.
Ultimately, Peterson argues that although traditional functionalism is theoretically superior, realistically legislative affairs intervene into the policy making process thus costing America more. He describes the problems with modern federalism as the costs of welfare; the creation of fiscal inequalities; and the expensive of providing public services in central cities.
In regards to welfare policy, Peterson identifies distinctive areas of functionality for government funds separated into developmental vs. redistributive grants. Developmental funds are designated for infrastructure, roads, mass transit, sanitation systems, public parks and institutions to protect the public like for health and education. Redistribution is aid that helps the elderly, disabled, unemployed, sick, poor, and indirectly helps economic development. Functionalism argues that local governments are equipped to design and administer development problems because market forces and political processes discipline them better. As defined in public choice theory, it is the marginal resident and business that determines the market value of property in a locality (page 18). Citizen choices at the local level will select the optimal level of market-based outcome for the basic services. Although citizens are likely to eschew income tax and relay on property taxes, user fees and misc. taxes to pay for public goods, political pressure is minimal at the local level.
Yet if local governments are allowed to provide both development and redistributive policies, areas will concentrate between the rich and the poor creating huge inequalities. Concentration of poor unable to pay for basic services will grow and rich municipalize will promote politics of Not In My Back Yard (NIMBY). Therefore Peterson argues that the national government should be in charge of redistribution. Likewise, legislative theory acknowledges that national federalism is shaped by political needs of legislatures responsible for their jurisdictions. Politicians lobby for resources and claim credit and shift the burden to other levels of the federal system, which could create a distorted allocation of resources. These contradictions result in fiscal inequalities of national benefits.
Finally, Peterson argues that inter-cities receive a grunt of the burden. He suggests that diseconomies of scale that occur in big cities government are less likely to offer market-based information. With more density, cities have increased inequality and must pay more for maintenance and management but have the diminishing costs of providing public services. Big cities problems are hard to tackle. They are ridden with crime, welfare dependency, poor schools and high unemployment rates. Similar to developing countries, big cities have large amounts of inequality. Functionalists expect territorial inequities in fiscal resources among states to be distributed through federal grants. Yet, Peterson is less optimistic that legislative theory can offset fiscal inequalities at the state and local levels by federal grants.
Peterson empirically tests whether state’s political and institutional history will have a legacy of fiscal consequences, suggesting that more professional states will spend more. He uses coefficient of variation (CV) to measure the differences between states by the following independent variables: population density, taxable resources, poverty rates, and population living in urban areas, minority percentage, partisanship, and professionalization of state politics. He concludes that social costs of federalism are considerable. States with higher poverty rates spend no more on redistribution than those with lower poverty rates. Redistributive expenditures are not responsive to social need, all things being equal, and actually are reduced in states with higher percentages of minorities.
Additionally, Peterson tests for the possible “welfare race to the bottom.” He studies states provision of Aid to Families with Dependent Children (AFDC) reforms. In the 1990s President Clinton shifted welfare policies from categorical grants (funding for specific policy outcome) to block grants, which provided state’s discretion for federal funding. Peterson argues that while categorical grants have a redistributive purpose (programs with specific target populations and needs), block grants help development objectives (because they are managed by each state). He argues that in order to have progress, the state government needs to have more of a say how federal aid should be distributed. He is an advocate of the block grants program.
Contrary evidence of this political divide was provided in the McFarlane and Meier (June 1998) article, which evaluated the cost effectiveness of re-allocating categorical/entitlement programs into block grants. They looked at family planning and evaluate the long-term outcomes of the policy after the national government changed its funding mechanism allowing the states to decide how to implement the program. They argue that spending was reliant on the state’s political and historic legacy; more conservative states wouldn’t pay for birth control, while more liberal one would. Furthermore they suggested that it is of the countries best interest to have better family planning to help curb unwanted pregnancies, which will ultimately also relieve future
Ultimately, Peterson argues the direction of the price of federalism. Functional theories suggest the price is diminishing with each level of government outperforming the next. Legislative theory anticipates the price with climb and for sees higher levels of government taking credit for financing popular development programs. Peterson argues for its decline and suggests movements different between Great Society programs and the Reaganomics. He adds that each level of government is increasingly focused on the policy area in which it has the greatest competency (i.e. local governments with economic development/national government with redistribution). Legislative theory increased levels of federal development grants between 1957-1977 (pg 83). Yet tax indexation, congressional centralization, fiscal deficits and budgetary crisis have imposed greater political costs on legislative spending proposals. But ultimately, it’s up to the readers to decipher their own verdict.