Illustration by David Ridley

What the New Deal Wrought

For the first 150 years of the American republic, the Supreme Court interpreted the Constitution as requiring strict limits on the national government's authority to regulate markets and promote public welfare. Consider the commerce clause, the national government's principal source of authority to regulate. Although a large part of our modern legal framework, the commerce clause went unused for nearly all the first hundred years of the Constitution. The federal government exercised this authority for the first time in 1887 with the inception of railroad regulation.

In the wake of the Great Depression, however, when Democrats sought to expand the national government under the New Deal, the Supreme Court dramatically weakened the constitutional limits on the federal government. Without these changes, the growth of the federal government in the 1960s and 1970s would not have been possible.

The growth of the federal government, increasingly the principal source of economic and social regulation, markedly altered American federalism. During America's first 150 years, economic regulation and the promotion of social welfare remained the domain of the states. In the past sixty years, however, those powers have been shared, with the national government free to enter policy areas that had previously been the province of the states or that had not been subject to any government action.

Moreover, the national government's authority to enlist state governments in the service of federal programs was greatly expanded through a broad judicial reading of the spending powers. For example, the Court permitted Congress to use federal money to induce state participation in Aid to Families with Dependent Children, food stamps, aid to education, and environmental policies. It also permitted Congress to tie federal funding of specific programs to the states' adopting unrelated federal policies. Thus Congress made receiving state highway funds contingent on the states' adopting the fifty-five-mile-an-hour speed limit and the minimum drinking age of twenty-one. The Court therefore allowed Congress to harness the ample administrative powers of state and local governments in service of national goals.

At the same time Congress was entering new policy domains, the courts were making use of their wider conception of federal commerce powers to invalidate various state actions. Many activities triggered judicial scrutiny that had previously been only distantly connected to interstate commerce. Court-imposed limitations combined with a more aggressive Congress to diminish the capacity of the states to act as autonomous governments within the federal system. No doubt this diminution of state authority shifted popular and journalistic attention away from the states to Washington, where the action was.

The expansive reading of Congress's enumerated powers could have been checked by the Tenth Amendment, which reserves those powers not delegated to Congress to the states or to the people. But, after a brief dalliance with this idea in the 1976 National League of Cities decision--which forbade Congress from regulating the wages and hours of municipal employees--a deeply divided Court abandoned this effort. In Garcia (1986), the Court asserted that the Tenth Amendment placed no limits on the expansion of congressional action.

Can the States Be Trusted?

In recent years, the growth of the federal government and its failure to resolve many major problems have raised questions about whether the national government is the appropriate regulator of all the problems it has taken on. Scholars and policymakers suggest that reinvigorating federalism may provide better solutions to many of the problems that the federal government has tackled unsuccessfully.

The reinvigoration of American federalism signals a dramatic departure with the recent past, forcing us to confront the question of whether it will yield better government. In a word, can the states be trusted? We argue that there is no blanket answer.

For example, the long history of legal discrimination against African Americans demonstrates that states cannot be trusted on all dimensions of public policy. Competition among states is unlikely to prevent particular states from abrogating certain citizen rights--such as the right to vote and to public participation on an equal basis.

During the 1960s and 1970s, civil rights became the canonic case, as the national government took over one policy area after another, many of which had been the states' domain for more than a century. The public demand for solutions to perceived problems translated into intervention by the national government, for many people perceived that the problems they sought to address reflected state inaction or incapacity. Yet did the analogy from states' civil rights failures go too far? The widespread dissatisfaction with a mammoth federal bureaucracy, high taxes, and high costs of regulation suggests that it has.

If some took the civil rights analogy too far, proponents of small government use the mantle of federalism and especially states' rights to rationalize smaller government through a wholesale limiting of federal power.

Current Efforts

Events of the past few years promise significant changes in federalism, the most immediate of which are the changes associated with Republican Congress since 1994, especially its Contract with America. During the past few years, congressional Republicans have proposed turning back major portions of federal authority to the states, introducing initiatives on, among other things, welfare, Medicaid, legal services, job training, and housing. These initiatives have thus far met with at least partial success.

Proponents of the new federalism hark back to an earlier era of states' rights and, to use Justice Louis Brandeis's famous phrase, the "laboratory of the states." Economists have long argued that jurisdictional competition under specific circumstances enhances public

The long history of discrimination against African Americans demonstrates that states cannot be trusted on all public policies.

welfare, giving states the incentive to design cost-effective programs. Along with many state programs come multiple approaches to a particular problem--in contrast to a single national one. Multiple approaches in turn imply that states will imitate the most successful programs and that the less successful ones will be altered or dropped. In sum, this view suggests that the new federalism will enhance public welfare.

