Published: Wednesday, July 27, 2011
Restoring the ideal of limited federal government
The debt/deficit/default debacle dominates everything right now. It also tells us something about the current condition of federal-state relations. The states -- once celebrated as "laboratories of democracy" by defenders of American federalism -- now resemble insecure dependents of a faithless uncle. Billions of dollars of federal aid greased the states' slide from sovereign to beholden. The recession accelerated the descent, leaving states unable to shake free without enduring and inflicting unacceptable hardship on their citizens.
Forget "too big to fail." The federal government has become too big to succeed and too involved in activities properly handled by the states. Consequently, when the feds confront deficit reduction, the states fear they'll be among the first dominos to topple.
A report released last December by the National Association of State Budget Officers (NASBO) documents federal dominance. In 2008, before the stimulus act, federal funds accounted for about 26 percent of total state spending. With the stimulus, that share rose to nearly 35 percent in 2010, returning to pre-stimulus levels next year, long before state revenues recover. Remarkably and unreliably, a federal government borrowing more than 40 percent of the money it spends will pay for more than one-quarter of state spending.
Dependence on federal aid increases state budget risk. Most federal funding for states -- 43 percent according to NASBO -- is tied to Medicaid, the Sixties-era state-federal partnership providing health care for low income people. The feds pumped up Medicaid support in the stimulus package, but hamstrung states with "maintenance of effort" requirements that require elevated spending until 2014.
Medicaid cost control necessarily emerges as a central factor in deficit reduction talks. The prospect generates bipartisan apprehension from the nation's governors. Gov. Chris Gregoire, as outgoing chair of the National Governors Association, wrote the president and congressional leaders urging them "not to continue to mandate Medicaid program requirements upon states without … adequate federal funding or federal law flexibility..."
As the letter suggests, the federal government is always the senior partner in any joint venture. Following the inevitable path of all entitlements, Medicaid grew over the years with steady increases in benefits and expanded eligibility, some driven by federal requirement and others tied to the lure of matching funds. According to the Congressional Budget Office, in 1975 Medicaid (including state spending) amounted to less than 1 percent of the nation's economy. By 2008 it claimed an astonishing 2.5 percent.
Medicaid so ensnares states in the federal web that 26 attorneys general, including Washington Attorney General Rob McKenna, have made it a factor in their lawsuit challenging the 2010 federal health care law. Saying provisions of the act that add to states' Medicaid costs represent "an unprecedented encroachment" on state sovereignty, the states note that they cannot easily back away from the program:
"Plaintiffs cannot effectively withdraw … because Medicaid has, over the more than four decades of its existence, become customary and necessary for citizens throughout the United States … and because individual enrollment in …[these] programs, which presently cover tens of millions of residents, can only be accomplished by their continued participation in Medicaid."
Last month, in federal appeals court in Atlanta, Judge Joel Dubina called the states' argument "pretty powerful."
The lawyer representing the federal government countered, "They knew the terms of the deal going in."
If only.
Regardless of how the U.S. Supreme Court resolves the matter, the relentless expansion of the federal government, under Republicans and Democrats alike, cannot continue. Trillions of dollars in deficit spending must be stemmed. State and local governments will not be spared. In addition to the Medicaid expansion, Congress and presidents have steadily increased federal funding for education, unemployment, transportation and more -- all with policy strings attached.
The strings will not be sliced swiftly. More likely, they'll unravel as costs and consequences become clear. Trends that cannot be sustained eventually end. So it is with the relentless, debt-financed growth in federal spending.
Ideally, severing the strings binding them so tightly to national policies will stimulate more innovation and accountability in the states. The dysfunction on display this week in D.C. confirms the wisdom of limited federal government. With the eager complicity of state officials, those limits have been overstepped. Now, it's time to restore balance.
Richard S. Davis, president of the Washington Research Council, writes on public policy, economics and politics. His email address is rsdavis@simeonpartners.com.
Forget "too big to fail." The federal government has become too big to succeed and too involved in activities properly handled by the states. Consequently, when the feds confront deficit reduction, the states fear they'll be among the first dominos to topple.
A report released last December by the National Association of State Budget Officers (NASBO) documents federal dominance. In 2008, before the stimulus act, federal funds accounted for about 26 percent of total state spending. With the stimulus, that share rose to nearly 35 percent in 2010, returning to pre-stimulus levels next year, long before state revenues recover. Remarkably and unreliably, a federal government borrowing more than 40 percent of the money it spends will pay for more than one-quarter of state spending.
Dependence on federal aid increases state budget risk. Most federal funding for states -- 43 percent according to NASBO -- is tied to Medicaid, the Sixties-era state-federal partnership providing health care for low income people. The feds pumped up Medicaid support in the stimulus package, but hamstrung states with "maintenance of effort" requirements that require elevated spending until 2014.
Medicaid cost control necessarily emerges as a central factor in deficit reduction talks. The prospect generates bipartisan apprehension from the nation's governors. Gov. Chris Gregoire, as outgoing chair of the National Governors Association, wrote the president and congressional leaders urging them "not to continue to mandate Medicaid program requirements upon states without … adequate federal funding or federal law flexibility..."
As the letter suggests, the federal government is always the senior partner in any joint venture. Following the inevitable path of all entitlements, Medicaid grew over the years with steady increases in benefits and expanded eligibility, some driven by federal requirement and others tied to the lure of matching funds. According to the Congressional Budget Office, in 1975 Medicaid (including state spending) amounted to less than 1 percent of the nation's economy. By 2008 it claimed an astonishing 2.5 percent.
Medicaid so ensnares states in the federal web that 26 attorneys general, including Washington Attorney General Rob McKenna, have made it a factor in their lawsuit challenging the 2010 federal health care law. Saying provisions of the act that add to states' Medicaid costs represent "an unprecedented encroachment" on state sovereignty, the states note that they cannot easily back away from the program:
"Plaintiffs cannot effectively withdraw … because Medicaid has, over the more than four decades of its existence, become customary and necessary for citizens throughout the United States … and because individual enrollment in …[these] programs, which presently cover tens of millions of residents, can only be accomplished by their continued participation in Medicaid."
Last month, in federal appeals court in Atlanta, Judge Joel Dubina called the states' argument "pretty powerful."
The lawyer representing the federal government countered, "They knew the terms of the deal going in."
If only.
Regardless of how the U.S. Supreme Court resolves the matter, the relentless expansion of the federal government, under Republicans and Democrats alike, cannot continue. Trillions of dollars in deficit spending must be stemmed. State and local governments will not be spared. In addition to the Medicaid expansion, Congress and presidents have steadily increased federal funding for education, unemployment, transportation and more -- all with policy strings attached.
The strings will not be sliced swiftly. More likely, they'll unravel as costs and consequences become clear. Trends that cannot be sustained eventually end. So it is with the relentless, debt-financed growth in federal spending.
Ideally, severing the strings binding them so tightly to national policies will stimulate more innovation and accountability in the states. The dysfunction on display this week in D.C. confirms the wisdom of limited federal government. With the eager complicity of state officials, those limits have been overstepped. Now, it's time to restore balance.
Richard S. Davis, president of the Washington Research Council, writes on public policy, economics and politics. His email address is rsdavis@simeonpartners.com.
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