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Realigning The Third Wheel

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Federalism, the most disputed aspect of American governance, is once again under the microscope.

In this week's New Yorker, James Surowiecki calls our fifty states "a serious impediment to reversing the [economic] downturn." This is because state constitutions require balanced budgets, which lead to a "procyclical" -- that is, downturn enhancing -- fiscal policy of budget cuts and tax increases. Surowiecki concludes with a lament for "a genuinely national government."

Paul Krugman picked up on the pitfalls of federalism several months ago, supporting a stimulus package that included aid to state and local governments. But he criticized our federalist system more broadly, asking:

As a nation, we don't believe that our fellow citizens should go without essential health care. Why, then, does a large share of funding for Medicaid come from state governments, which are forced to cut the program precisely when it's needed most?

An educated population is a national resource. Why, then, is basic education mainly paid for by local governments, which are forced to neglect the next generation every time the economy hits a rough patch?

And Matt Yglesias identifies a deeper problem:

Strong federalism is even the enemy of sensible decentralization. Since the states are "sovereign" and represented as such in the Congress, there's no way to reorganize America's administrative subdivisions no matter how anachronistic they've become.

The third, and often forgotten, piece of this tripartite federalism puzzle is city government, which is part of the federalist system -- city governments raise taxes and provide services -- but which essentially serves the will of state government. City governments, like their state superiors, also engage in procyclical fiscal policy.

While the stimulus package directed about $140 billion to state governments, the recovery act sent very little money directly to cities: much city aid was funneled through state governments. Providing money directly to cities in a subsequent stimulus package would not only mitigate procyclical state fiscal policies, but would generate longer-term dividends for federalism.

Targeting aid directly at cities would free up state money to balance budgets in the exact same way that aid to states would prevent cuts in state funds for city schools and other urban programs. The countercyclical effect is the same: federal funds prevent service cuts at a time when they are most needed. In fact, the effect is even enhanced if state governments -- which, as Surowiecki points out, are disproportionately influenced by rural areas -- enact more severe cuts for more populated urban areas than for suburban and rural ones.

Perhaps more importantly, funneling stimulus money directly to urban areas would increase the national political role of cities in general and mayors in particular. As Richard Schragger writes in an article examining the impotence of mayors, currently:

[Mayors] approach the state or federal governments in the position of supplicant. Mayors come to Washington to lobby for aid or assistance, but they tend not to have ongoing relationships with federal elected officials or federal bureaucracies. Instead of being direct participants in state and federal policymaking, they are outsiders to it, only as influential as any other representative of a group or institution seeking government aid might be.

Directing stimulus funds to cities would make mayors and city governments less captive to their state governments, which currently hold cities' budgeting -- and thus policymaking -- processes hostage. One of the worst examples of this came when Mayor Bloomberg budgeted 14,000 teacher layoffs in case significant state education funding was withheld.

In the long run, increasing the national political power of cities and mayors would exert a drag on decisions made at the state level, helping ensure that policymaking is based less on politics and more on efficient investment. At the same time, the federal government might be persuaded to recognize the strategic national importance of urban areas in its policymaking.

While a wholesale reorganization of American federalism is all but unthinkable, empowering the third leg of the system could mitigate some of its pitfalls.