New Federalism

Over the next few months, most state governments and municipalities will face massive revenue shortfalls, thanks to rising unemployment, falling real estate values, and the absence of capital gains. The bailout could be huge. We should be alarmed that this is not widely discussed in the press or in Washington.

Most states and cities have a balanced budget requirement. Are they going to tax their way back into balance? That doesn't seem likely. Are they going to lay off lots of workers and cut benefits to retirees? Unless someone gets creative, that may be the only option. In states already hard hit by the recession, that option is particularly unattractive.

I propose that we revisit the work of Alexander Hamilton, who famously addressed a similar situation after the American Revolution. The 13 states had borrowed heavily to finance the Revolution and faced a crisis when the war ended. Hamilton proposed that the Federal government assume the debts of the states in exchange for control of the currency and limited ability to tax. Federalism enabled the new United States to get off to a great start -- and eventually to become the biggest economy in the world.

I would like to see the Obama administration implement a new Federalism. The Federal government could assume the debt of cities and states in return for changes in policy and/or governance. What would those changes be? Some of my favorites include eliminating the Electoral College, eliminating California's referendum process (which gives the state practically no flexibility to adjust its budget to changing economic conditions), mandating higher standards for public education, etc.

The same forces that drove our economy over the abyss have been at work in state and local government. Why not address both problems at once?