The Agenda

Medicaid and Federalism

James Surowiecki has written an essay on the downsides of fiscal federalism, a subject we’ve discussed at The Agenda. He concludes with the following:

The tension between state and national interests isn’t new: it dates back to clashes in the early Republic over programs for “internal improvements.” Of course, the federal government is far bigger than it once was, and yet in the past two decades we’ve delegated more authority, not less, to the states. The logic of this was clear: people who are closer to a problem often know better how to deal with it. But matters of a truly interstate nature, like the power grid, can’t be dealt with on a state-by-state basis. And fiscal policy is undermined if the federal government is doing one thing and the states are doing another. It’s a global economy. It would be helpful to have a genuinely national government.

Though Surowiecki starts with a sound premise, I think his conclusion is seriously overdrawn. There are, as he surely understands, downsides to excessive centralization. A “genuinely national government” isn’t the solution — but a rebalancing of responsibilities between the states and the federal government might be.

A number of policy analysts on the left have proposed federalizing Medicaid, including Greg Anrig of the Century Foundation (via Ezra Klein). But the idea of federalizing Medicaid actually has a solid conservative pedigree, as Steve Teles has pointed out to me.

Timothy Conlan’s From New Federalism to Devolution containsan extensive discussion of Reagan’s views on federalism, including his belief that AFDC — now known as TANF — should be the responsibility of the states. In 1982, the Reagan White House launched its federalism initiative.

In his State of the Union address, Reagan proposed to nationalize health care financing for the poor, terminate the federal role in welfare, and return to the states forty-three major federal grant programs along with $28 billion federal dollars in excise taxes to pay for them.

Most proposals for rebalancing federal responsibilities actually handed the federal government responsibility for income maintenance programs, yet Reagan believed, rightly in my view, that an AFDC block grant would be preferable, to give states the flexibility to pursue more effective anti-poverty approaches tailored to local economies. This, of course, is what later enabled welfare reform. Going further, they also envisioned transferring all responsibility for welfare to the states as part of a broader “swap.”

First, they proposed a $20 billion program “swap”: the federal government would return to states full responsibility for funding AFDC and food stamps in return for federal assumption of state contributions to Medicaid. Second, the plan included a temporary $28 billion trust fund or “super revenue sharing” program to replace approximately forty-three federal aid programs for education, health, social services, and community development, and transportation. … After four years the trust fund and the federal taxes supporting it would be phased out, leaving the states the option of replacing federal taxes with their own and continuing the terminated programs or allowing both to cease altogether.

There are cleaner ways of doing this. For example, if the federal government financed a $50,000 income tax exemption ($100,000 four married couples) with a 10-14 percent VAT, as in Michael Graetz’s Competitive Tax Plan, the states could piggyback on the federal tax collection system by adding points to the VAT for sales made in their states, eliminating the need for separate state retail sales taxes. But the basic idea is very attractive.

It does not, however, address the countercyclical concern that Surowiecki highlights: if social welfare spending in the states depends on state revenues and states have balanced budget requirements, surely this will deepen economic contractions. The solution is to move away from ad hoc stimulus efforts to federal transfers that kick in under certain economic conditions: a state is in recession, its unemployment rate reaches X amount, etc.   

What is the appeal of federalizing Medicaid? Simply put, it will lead to greater accountability: now the federal government spends the bulk of the money, but the states determine eligibility rules, etc. Washington depends on the states to control costs, yet the states don’t bear the full burden of their spending decisions. The consequence is a ballooning program. By the same logic, all programs that are jointly-funded and jointly-operated deserve close scrutiny. 


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