Better Federal Government Starts With States

Origninally published in Bloomberg News

January 16, 2012
Edward Glaeser (Glimp Professor of Economics, Harvard University)

The 2012 election will treat Americans to a fractious debate about the federal government’s role in strengthening the nation.
With any luck, we will quickly move past tired exchanges in which one side implausibly argues that lower federal taxes can solve everything and the other side unconvincingly asserts that Washington is the answer.
America needs candidates who will fight for better government, not just more or less of it. And better government requires rethinking the relationship between the federal government and the states.
Many central governments, from Paris to Tokyo, are colossi that dominate the public sector and the larger economy. In such places, a new national leader can directly determine the path of public services. But in the U.S., lower levels of government wield control of the schools that teach our children, the roads on which we travel and the regulations that can excessively limit entrepreneurship and housing supply.
If you believe that infrastructure, regulation and schools matter for economic success, then you should start thinking about the thorny ties between Washington and the states.
Separate States
The U.S. began, not as a unified nation, but as a motley collection of separate states. Those entities ceded authority to a central government that could coordinate foreign policy, eliminate internal trade barriers and sort out the American Revolution’s financial hangover. Nonetheless, we never really centralized. Even after the Civil War, at the start of the 20th century, cities and towns collectively spent more on water provision alone than the federal government spent on everything except for the post office and the Army.
Over the past 75 years, the federal government has grown large, due to recessions and the rise of social welfare programs, such as Social Security and Medicare (USBOMDCR). For good and ill, the federal government isn’t bound by the balanced-budget rules that tie states, and it plays the role of spender of last resort during a downturn.
Free migration across the country means imposing additional state taxes on companies and the wealthy to fund state-specific welfare programs. This leads to an influx of the poor and an exodus of the rich. Social safety nets can’t be just local.
If the candidates want to improve our national government, they should start discussing ways to streamline our approach to poverty, though those programs will have to stay national. We should rethink the bizarre way we approach poverty with four large, completely separate programs (Temporary Aid to Needy Families, Section 8 housing vouchers, food stamps and Medicaid) administered by three departments (Health and Human Services, Housing and Urban Development, and Agriculture).
If the Republican front-runner, former Massachusetts Governor Mitt Romney, were still a consultant at Bain & Co., he would surely want an efficiency-enhancing consolidation that leaves a single program to determine both aid eligibility and the right mix of cash and in-kind transfers. Such consolidation could also make it easier to evaluate program results.
Once we’ve resolved the question of redistribution, we also need to reconsider the policy areas that contribute to the nation’s long-run economic competitiveness. That road leads from Washington to state capitals. President Barack Obama’s election was accompanied by unrealistic expectations that could barely have been achieved with the despotic powers of an early Ottoman Sultan, never mind the limited authority of a U.S. president.
Local governments do much of what matters in our country and our frequently dysfunctional Congress often makes me wish that states did even more.
Education Help
Yet while long-term investments in America’s future are often made by states and localities, the federal government should help fund education and create incentives to improve local performance in transportation infrastructure.
Education has evolved from an overwhelmingly local affair to having more federal involvement. That’s a good thing. Schools can get “captured” by local interest groups, including teachers’ unions, and federal intervention can help put students first.
People leave their childhood homes, bringing their education with them across state lines, and that creates another rationale for federal funding. Good schools are the best way of turning poor children into prosperous adults, which means that the federal government’s social safety net mission also puts it into the classroom.
Perhaps most importantly, the federal government has a role because the strength of our nation ultimately depends on its human capital.
There is much to like about both No Child Left Behind and Race to the Top, but the 2012 candidates need to champion the next generation of education programs, which should combine generous federal funding with tough local accountability.
The federal government should continue to use its financial support as a lever to ensure that states don’t block the charter schools that create competition and have dramatic effects on test scores. Longer class hours seem to be the secret of the success of many of these schools, so the federal government could fund more after-school learning programs, as long as private suppliers could compete for funding that was then based on tangible test-score results.
Washington’s large role in transportation is less defensible. The best case for federal infrastructure spending is that consumers everywhere benefit from the ability of trucks to use a nationwide highway system. There is no reason those trucks can’t pay for their own roads.
Local Roads
It is particularly hard to defend the notion that federal tax dollars need to go for projects, such as local roads or transit systems, that serve overwhelmingly in-state constituencies.
The U.S. needs new infrastructure, but the federal government shouldn’t pay for it. Why should those who fly, who are typically prosperous, expect taxpayers to pay for the infrastructure that they use? In an era of limited energy, why should the government ever subsidize anyone to drive or travel?
The federal government should be the steward, not the patron, of transportation infrastructure. The financial engagement from Washington should be just large enough to prod states into revitalizing their transportation networks, but the funding for those programs should come directly from their users.
The states can provide better schooling and infrastructure, but those efforts can be strengthened by oversight from the federal government. Too many states have a tendency to rack up huge pension liabilities that are masked by unrealistic expectations about the future returns of those funds’ investments.
The Nunes-Issa-Ryan Public Employee Pension Transparency Act offered a clever solution to this problem by requiring local governments to properly report their pension obligations or risk losing federal tax deductibility for their debt. A similar approach can also be used to push states to limit the regulations that prevent new business formation and new housing construction.
I, too, dream of a renewed America, but that renewal won’t come from Washington. It depends, above all, on the innovation and entrepreneurship of ordinary Americans. The most important public functions, outside of social-welfare programs and the military, depend not on the federal government but on lower levels of government.
If the presidential candidates want to find America’s missing mojo, they need to think harder about how a limited pool of federal resources can get better behavior out of the states.