Fifty ways to kill recovery

George Washington presides over the signing of the US constitution

An interesting article by James Surowiecki, author of “The Wisdom of Crowds”, in the New Yorker asks whether American federalism is hampering the ability of the United States to respond to the financial crisis and the recession that has followed. (Read the article here.)

The problem is that, while the federal government can take counter-cyclical measures by borrowing money to use as a fiscal stimulus, the state governments cannot. They are constitutionally bound to balance their budgets, which means that their spending has to fall in line with the decline in their tax revenues. Fortunately, the counter-cyclical policies of the federal government are more powerful than the pro-cyclical policies of the states, but nevertheless the overall effect of federal policy is smaller than it might otherwise have been.

Furthermore, even those aspects of federal expenditure, such as highways, that are routed through the state administrations are considered to be less effectively managed than those that are handled directly.

These two problems are blamed, in the article, on federalism: “It would be helpful to have a genuinely national government”, it concludes.

But those two notions are not in conflict. It is perfectly possible to have an effective federal level of government alongside a set of powerful state governments, as long as the powers are allocated properly between them: the issue is one of subsidiarity.

The term subsidiarity is not widely used in the discussion of American federalism. The concept is there, of course, underlying the Tenth Amendment, for example, but not the word. Maybe it is because the American constitution was adopted, not on the basis of a study of the theory of federalism, but as a means of solving the problems of governance faced by the 13 colonies. Since then, the theory of federalism has grown up based on an analysis of what it was that the Founding Fathers discussed and agreed. They were like the man who was talking prose all his life without realising it.

In the modern era, the allocation and re-allocation of competences between the state and the federal levels of government is a contested matter, so coordinating the actions of the different levels of government also becomes a necessity. The same of course is true in Europe where the ability of the European Commission to lead a recovery strategy depends entirely on the ability and willingness of the member state governments to provide the funds for it.

On both sides of the Atlantic, the question is whether an effective economic recovery programme can arise from a diverse and often conflicting set of interests. What is certain is that, without coordination from the federal level, it certainly could not.

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