Why is the United States a federal republic? The obvious answer is that our federal structure is an accident of history, a purely political accommodation of the fact that the colonies that had become states in the wake of the War of Independence were unwilling to be dissolved into some larger entity. Yet there was also a principled reason for the United States to be constituted as a compound republic. Citizens, like consumers in private economic markets, benefit when there is competition among the producers of public goods and services. A centralized government can be understood as a monopolist, in which the sovereign can credibly tell citizens that it is “my way or the highway,” the highway being emigration to some other country. Suffice it to say, emigration is a costly and difficult option even now, and it was even more so in the late 18th century.
Competitive federalism offers another way forward. The constituent units of the republic could be given wide authority to pursue different policies regarding economic and social regulation, taxation, the variety and the quality of public goods and services, and much else. Preferences regarding policy vary, and they also evolve over time. Over time, in theory, citizens could move from one state to another to find a more congenial policy environment. The economist Charles Tiebout is credited with offering a rigorous account of how citizens might “sort” into local governments on this basis, which is why scholars refer to Tiebout choice.
More recently, David Schleicher has observed that there is a tension between the benefits of sorting and the benefits of agglomeration. Economic actors make location decisions for a number of reasons. They might, for example, place heavy emphasis on transportation costs, market depth, and intellectual spillovers, in which case they might prefer a dense city. Or they might prefer a quiet, rural environment in which congestion costs are low. Tiebout choice complicates this picture, as it adds in variables relating to the quality of governance and the tax burden that don’t relate to underlying economic factors. One could argue that giving constituent units too much power could undermine agglomerative efficiency. This is a legitimate concern, and a good reason to use the federal government to defend a free and open national marketplace.
Since the New Deal era, however, the problem facing the United States hasn’t been too much policy variation across states. The country as shifted away from competitive federalism and towards what Michael Greve has called “cartel federalism.” As Greve explains in The Upside-Down Constitution, the New Deal revolution isn’t best understood as a centralizing revolution. Rather, the New Deal strengthened governments at all levels, in part by dampening competition among states. Like an economic cartel, in which firms might collude to raise prices or in which they promise not to poach each other’s employees, a policy cartel disadvantages citizens by limiting their options. Defenders of cartel federalism warn against competitive federalism as “a race to the bottom,” in which states with lax regulations will undercut their more high-minded neighbors. This assumes, however, that stringent regulations don’t offer compensating benefits, which some firms and individuals might freely choose. In a similar vein, high-tax states could win citizens by channeling revenues into high-quality public services, which at least some people value very highly.
As Greve argues at length, cartel federalism has contributed to overspending across all levels of government. Medicaid, education, and welfare are three areas in which the federal government raises funds from taxpayers across the country and then transfers the funds to state and local governments with various strings attached. This encourages institutional isomorphism. That is, different governments are forced to coalesce around a relatively narrow set of institutions, within the parameters set by federal law. Innovative approaches that might prove more cost-effective thus become less likely. Moreover, incentives are badly misaligned, as subject we will address at greater length when we discuss Medicaid.
One of our core goals should be to restore competitive federalism. In Greve’s view, conservatives have fixated too much on the question of “how much” federalism we should have and not nearly enough on what kind. The unfortunate truth is that state governments, like private firms, do not actually want competitive federalism, because competitive federalism will undermine their power and reduce they rents that they can extract from citizens. They much prefer cartel federalism. That is why we need voters and politicians who understand that federalism isn’t about “states’ rights.” Rather, it is about protecting the interests of citizens by subjecting their state governments to vigorous competition from other state governments.