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Chances for New Deal repeal debated at federalism conference

STANFORD -- Students of history, take heed: It's time to dust off those old arguments from the 1790s and put away those books from the New Deal.

This could be the year that the forces of Thomas Jefferson win back the country from those of Alexander Hamilton. It could be the year that Congress or the Supreme Court reverses the 60-year direction the country has taken toward centralizing government, said some political activists and scholars who took part in a conference on American federalism at the Hoover Institution May 23 and 24.

Other participants among the 130 who attended weren't so sure, contending that neither members of Congress nor Supreme Court justices voluntarily will cut back their own powers. Four Republican governors who came to the final session of the conference expressed some doubt that reforms being proposed in Washington are sufficient to create the kind of sea change they would like to see -- a return of power to state and local government. Govs. Pete Wilson of California, John Engler of Michigan, Mike Leavitt of Utah and Marc Racicot of Montana said they are thinking ahead to what they and others might do to bring about what was dubbed "the devolution revolution."

Organized six months ago as part of Hoover's ongoing program on American institutions and the economy, the conference on revitalizing federalism turned out be more timely than even its organizers -- David Brady and Henry Rowen, Hoover fellows and Stanford professors -- had imagined. The new Republican-controlled Congress is seriously considering turning major federal "entitlement" programs over to the states in no-strings-attached "block" grants. Other ideas, such as turning federal lands over to the states and disbanding the U.S. Department of Education, are in the hopper. Congress already has passed a law promising it won't pass any more unfunded mandates down to state and local government, although conference speakers said that the law is too weak to mean much, just as similar laws have not worked in several states to keep state legislatures from pushing costly responsibilities onto local governments.

The Supreme Court also suddenly has taken an interest in states' rights. In April, a majority of the justices did something the court had not done in nearly half a century: slap Congress' wrists for abusing its power under the Constitution to regulate "commerce." In United States v. Lopez, the court invalidated a federal law prohibiting the possession of a gun within 1,000 feet of a school, a law most states already had on their books.

Then, the day before the Hoover conference, the court narrowly turned down an attempt by one state's voters to limit the terms of their Congress members. Court watchers at the conference agreed that the two 5-4 decisions don't provide a clear picture of future court directions, but they do suggest that a major rethinking of federal powers is under way, with Justice Anthony Kennedy (Stanford Class of 1958) the most likely swing vote.

Virtually all of the 21 presenters at the conference advocated returning more power to state and local governments. They included academics in political science, economics and law, and former appointees of the Eisenhower, Nixon and Reagan administrations. Their reasons varied, but the major arguments included better economic growth and fiscal accountability to taxpayers; less costly government overall; and smaller government deficits. In more detail, the participants said that more power sharing among levels of government would bring about:

  • Economic growth because states have strong incentives to create stronger economies if they are in competition with each other on taxes and public services. Individuals and businesses in one state or town can "vote with their feet" by moving to another if they don't like the public service--tax combination where they are, and this should lead to productivity gains that will help the United States compete in the international economy.
  • Fiscal accountability because voters would have a better chance of figuring out which elected officials were doing a good job. Now, the federal government collects a large portion of the tax money and redistributes it to local and state governments. Voters can't track who is responsible for failures or successes, and officials at every level can blame any problems on someone else, speakers said.
  • Efficiency because many costly bureaucrats -- called middlemen in private sector parlance -- would be eliminated. The goal should be to place all governmental functions and tax collections at the level closest to the people at which it can be handled effectively, Rowen said. Interstate commerce, international trade and defense need to be centralized at the federal level, but education and police protection are more efficient if decisions are made and tax dollars are raised at the local level. Questionable federal programs, Rowen said, include elementary and secondary education programs, land use regulation, local transportation, public housing, crime control, local environmental impact control and medical care.
  • A reduction in "perverse" incentives created by mingling government funds. To get matching grants, lower levels of government will spend their money on programs they wouldn't otherwise fund, and the federal government often winds up with more influence over policy than its share of the financing would suggest. One reason for the current proposal to disband the U.S. Department of Education is that the federal government contributes only about 6 percent of the funds but has greater influence over schools than local taxpayers and parents, said Stanford education Professor Michael Kirst. Local community control of schools also has been undermined by state financing in some states, he said.
  • Better control of government deficits. Because the federal government prints its own money and sets its own terms for repaying its debt, it is the only level of government without a hard budget constraint. State and local governments have more incentive to say no to more spending, since lenders won't continue to buy their bonds if they overspend, said Stanford economist Ronald McKinnon. Lobbies of all sorts turn to the federal government, several speakers said, because they see it as possessing the pot of gold at the end of the rainbow.
  • Experimentation. In areas in which government is widely regarded to have failed, such as welfare or federal land management, states and local communities can serve as laboratories to find better ideas. Learning from experience doesn't happen if the federal government sets uniform rules, many speakers said.