Critics of the new federalism make the opposite argument: that turning power over to the states is tantamount to major reductions in programs. Those critics further argue that the Republicans' arguments about federalism, states' rights, and efficiency are a smoke screen for their ideological goal of cutting government. Competition among the states, critics say, will not enhance efficiency but will force states to "race to the bottom" under pressure to maintain a low tax base and thus force lower levels of service. In sum, this view suggests that the new federalism will lower public welfare.

The argument that states will engage in a race to the bottom is often made in journalistic or political settings--settings in which careful analysis is scarce. Where analysis has actually been performed, however, it overwhelmingly suggests that, if the states are likely to engage in a race of any kind, it will not be a race to the bottom but a race to provide efficient, effective services. The volume we have just published, The New Federalism: Can the States Be Trusted? lays out the evidence for this finding.

s Each contributor to that larger study takes seriously the possibility that state competition might have various adverse effects, but none finds much systematic evidence of a race to the bottom. Working in the welfare domain, an area where race-to-the-bottom arguments are common, Craig Volden shows that the adverse effects of state competition are quite weak. In the area of Aid to Families with Dependent Children (AFDC), for example, existing federal legislation has long granted states the freedom to set certain aspects of benefit levels, implying that, were there a race to the bottom, it would have already occurred. Volden reports that the evidence suggests that states rarely cut welfare spending in areas where they have the freedom to set benefit levels. Historically, the biggest source of benefit reduction has not been state competition but national inflation.

Richard Revesz shows that, in the area of environmental policy, the arguments for a race to the bottom are weak, except when the specific policy concerns interjurisdictional spillovers. Finding little evidence to

The central question is congressional restraint. But whether Congress can restrain itself is a difficult issue.

support a race to the bottom in environmental policy, Revesz goes on to show that federal attempts to alleviate the negative effects of state competition have generally made things worse. Finally, Roberta Romano, in her study of state chartering of corporations, shows that state competition has had generally beneficial effects on the structure of corporate law. That competition has permitted one key state, Delaware, to play a leading role in innovating the laws governing charters. The result has been a legal regime quite favorable to corporate governance and economic efficiency. Taken together, these papers undercut the idea that we ought to be automatically suspicious of programs in which states and localities play a more substantial role.

Two Questions

We believe it best to steer a middle course. As the nation experiments with federalism, it must, in our judgment, submit new policies to two rigorous questions.

First, the analysis must identify those problems best addressed at the state or local level and those best addressed at the national level. Sweeping generalizations--either that the states have a right to run public policy as they see fit or that, to the contrary, the states cannot be trusted with public policy--will prove of little use. Policies must instead be analyzed, painstakingly, issue by issue.

Second, the analysis must address the nature of states and localities as political units within the federal system. Although these political issues appear independent, they are not. If the states take on more responsibilities, they will become more vigorous and vital political units; they will therefore increasingly attract public attention and support, along with high-quality officials. In the early days of American federalism politicians commonly left national offices to serve in their states. If states once again become "where the action is," their quality as political systems will improve.

Ironically, for the states to play the enhanced role we envision for them successfully, they must also be limited in some ways. For example, some argue, persuasively, that for state competition to be beneficial, states must operate with hard budget constraints and be restrained (by the courts) from interfering with interstate commerce or shifting the costs of their policies to others. The success of American federalism, relative to federalism in other countries, is partly traceable to two features: that American states operate in the bond market's unforgiving, tight financial environment and that courts have prevented them from restraining interstate commerce. Thus, the new federalism, whether statutory or constitutional, retains a substantial role for national institutions.

Vox Populi

For states and localities to address a wider range of policies effectively, they must be allowed to experiment with various approaches and to attract financial and other resources to meet their new responsibilities. The central question of the new federalism, therefore, is congressional restraint. But whether Congress can refrain from interfering in state domains is a difficult political issue. The movement toward new federalist solutions requires sustained popular support, which means that the people must stop expecting federal action on every problem. For the new federalism to be viable, congressional majorities must find the idea of restraint politically attractive. In the long run, this depends on the new federalism attracting sustained popular support in elections at all levels of the federal system.

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