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Rogue States

by Ramesh Ponnuru

They are the enemy of federalism

In this season of resurgence, conservatives have goals more ambitious than ending bailouts or cutting federal spending: They seek a constitutional restoration. They believe that today’s bloated federal government is not just doing damage to the economy but doing violence to the Founders’ design. They worry especially that the federal expansion has come at the expense of the states. So there is talk in conservative circles about constitutional amendments to right the balance, and about “devolving” power and programs to the states. The House Republicans’ “Pledge to America” calls for a revival of the Tenth Amendment, a constitutional provision often considered to be a defense of “states’ rights.”

Yet this may not be an auspicious time for a campaign to empower the states, since their own mismanagement has been in the headlines for several years. California and Illinois are the most familiar basket cases, but even Utah, the best-ranked state in Forbes’s survey of state-government debt, has unfunded pension obligations that amount to $7,000 per resident. At a time when states have been asking the federal government for bailouts, is it really a good idea to entrust them with more responsibilities? Will the public think so?

If political constraints end up blocking devolution, it might be a good thing, because the bigger problem with the conservative defense of the states is that it rests on mistaken premises. The decline of American federalism has not been a story of the federal government growing and state governments shrinking. It has been a story of governments at all levels growing at once, and collusively.

Medicaid, the government health program for the poor, is perhaps the best example. The federal government requires states to provide some benefits, but for the most part, states spend money because of bribes rather than orders. The federal government has long given the states about 50 cents for every dollar they spend. Thus state governments can expand benefits without taking full responsibility for paying for them.

Because of this mixed system, the country ends up spending more on Medicaid than it would if the program were wholly run by the feds or wholly run by the states. We get bigger state governments and a bigger federal government. The system’s incentives also cause recurrent, predictable state-budget crises: In boom times Medicaid expands, because state legislators and governors can offer their constituents one dollar of services in return for 50 cents of taxes. In lean years Medicaid is hard to cut, because states save only 50 cents for every dollar they cut benefits.

To be sure, Medicaid has statutory limits on the ability of states to hand out federal money. But the Bush administration, in the name of decentralization, federalism, and flexibility, granted states waivers from those limits. (The Clinton administration had granted waivers, too.) This “devolution” has been a principal reason for the socialization of American medicine over the last decade. Around 35 million Americans were enrolled in Medicaid in 2000. That number grew to 53 million by 2005. As a result of Obamacare, it is expected to hit 85 million in 2014.

We used to have a federalism defined by choice, competition, and accountability, all made possible by the assignment of distinct tasks to different levels of government. Now we have what scholars call a cooperative model of federalism — and it is one of the reasons that both the federal government and state governments are in fiscal crisis.

It’s also a hidden cause of other problems. For example, the litigation crisis is largely the result of a breakdown of federalism. Much of the Founders’ motive for writing the Constitution, recall, was concern that the states were committing economic aggression against one another to the detriment of national commerce. The Constitution therefore imposed limits on the states as well as on the federal government. States are, for one thing, supposed to give “full faith and credit” to the laws of other states. Instead we let (for example) plaintiffs in Illinois sue Texas companies before an Illinois judge and jury, applying Illinois law. The result of this dispensation is that the venues friendliest to trial lawyers set what amounts to national policy on product-liability standards.

The breakdown of federalism is also a growing problem for the rule of law and the goods that it protects. When 50 states and the federal government have overlapping regulatory authority, businesses have a much harder time staying in compliance with the law, or even knowing what the relevant law is. Government loses the ability to do what only it can do: provide a stable legal environment in which private actors can make their plans. It is no accident that most major deregulatory initiatives of the last four decades have involved federal action to block state interference with commerce.

Today’s states are clients of the federal government, and therefore not natural allies in the fight to rein in its power. The challenge for conservatives is to change the relationships between and among these governments in order to foster healthier politics at both levels. There are a number of specific initiatives that conservatives in Washington, D.C., should pursue in order to achieve this goal and advance a constitutional federalism.

1. Stop giving the states money. When the federal government gives money to states, it makes the work of reformers such as New Jersey governor Chris Christie harder. Budget constraints are what make reform possible. For most of our history, there has been an understanding that the federal government would not bail out states, and this understanding has helped to preserve what is left of the Founders’ limited-government federalism.

Unfortunately, and to a remarkable extent because of President Obama, that understanding has now vanished. It will be very hard to restore it, for the same reason that no incoming president can now credibly announce that he will under no circumstances bail out a financial institution. It may be time to consider a step that would once have been unthinkable: to create federal bankruptcy procedures for the states. In the place of ad hoc bailouts that reward state lobbying and subvert needed reforms, a regularized process that requires downsizing could be instituted. It may be the only way to rescue some states from their unwise promises to public-sector unions.