Economist Terry Anderson of Montana's Political Economy Research Center reported, for example, that the state of Montana makes $2 for every dollar it spends managing its timberlands, while the federal government takes in 50 cents for every dollar it spends managing federal timberlands in the same state. And the state did better than the federal government and private owners on an environmental audit. The reason the state is a better manager, Anderson claimed, is that its timberland managers are required by law to use timber revenues to support schools. The federal land managers, on the other hand, simply ask for larger appropriations if they can't turn a profit.

Several "downsides" to revitalizing state and local power were mentioned at the conference, although not explored in detail:

  • Some national problems, such as aspects of environmental pollution, may be pushed down to levels where they cannot be solved.
  • Interstate competition might give states incentives to exclude people who are a net burden to the taxpayers. Sen. Daniel Moynihan, D-N.Y., has suggested that competition among states will create a "race to the bottom" in providing a safety net for the poor. "The desirable aspects of interstate competition need to be tempered by recognition of this incentive," Rowen said.
  • Since the poorest regions and inner cities do not have an equal capacity to raise taxes, shifting responsibility might not be equitable. Several conference participants indicated they favor the federal government retaining some form of revenue equalization subsidy to the poorest regions or inner cities, as is done in Canada and the European Union. McKinnon strongly disagreed, however, saying that northern Italy's long-term subsidy to southern Italy is a major reason southern Italy has remained poor.
  • The call to states' rights is associated historically with trampling on the rights of some businesses and individuals. Experience with the segregation policies of the South, in particular, leads many citizens to distrust state governments' ability to guarantee individual and civil rights.

Most Americans may be sick of Congress telling everybody what to do, said James Huffman of the Northwestern School of Law at Lewis and Clark College, but they care more about individual rights than they do about states' rights. The prospect of states running roughshod over these rights could become a concern of both the left and the right, several speakers suggested. When the Council of State Governments tried earlier this year to get state legislatures to endorse a meeting of state representatives to discuss federalism ideas, right-wing groups campaigned to stop it, said Robert Silvanik of that organization. They apparently saw it as a precursor to a constitutional convention that might eliminate the Second Amendment's guarantee of the right to bear arms, said Utah's Gov. Leavitt.

Federalism's historical twists and turns

Fights between federalists and nationalists date back to the founding of the United States and resulted in the U.S. Constitution and the Bill of Rights, which situates individuals as simultaneous citizens of both state and nation. In a series of essays known as The Federalist Papers, Alexander Hamilton pressed for a strong central government. Thomas Jefferson was a chief advocate for the states. Among the powers the Constitution allocated to Congress was the power to regulate "commerce among the several states." Protecting the free flow of goods across state lines became the main objective of constitutional law decisions on behalf of the federal government until after the Civil War, said Daniel Rodriguez, a law professor at Berkeley's Boalt School of Law.

Federalism prevented economic interests in the established states from blocking the economic growth of the frontier, said Barry Weingast, a Hoover fellow and Stanford political scientist. Cattlemen in New York, for example, tried but did not succeed in getting the federal government to prevent cheaper beef from being imported into their state from the West. The federal government, meanwhile, financed expansion of railroads -- to the dismay of commercial agents along established water transportation routes.

"The U.S. economy became one of the largest unregulated economies of its time, largely because of limits on the states and the federal government. It went from being poor to the richest," Weingast said. Tension between the North and South resulted in a bias toward weak federal government.

Federal power was temporarily enhanced to protect individual liberties and civil rights for the first time after the Civil War to aid Reconstruction, Rodriguez said, but both politicians and the courts withdrew their support from that effort quickly. The expansion of federal power into its second strand -- the protection of individuals' rights from other governments - awaited the New Deal.

Constraints on the federal government were dramatically lifted in the 1930s because 25 percent of Americans were unemployed, Weingast said. In a recent paper he wrote on federalism, Weingast puts less credence than many legal scholars do in the importance of the Constitution as a rulebook. The rulebook can be changed any time those with enough power choose to change it, he argues. What keeps government from usurping more power on behalf of one group or another is the self- enforcing nature of the rulebook.

The Warren Court gradually expanded federal power in the 1960s by upholding a number of national civil rights laws, and ultimately created constitutional law to support President Kennedy's New Frontier and President Johnson's Great Society, Rodriguez said. By the end of the '60s, he said, the constitutional law of federalism could be summarized "with only a little hyperbole" as "the federal government can make regulatory choices more or less as it wishes, to the extent that it does so in the name of protecting interstate commerce or safeguarding civil rights and liberties. At the same time, the states are to be vigilantly watched by the courts to ensure that they do not exercise their powers to regulate in ways that discriminate against commerce and against individuals."

