Is the US Ripe for Devolution?
Longtime followers of my Twitter career and my blog are undoubtedly familiar with my calls for greater devolution in the US,. See here, e.g., https://rajakorman.tumblr.com/post/65152779520/some-thoughts-on-reforming-the-american-transfer. However, events in recent months and heading into the November elections lead me to think that what I once framed as pique now deserves to be considered seriously as necessity.
The Coronavirus epidemic has brought to the fore a set of long-simmering discontents in the US regarding the political and economic relationships between the Federal government and the states, and between the states themselves. The proximate cause is the sharp drop in state- and local tax (SALT) revenues and the consequent need for fiscal and monetary backstops for the US’s subsovereign governments from the US Treasury and the Federal Reserve. But the resulting controversy over “bailouts” has resulted in a much sharper set of exchanges over how to characterize net contributor and net beneficiary status inside the American fiscal/monetary union.
These developments are occurring against a deeper polarization of American politics often portrayed as a continuing version of the US’s historic “North-South” divide, but one that is in fact more reflective of widening differences in US political affiliation based on population density, a phenomenon visible across the country. Meanwhile, the US is also wrestling with the prospect of more acute crises of representation and legitimation as the demographic and economic weights of America’s states become less congruent with electoral outcomes at both the national and subnational levels. The demographic issues are obvious in the divergence between the popular vote and the electoral college vote (something that has recently penalized Democrats, as in 2016), but the divergence between the economic and political weight of US regions is even more striking. In the 2016 election, counties that voted for Democrats generated 64% of US GDP, but the party still found itself shut out of 2 of the 3 branches of government.
While increasingly heated debate over the direction of transfers in the US is becoming more reminiscent of events in the Eurozone, it is occurring in a country where dominant party affiliations in the country’s economic core lead to that party’s supporters viewing themselves as being pushed into the political periphery. In this regard, US politics have begun to resemble politics in Spain (Catalonia), Italy in the early 1990s (Lega Nord), and — at the risk of exaggerating the effects — post-Tito Yugoslavia (Croatia and Slovenia vs. Serbia). Compounding matters, unlike the above instances in Europe, there is a bigger discrepancy between ideology and practice in the stance of a Republican party that pays allegiance (or at least lip-service) to libertarian, small-state ideals while its most loyal rank and file supporters are beneficiaries of state-led economic interventions.
This, in turn, increases the risk (and indeed the incidence) of two negative politico-economic phenomena in the US — electoral politics as competitive clientelism; and highly selective invocations of Ricardian equivalence in the US right’s preferred fiscal/monetary posture depending on whether it is in power or in opposition. Finally, the US is a narrowly-divided country in political terms — national elections are typically settled by narrow majorities — but increasing political and regional/geographic polarization and an increasing conviction among party loyalists that “elections (should) have consequences” increase the risk of actual or perceived overreach by the winners and deepening disaffection among the losers, exacerbating crises of legitimacy.
At its heart, the above is also the natural result of the accretions over two centuries of the American constitutional order, which superimposes a powerful national Federal executive (made even powerful in the last centuries through the creation of the Federal Reserve and a national income tax in 1913) on an 18th century confederal political structure where the political (and consequently economic) rents from “statehood” run extraordinarily high. Meanwhile, the power of the states has shrunk in relation to that of the Federal government, with the latest blow coming in the repeal of the ability to deduct state and local taxes from Federal taxation. This is a step that essentially reduces the “political” fiscal capacity of subsovereign governments in large and economically diversified states by turning their recourse to taxation to fund locally-desired (and affordable) public goods into a more fraught political exercise. These are not new problems but have become more acute in an atmosphere of increased polarization and the reshuffling among the roles of economic/political cores and peripheries outlined above.
But while all might seem lost, there is also hope in the above litany. The US is indeed a narrowly-divided country (albeit an increasingly polarized one) at the national political level, but this narrow balance is now built around persistent megaregional supermajorities. The term megaregion is used to represent multiple contiguous states with a typically narrower spread of political opinions across a substantial majority of the population (or the width the Overton Window). This is not to deny that urban vs. rural or high vs. low-density political divides remain very fraught even within states, but it is still the case that political transitions from Democrats to Republicans in California or New Jersey (and vice versa) are less fraught than those at the national level.
The megaregions are also larger than single states and consequently have a greater fiscal capacity than single states. It is important to recognize that limitations of fiscal capacity are typically not just a function of relative poverty but also of size because larger states are likely to benefit from greater economic diversification, greater resilience over an economic cycle, and economies of scale in the delivery of services. This suggests advantages from a combination of GREATER DEVOLUTION TO THE STATES and INCREASED COOPERATION AMONG LIKE-MINDED STATES.
Increased devolution, whether through restoration and expansion of the SALT deduction or through substantial reductions in the Federal income tax (something the GOP has historically claimed to support) is an opportunity to reconnect America’s legacy confederalist political structure with a fiscal confederalism at the multi-state megaregional level. The goals is to give the US greater political resilience through a combination of devolution from above and increased cooperation and consolidation from below. The first step to doing so could be a restoration of the SALT deduction. However, this should be configured to limit purely local deductions very stringently by recognizing the economically unified Metropolitan Statistical Area as the effective politico-fiscal unit for purposes of debt issuance, service provision, local taxation and Federal tax deduction. This would help limit the negative socio-economic consequences of high income/high property tax/high service gated-community ecosystems, perhaps the strongest (and in my view, most valid) criticism of the SALT deduction.
At the same time, there should be much greater encouragement for like-minded state governments to engage in cooperative efforts for both revenue generation and tax-funded provision of public goods. Some of this will happen anyway — as the fiscal capacity of the Federal Government falls, small states will see their politico-fiscal rents fall with it. Conversely, the incentives for small states to cooperate with larger, more diversified states that share a similar broad political orientation will rise. In extremis, we might even see willing mergers among US states. I have in the past suggested that the apportionment by electoral votes of the Federal Government’s debt stock (now rendered less viable by a substantial part of its revenue base being subject to the process of fiscal devolution) would naturally bring about such a result, but that is a bridge that need not be crossed quite yet. For the moment, however, I would just suggest that the steps outlined above could help substantially the rising temperature around many core political, institutional and constitutional issues in the US today.
