Federalism’s Hope: Analysis and Speculation

Yesterday’s post described a sharp sectional divide in contemporary American federalism: pro-competitive states versus pro-cartel states. The divide holds across Obamacare/Medicaid, labor, environmental, tax, and cultural issues. Here is the basic map again (the competitive coalition appears in red, the cartel cabal in blue):

Today, as promised, some thoughts on what the sectional divide might mean for American politics and federalism.

Sectionalism: Politics and History

Justice Scalia: Mr. Clement, I didn’t take the time to figure this out, but maybe you did. Is there any chance that all 26 States opposing it have Republican governors, and all of the States supporting it have Democratic governors? Is that possible?

Mr. Clement: There’s a correlation, Justice Scalia.

Obamacare Transcript, Day 3

Isn’t the sectional pattern simply a reflection of red-and-blue party politics? Undoubtedly, partisan politics plays a role (for example, in some states’ litigation positions). However, California and Massachusetts have been aggressively “pro-enviro” and pro-Medicaid even and especially under Republican governors. Conversely, Virginia has two Democratic Senators, and Florida is usually a toss-up state.  And the states’ congressional delegations are often divided (see Table below—more on the implications later). In short, Paul Clement was righter than he knew, in a broader sense than he intended: partisan alignments correlate strongly with states’ pro- or anti-competitive orientation, but they reflect rather than produce a divide that runs deeper than party politics.

The map above is the oldest map in American politics. Circa 1900, it would show sharp cleavages between the (then-segregationist) South, the (then-industrial) Northeast and Great Lakes states, and the (then-agrarian-populist) West. The contemporary alignments look strikingly similar. The South hangs together, anchored by Texas and Virginia. (Non-red Southern states trend strongly red).  The coalition has picked up reliable allies among Mountain and Plains states—not a surprising trend, in a broad historical perspective. (The question why the West did not form a firm coalition with the South against the then-dominant industrial Northeast in the decades around 1900 has confounded sociologists and economists from Barrington Moore to Ronald L. Rogowski. Most likely, folks out West loathed Jim Crow; that issue, obviously, is now off the table.) The Northeast has picked up the West Coast, foremost California. However, with the exception of hapless, hopeless Illinois, it is gradually losing Great Lakes states that by all rights should be blue: Ohio, Pennsylvania, Indiana, Michigan, Wisconsin. Many of them are defecting; that’s what the public union melee in those places is about.

The crucial change has to do with substance, not alignments: the South and its allies, back then the periphery of America’s political economy, have become its dynamic center. Meanwhile, the once-vibrant Northeast-cum-California is bleeding jobs, population (especially millionaires), industries, and House seats and electoral votes (see Table above). The dynamic and the state alignment aren’t going to change any time soon and with this or that election. Sectionalism is the most stubborn force in American politics even as the underlying issues change. Back then, the dividing issue was race. Today’s divide looks like Europe versus America, but the geographic line runs where it has always run. I live on the Potomac, just south of Old Town Alexandria, VA. From my balcony, I can see Europe.


What does any of this have to do with federalism? Everything. Yesterday’s snazzy maps and today’s observations suggest a fundamental re-negotiation of America’s federalism bargain.

To see the point, note that the (blue) cartel states are the glory of Justice Brandeis’s federalism—“courageous little states” that conduct social “experiments.” Those usually prove expensive. To keep the laboratory going, all other states must be induced to run the same experiment. That is the point of federal regulation. The Fair Labor Standards Act protected high-labor-cost producers in the industrial Northeast against low-cost (often black) labor in the South. The Clean Air Act covered the country in a regulatory fog to clean up the air in Los Angeles. And so on. It is also the point of federal transfer programs. Once a courageous state manages to sell its domestic social program as a splendid candidate for federal co-funding, the perceived price of the program drops in all states, and even reluctant states will join the pro-cartel cabal for fear of “losing” federal dollars (some of them paid by the states’ own citizens). This pattern has defined the trajectory of American federalism for the better part of eight decades.