Why should we expect the federal government to stand up to these interests any better than the states did? It’s simple: Because the federal government knows that the states aren’t going to bail it out.

2. Cap the state- and local-tax deduction. State and local taxes can be deducted from federal taxable income. The effect is a subsidy from low-spending states to high-spending ones. If a state wants to jack up taxes on its affluent residents to fund lavish programs, let it pay the full freight — and run the risk that some of those residents will move. Capping the deduction, rather than eliminating it, would affect only those affluent people — and even they would not pay much in higher taxes, since a smaller deduction would expose fewer of them to the alternative minimum tax.

3. Defend the Supreme Court when it limits the states’ adventurism. The Court, especially Chief Justice Roberts and Justice Alito, has shown a practical grasp of the real challenges to federalism and attempted to reassert the old constitutional rules that sustained it. The Democrats have pushed back by describing these decisions as activism on behalf of corporations. But protecting national commerce from parochial interference has been an important part of the Court’s duty from the very beginning, and conservative politicians ought to say so.

4. Where federalism is in good working order, leave it alone. For years, Republicans have been pushing for a national reform of medical-malpractice laws. But even assuming that we know the ideal form of such laws — which we do not — states that adopt foolish malpractice laws bear the costs of their folly. (Product-liability laws, as noted earlier, are not this localized in their effects.) If West Virginia drives out some of its doctors, no other states suffer; in fact, they may benefit. West Virginia’s polity should not be relieved of the responsibility of enacting good laws, nor should Texas be stopped from reaping its full reward for having done so. Let the states compete.

5. Stop creating new opportunities to sue state governments in federal court. Liberal interest groups use vaguely worded federal laws to sue states into expanding their social programs. Congress has blocked this sort of thing before: The most important provision of welfare reform in 1996 was the elimination of a federally guaranteed right to state-provided benefits. Congress should pass a law saying, at minimum, that no law creates such a federally enforceable entitlement against the states unless Congress says so explicitly.

6. Fix Medicaid. Many experts have offered bright ideas for reforming Medicaid over the years, but unless reform alters the incentives for state governments, it will not work. Ideally, the federal government would withdraw from providing medical help to the poor and let the states take full responsibility. A second-best solution would be for the federal government to take its annual spending on Medicaid, divide it among the states, and tell them that they can spend it on medical assistance for the poor as they see fit, but that the total spending will be capped. A third-best solution would be a complete federal takeover. Whatever reform is adopted, the days of Medicaid as a “funded un-mandate” (in the words of Michael Greve, who studies federalism at the American Enterprise Institute) have to end.

7. End McCarran-Ferguson. In 1944, the Supreme Court ruled that state regulation of insurance improperly interfered with interstate commerce. It was up to Congress to provide that regulation. Congress passed a law granting its power to the states. Health insurers are thus immune from some antitrust actions, but the practice of state-by-state regulation has kept a national market in individual insurance from emerging. During the health-care debate, some Democrats proposed ending the antitrust exemption, which is not terribly important, and most Republicans wanted to let people buy insurance across state lines. Maybe there’s a deal to be made here.

Federalism, properly considered, is not primarily about protecting “states’ rights.” The Tenth Amendment (“The powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people”) is only incidentally concerned with preserving state powers; its purpose is to limit federal power. In Federalist 45, James Madison wrote a stirring rejection of a state-centric view of the Constitution: “Was, then, the American Revolution effected, was the American Confederacy formed, was the precious blood of thousands spilt, and the hard-earned substance of millions lavished, not that the people of America should enjoy peace, liberty, and safety, but that the government of the individual States, that particular municipal establishments, might enjoy a certain extent of power, and be arrayed with certain dignities and attributes of sovereignty?”

Ronald Reagan also understood that federalism did not mean letting states act as “laboratories of democracy” on the federal dime; it meant disentangling the two. He tried to raise popular awareness of the problem in his 1982 State of the Union address: “A maze of interlocking jurisdictions and levels of government confronts average citizens in trying to solve even the simplest of problems. They don’t know where to turn for answers, who to hold accountable, who to praise, who to blame, who to vote for or against.” His proposed solution: a “swap” in which the states would have sole responsibility for welfare while the federal government would take over Medicaid completely.

The reaction that Reagan’s proposal received suggests the odds against a revival of constitutional federalism: State governments, which wanted neither a diminution of their power over Medicaid nor an increase in their responsibility for welfare, shot it down.

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