As the March 1 sequester deadline looms, congressional conservatives should wake up to the fact that an agenda focused solely on spending cuts is a losing agenda, one that wouldn’t help matters much even if it prevailed. Our very system of government is badly malfunctioning. What’s needed at the heart of the conservative agenda in Congress is a program of structural reform that goes far beyond entitlements.
The first priority for such reform is something hardly anybody is talking about: disentangling the functions of state government from those of the federal government. The intermingling of state and federal functions through “cooperative federalism” has created the conditions for perpetual fiscal crisis and overregulation at every level of government.
Federal funds now account for about 30 percent of the typical state budget. This “assistance” doesn’t come from Mars, of course. The federal government is taxing and borrowing from all of us in order to return that money to our state governments, under onerous conditions.
According to the White House, the average federal deficit over the past 30 years amounted to 3.4 percent of GDP. The average amount of federal transfers to state and local governments during the same period was 3.0 percent of GDP.
States and localities are severely limited in their ability to borrow. And yet virtually all the expansion of the American public sector since 1950 has come at the state and local level. Almost all of the federal deficit can be accounted for by the federal government’s support of state and local governments, inflating their budgets well beyond what they could sustain on their own.
In effect, the federal government is running up huge deficits in order to purchase control of state governments. The problems that arise from this disastrous intermingling of federal and state finances are almost endless. By seizing substantial control over state governments, Congress invades areas of regulation that the Constitution recognizes as belonging exclusively to the states. Worse, Congress escapes accountability by leaving the states’ elected officials on the hook for what common voters can only assume are state programs but what really are federal programs in disguise. And so local self-government, which is at the heart of our Constitution, is shrinking.
With respect to state budgets, this “assistance” is not just unnecessary; it’s harmful. States are left at the mercy of congressional appropriations and dependent on federal bailouts every time there’s a downturn in the economy. If the federal government weren’t sucking so much money out of the private economy to pay for these programs, the states could run them more efficiently and sustainably on their own. And the whole American public sector would be leaner. These programs, which are meant to equalize income disparities among the states, actually exacerbate them, especially through the tactic of matching funds. For example, under Medicaid, rich states can afford bloated Medicaid programs and are rewarded with federal matching funds. Poor states are penalized.
Under more than 600 federal spending programs, mainly for health, education, and transportation, Washington sends money to the states on condition that the states do what Washington wants. The conditions on this “assistance” are increasingly complex, intrusive, and suffocating, making state governments little more than instruments of Congress. If your state wants approval for federal Medicaid matching funds, for example, it has to meet about 100 different conditions on matters that in principle should be the state’s prerogative.
Every time a state legislature meets, its most difficult task is to find wiggle room inside the straitjacket of conditions on federal funds. That wiggle room is shrinking.
One reason these programs exist is that regulation-heavy states want to eliminate the competitive advantage of regulation-light states, and they form coalitions in Congress to do just that. In 1926, faced with rampant inheritance-tax competition among the states, Congress adopted a federal inheritance tax with offsets for inheritance-tax payments at the state level. The immediate effect of this law was to eliminate state competition for rich retirees and to incentivize all states to raise their inheritance-tax rates.
What conservative scholars call “competitive federalism” is a basic feature of our Constitution, as Michael Greve argues in The Upside-Down Constitution (2012). Competitive federalism exerts strong downward pressure on government power at every level. But through the disastrous fusion of state and federal finances, that pressure is not only defeated but reversed, leading to the unsustainable expansion of government spending at every level.