State powers also were usurped through the power of Washington's purse strings, according to several panelists. Most government goods and services always have been delivered at the state or local level, but the trend this century has been to steadily move the financing to tax revenues raised at higher levels than it is spent, said Princeton political scientist Thomas Romer. From the 1920s on, "almost all federal financial activity began to acquire a component to equalize funds" between states, he said, usually on a per capita basis so that the amount a state received for highways or education or welfare became inversely related to the state's income. The effect of equalization, Romer said, has been more intergovernmental aid and more power both for states at the expense of localities and for the federal government at the expense of the states.

In 1902, local governments got just 6.5 percent of their revenue from the states, he said. By 1982, 44 percent of it came from the federal or state government. Both Democratic and Republican presidents of the past 30 years accelerated the trend, he said, in a political response to demands for more services in areas such as education, transportation, criminal justice and environmental protection. Reagan slowed the growth in federal funding but not in the federal mandates that force states and local governments to provide new services.

The first substantial unfunded mandate on state and local governments was in 1931, followed by one in the 1940s and none in the 1950s, said Edwin Meese, a Hoover visiting fellow and former attorney general in Ronald Reagan's administration. In the 1980s, he said, 27 unfunded mandates passed Congress and 43 already have been passed in the 1990s.

The New Deal shift toward centralized government showed up in changing debt loads for government, said Stanford's McKinnon. In 1929, the federal government debt was 16 percent of the gross national product and the combined debt of state and local government was also 16 percent. In 1991, the state and local debt is still 16 percent but the federal debt has risen to 81 percent of gross national product.

The reason for this stark rise, McKinnon contended, is that the federal government can't get in trouble with or be restrained by private borrowers in the same way New York City did in the 1970s or Orange County has today. "This is an important reason funding has shifted up to the federal government."

The temptation for European governments, which own their own central banks, he said, is to respond to political pressure by propping up their failing industries in a way American states can't because they don't control "the money machine." In the absence of a hard constraint on the U.S. money machine, McKinnon said, the second best solution is a balanced budget amendment and shifting down of finance to government service as much as possible.

Recent research suggests that states and localities are more sensitive than previously believed to the economic conditions of both their geographic and socioeconomic neighbors, said Princeton's Romer. Voters also are holding governors more politically accountable for economic conditions. Because of the increasing mobility of both capital and labor, he said, there are potential economic productivity gains to be reaped from more decentralization of public finance.

'Fixing' the system won't be easy

A second major focus of the conference was delineating those political obstacles to revitalizing federalism -- especially "self- enforcing federalism," a term used by Weingast to describe a stable system in which checks and balances work over time so that no one level of government can squeeze out the other. Several speakers outlined the current dilemma as one of human nature: People seek more control and influence, not less, and therefore it's unlikely that even the newly elected Newt Gingrich Republicans will voluntarily give up the power that has been concentrating in their offices ever since the New Deal.

Political scientist Brady brought the political problem to the practical level with an example. The state of New Hampshire may like to take sole control of its highway budget, but it currently gets 50 percent more in federal highway funds than it contributes. A transfer of authority for highways would mean a 21-cent- per-gallon increase in the state's gasoline tax, he said. Any New Hampshire member of Congress who votes for the change, he suggested, may not be reelected.

To get around this problem, House Republicans are proposing that the federal government transfer cash on a past allocation basis, rather than transferring taxing authority and programs to the states. They would bundle together a number of federal entitlement programs currently administered by the states, giving the states "block" grants for five years in proportion to the revenues the states have received over the last five years, without requirements that states maintain their previous fiscal contribution.

The problem with the proposal is that it undermines a major advantage of fiscal federalism -- the idea that "the people most affected by a government activity should pay and their elected representatives should decide how their funds should be spent," said Rowen, who has served in the federal government a number of times, most recently as an assistant secretary of defense in the Bush administration.

President Nixon's general revenue sharing plan for capital and operating costs of local governments was a bad idea, Rowen said, because the spending decisions were made by local officials who didn't have to raise the money. The current block grant proposal is better in that it restricts the use of funds to certain areas of expense. "However, the fact that money is fungible makes this restriction less binding on the recipients than it might appear," Rowen said.

Other speakers indicated, however, that block grants are a temporary ploy, a practical accommodation to the political problem Brady outlined with the New Hampshire example. In future Congresses, Rowen predicted, one of the most vulnerable budget categories to cuts will be "all that money going directly from the U.S. Treasury to the states."

"Yes, it's going to be vulnerable in the budget. On the other hand, I think it should be vulnerable," said Robert Carleson, who is lobbying for the block grant legislation in Washington. He is a fellow of Washington-based Free Congress Foundation for Education and Research and the drafter of Ronald Reagan's welfare reform plan when he was governor of California. Nixon's general revenue sharing disappeared, he noted, because Congress saw no advantage to itself in continuing it. This time, however, specified responsibilities are being transferred as well as cash, he said.