Now, the game is up, for a slew of reasons. In no particular order:

  • Nobody seriously believes that the lead states’ “experiments” are a viable social model. Their attempts to enlist the federal government in defense of those experiments look less and less like social progress, and more and more like self-serving maneuvers to inflict comparable damage on states that would rather run a more dynamic economy.
  • Competitive states have woken up to the recognition that our fine “cooperative federalism” experiments, regulatory and fiscal, are actually acts of aggression on their social model. One measure of this trend is the phenomenon of opposing state coalitions in litigation over Obamacare and greenhouse gases. The pattern has long been very common in cases arising under the Supreme Court’s “mystery of life” jurisdiction (abortion, the death penalty, gay rights), the purpose of which is to drag the recalcitrant South into the advanced states’ postmodern universe. It is a new and noteworthy development in regulatory arenas, where it is easier to compromise differences and to bribe reluctant states into cartels.
  • The money has run out, and cartel federalism’s fiscal illusions have reached the limits of their plausibility. The most telling signal is Obamacare’s 100 percent Medicaid reimbursement formula for the newly covered: at that level, transfer programs cease to serve their intended function of stimulating state-level taxation and spending. If the plaintiff-states nonetheless challenged the expansion, that is because Medicaid is ruinous even at existing levels. And note the bizarre distributional logic: in an awkward moment in the Supreme Court argument, the plaintiff-states’ counsel was compelled to admit that his clients are actually net beneficiaries of the intergovernmental transfer system (Tr. at 35). The net payers are the states that defend Medicaid’s expansion. This isn’t as weird as it seems: if pro-spending states want to run a federal fiscal cartel, they will have to bribe recalcitrant states into it. Turns out, the competitive states have come to realize that the bribe isn’t worth having—all the less so because the cartel states are deadbeats and the feds are broke.

 Federalism’s Balance

Does all this mean that cartel federalism is on its way out—that it’s morning again in America for competitive federalism? Hardly, or at least not necessarily. Cartel federalism’s pathologies are matched by its enormous resilience.

All states, including the competitive coalition, operate under deeply entrenched regulatory and transfer systems that are geared toward enforcing and reinforcing the preferences of pro-regulatory, pro-spending states. Even in pro-competitive states, political elites and coalitions are powerful opponents. It’s easier to beat the teachers’ unions in Tallahassee than in Sacramento, but it’s hardly a cakewalk. Cartel federalism’s fiscal illusions are equally difficult to overcome. Even in places like Texas, the only way to counter the big lie that is Medicaid may be to tell half-truths (“we’re getting shafted; it’s expensive because we’re being commandeered.”) And in Congress, partisan dynamics will often block competitive states’ desire to act and vote as a united front. Coalitions that routinely lose at the state level may yet be able to elect a few representatives (see Table above)—traitors to their state in a way, but faithful to the district that elected them. Against the forces of ossification and dysfunction, however, stand equally potent dynamics.

Foremost, perhaps, the competitive states are dynamic and growing; the cartel states aren’t. For that reason (among others), it is easier for the competitive coalition to pick up allies than for the cartel cabal to hold them. Indiana isn’t trying to become Illinois (nobody is); it is well on its way to joining the competitive coalition.

Moreover, in federalism’s political economy (as in every economy), the stuff that matters usually happens on the margin. Some existing cartel arrangements will have to be demolished, starting with Medicaid. (The Obamacare plaintiff-states know this; their opposition to Medicaid’s further expansion is only a first, consciousness-raising step.) In many venues, however, yesterday’s environmental or labor regulations are sunk costs; what matters is the next game. The cartel cabal’s weakness is that it has to curb competition on every margin; when it can’t (as with taxation), it loses. The task, therefore, is to keep the game competitive in newly emerging arenas. The discovery of huge natural gas reserves in Ohio, Pennsylvania, and elsewhere is a game changer—unless the EPA, with the support of New York and California, shuts it down. That, along with global warming inanities, is the game that matters. The next big labor issue may well be a federal bailout of state and local pension and health funds; here, the competitive coalition may already be sufficiently large and cohesive to let the cartel states sink under their self-imposed obligations.  Even federal tax reform may lend itself to pro-competitive strategies. By all rights, the competitive states should support the elimination of deductions for home mortgages and state and local taxes—de facto subsidies for high-tax cartel states.

One can see the contours of the already-brewing sectional brawls; one can’t predict their outcome. However, one can safely say that the competitive states’ prospect would be greatly enhanced if they could begin to think of themselves as a coalition, not as one of fifty states with a symmetrical interest to control federal overreach. The federal government isn’t the competitive coalition’s enemy: it can be mobilized for competitive as well as cartel purposes, at least in principle. The enemy is the cartel cabal.

It’s easy to think of commensurate strategies: Make “competition” your motto and agenda, and forget “devolution” and “states’ rights.” Ignore the intergovernmental lobbying apparatus of NAG, NAIC, NAAG, etc. etc. (its very purpose is cartelization); build up rival, pro-competitive institutions, or institutionalize the ad hoc coalitions that have formed around Obamacare and global warming. Mobilize those institutions on a regular basis. Find allies among the few remaining industries that aren’t yet wards of the federal government. And find some credible policy entrepreneurs and spokesmen who can explain this to the public.

Not a sermon—just a thought.