A lot has been said about the growing dependence of American citizens on the federal government, including in this great CF&P Economics 101 video narrated by Emily O’Neill. But there’s another kind of growing dependence about which we need to be concerned, and that’s the degree to which states are being made dependent on the federal government.
This is an issue in which I take a particular interest, considering how important our federalist and competitive system is in protecting freedom and promoting prosperity. At the time the stimulus was passed, I noted that “funneling federal dollars into the states … leads to significant waste.” I’ve also defended federalism against attack from central planners, and explained how federalism helps preserve tax competition and the ability to flee confiscatory tax rates.
Most recently, I took a rather pessimistic view of the impact of Supreme Court’s Obamacare ruling on federalism, despite it overruling the federal government’s attempted Medicaid bullying. Now Veronique de Rugy, writing in the Washington Examiner, makes a powerful case of her own:
In light of the Supreme Court’s ruling upholding the Affordable Care Act, many claim that the choice of states’ ability to opt out of Medicaid expansion requirements without losing all Medicaid funding was a big victory for federalism. That may be true, but federalism is still seriously in jeopardy.
…[T]the federal government is pouring billions of dollars each year into the states’ coffers.
…This money isn’t free. It comes with strings attached — mandates and rules dictating how the states should spend their money, what services they should provide and how they should provide it.
…These requirements weaken states’ independence, especially since the federal government can bully states into doing what it wants by threatening them with “cross-over sanctions.” The classic example was the threat to withhold highway grants for states that failed to adopt a national drinking age above 21, or adopt federal clean air requirements.
And if the funding is temporary but the requirement permanent, this “aid” becomes even more expensive. Using data from 50 states over a 13-year period, a 2010 paper by economists Russell Sobel and George Crowley shows that temporary grants from the federal government to state and local governments cause the latter to increase their own future taxes by between 33 and 42 cents for every dollar in federal grants received.
Limiting the combined state and federal size of government will require returning to a strong federalist model, where states are again autonomous bodies responsible for the bulk of governance, and more importantly thus constrained by the forces of tax competition. The current trend toward greater and greater state reliance on the federal gravy train to administer federally mandated programs is politically, fiscally and economically untenable.