Politically, it will be difficult to hold conservative support together, Carleson said. Like the "Republican Hamiltonian presidents after the Civil War," he said, many of today's conservatives distrust the states and "want to micro-manage" block grants. "It will do more damage than good to let the feds write no-nos" into the block grant legislation, he said.

Others were impressed, however, with what they saw as an amazing change in political direction since the last Congress.

"We are talking about cutting the safety net to shreds, and nobody is even objecting," said Richard Nathan, director of the Nelson A. Rockefeller Institute of Government at the State University of New York in Albany and assistant budget director for human resources in the Nixon administration.

"I believe the new block grants are a bigger deal for U.S. domestic policy than Lyndon Johnson's Great Society, Richard Nixon's New Federalism and Ronald Reagan's 1981 budget and grant blocking changes," Nathan said, because they are directed at entitlement-type federal grants-in-aid (such as Aid to Families with Dependent Children and Medicaid) that are the large growth areas of federal domestic spending.

Putting states in charge of medical services for the poor and near-poor, he said, may not pass this term, but it is as big a reform as Clinton's failed health care plan, which took an opposite approach by guaranteeing health care to everyone. "This is an amazing change in direction," he said. "The president may not even get a clean shot at a veto" if House Republicans can make block grants part of the budget reconciliation act.

Democrats, he said, are talking about block grants as stimulating a race among the states to the bottom, which could cause a political backlash. "I'm not sure what the outcome will be," he said, but there is another possibility: "In conservative periods, the states have been the engines of innovation. When we were 'keeping cool with Coolidge,' it was state government policy initiatives that planted the seeds of Roosevelt's New Deal."

The liberal "pacesetter states" of Massachusetts, New York, Michigan, Wisconsin, Minnesota and California historically have forced others to catch up in public services ranging from kindergarten to environmental clean-up, said John Shannon, former executive director of the president's Advisory Commission on Intergovernmental Relations and a member of the White House staff to Eisenhower. "But if any state moves too far out ahead of its neighbors, it will find its economic development future torpedoed. New York came to that conclusion in the mid-'80s." At the same time, he said, southern states have learned that they must raise taxes for public services like education in order to attract industry. "This is the powerful stabilizing effect of our federal system."

Others questioned the depth of political support for a real change away from centralized government. The West's "sagebrush rebels" have been activists against federal power, said economist Anderson, but in meetings with them, he said he discovered "they wanted control but didn't want any part of the purse strings." Congress is now proposing turning federal lands over to the states, but it remains to be seen if western states will accept the deal, he said.

Princeton's Romer agreed that "one of the motivating factors in finance centralization was for people to get around local government's borrowing constraints." In a democracy, he said, there is "no easy way" to constrain the willingness of current voters to borrow at the expense of future taxpayers.

The current arrangement is actually in the interest of local and state officials, Brady said, in that "they can pass out the benefits and blame problems on Washington. That's why even this Congress is talking about block grants" instead of full transfer of responsibility.

Stanford's Kirst laid out two possible scenarios for what might happen to schools if the federal government combines existing categorical programs into block grants. In one scenario, he said, the powerful interest groups that have arisen to support federal categorical programs will simply transfer their lobbying activity to the states. "The special education lobby here is as dug in as in Washington," he said of California. "Also, the state agencies have internalized support" for federal categorical programs.

On the other hand, a political analysis would suggest that funds from existing federal programs that aid poor, disadvantaged school districts would flow to the suburbs, Kirst said, because their residents vote in higher numbers and fund political campaigns. "In California, 50 percent of the children are Hispanic and Asian but [these ethnic groups] are only 11 percent of the electorate," he said. Federal deregulation may be necessary to improve education, Kirst said, but it is by no means sufficient to guarantee better schools.

Alternative strategies

Alternative strategies for states to obtain more power from the federal government are limited, conference participants agreed. Among those suggested were campaigning for amendments to the Constitution such as giving three-fourths of state legislatures the right to veto a federal law; requiring a supermajority of Supreme Court justices to rule in cases involving states' rights; requiring term limits for Congress members or repealing the 17th Amendment, which calls for the direct election of senators. (Before the amendment was adopted in 1913, senators were chosen by and accountable to their state legislatures.) Calling a constitutional convention to clarify the separation of powers would be difficult, many participants said, because the procedure has not been used in 210 years.

Significant changes will not occur quickly, predicted Utah's Gov. Leavitt, but he added, "The people want this fixed, and we have to be thinking in 25- to 50-year terms, not simply from one congressional election to the next."



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