The Federalism Project

Constitutional Reform and Governance (In the U.S. & Around the World)

New Federalism

Government in the 20th Century!

What defined the 20th century was the ideological struggle between capitalism and socialism (national or proletarian).  In the end, the forces of ‘freedom’ and open markets prevailed with the collapse of the Soviet Union.

The fall of the Berlin Wall, and the subsequent collapse of communism in Eastern Europe constituted the single most transformation event of the past 40 years.  Since man walked the surface of the Moon, the collapse of communism signified the predominance of ‘one’ over the ‘other.’  A New World Order was beginning, in which the U.S. stood supreme – and capitalism was the preeminent economic/political ideology.  However, this very victory led (inevitable some would say) to our current economic and political quagmire at home and throughout Europe.

In particular, the euphoria of the victory over communism in the early 90’s led to further government deregulation by the end of the decade, including significantly lowering trade barriers (see passing of NAFTA and the WTO), more tax incentives for outsourcing and further deregulation of the financial/banking sector (see repeal of Glass-Steagall regulations).  As a result we saw great economic growth and innovation (like the development of the internet and wireless telecommunications), but also multiple economic busts and downturns (like the dot.com bubble and of course the more recent housing market collapse).

Following the 2008 financial crisis, the federal government tried to remedy the situation, with TARP, the Obama Stimulus, and the Dodd-Frank legislation.  The judgment on the governments reforms is not conclusive; Democrats argue that government intervention stopped the bleeding and averted another great depression, while Republicans concluded that government intervention cannot and will not fix unemployment or the housing market (just eliminate government regulations, lower taxes on the job-creators and let the market work its magic – see President Trumps economic agenda so far).

Furthermore, the financial crisis which originated in the U.S. caused a GLOBAL recession that exposed both the weaknesses of free markets and the vulnerabilities of the American financial system (the pride of capitalism as we know it).  The European sovereign debt crisis that followed, partially caused by the U.S. financial crisis, is now the single greatest threat to the European Union and EU integration.  In other words, the financial crisis further exposed the interconnectedness of this new (post-soviet) world order – a world that the U.S. cannot control (nor fix) on its own.

What should be the Role of Government in the 21st Century?

The question therefore, often asked by pundits these days, and the one that has been the subtext of every presidential election in the past 20 years is: What should be the role of the government?  Is government intervention necessary for the fair and efficient operation of the market, or is government the obstacle that holds back economic growth and full employment?  What is the concluding lesson of the most recent financial crisis; did the government cause the housing market collapse or did it avert another great depression?

However you frame the question, the answer is one and obvious: in this globally integrated world we are living in, where the market is truly global and even more unwieldy then in the past, government will play an even greater role during the 21st century.  Most governments around the world, from China and Japan to the European Union and Russia are consciously trying to protect their people and industries from the forces of global integration while at the same time take advantage of this global economy.  Governments around the world are trying to ‘manage’ the global economy (or at lease influence its impact on their domestic markets).

And what about the U.S.; what should the U.S. do in this globally integrated world?  Should the U.S. federal government pursue an activist role, picking winners and losers and adopting an industrial policy (or use tariffs to protect domestic industries) like so many other countries do in order to influence employment and economic growth?  Or, should the U.S. return to the ‘good old days’ when the federal government stayed out of peoples business and the free markets provided economic growth and ample employment opportunities!?

Is it possible that our federal government (meaning the executive branch and the federal bureaucracy) is too big and therefore too distracted (inefficient) to effectively mount any global economic strategy?  Is it possible, that weather we have a united government between Congress and the Presidency, or divided government between the two parties, our federal bureaucracy will not be able to deliver effective management of the U.S. economy and/or leadership of the global economy (or adequate solution of our major economic problems – unemployment, federal debt, income inequality, and social security solvency)?

Inevitably, due to this global economic integration, even if the U.S. pursues the best economic policies, it will not be insulated from global competition or economic instability abroad.  From the ever growing Chinese economy, to the political developments of the Arab world, to the current EU crisis, we are now and forever will be subject to global economic developments.

Government will matter a lot in the 21st century.  For the U.S., the ultimate question is whether we want an activist federal government that (like the rest of the world’s leading economies) adopts a ‘national’ industrial policy and pick winners and losers, thus better competing in this globally integrated economy, or perhaps, a federal government that stays out of the business of ‘managing’ the market and rather let the States pursue their own industrial policies, and by competing with each-other achieve economic growth and thus better compete with the rest of the world.

Devolution of Power to the States – They Know Better how to Grow their Economies!

Our current system of governance is dangerously misaligned.  Like the wheal’s of a car, over the course of the past 200 years, we have been constantly (slowly but surely) deviating from our original course.  Our current Republic resembles only in name the one that our founding fathers build.  And if you wonder why we are so political gridlocked these days all you have to do is compare our current system of governance with the one envisioned by the framers of the Constitution.

One of the fundamental presumptions of the U.S. Constitution is this: when governmental power is consolidated and unlimited it is unresponsive to the needs of the governed.  The framers originally sought to prevent the overreach of government by creating a system of governance that distributed power as widely as possible through a structured competition of natural self-interests.

Therefore, the framers preserved the sovereignty/integrity of the states, to be both independent and united, as well as “laboratories of democracy.”  The framers also divided legislation between a House that represents the people directly, and a Senate which represents the States equally.  They gave the executive to the President, and endowed the President with the power to veto legislation, but they also rejected popular election of the President and provided for the loser of the Presidential election to be the Vice-President (before the 1800 changes).

All these checks and balances to excessive and concentrated power by one branch of the federal government have been slowly eroding over the years.  The Senate no longer represents the State government, the Supreme Court has more often than not sided with expansion of the powers of the federal government, and the executive has amassed overwhelming powers and responsibilities.  The worst of all, has been the partisanship and politicization of the executive and judiciary branches of the government, and the complete abdication by Congress of its responsibility to legislative.

The original design of the U.S. Constitution acknowledged that the several state governments were better equipped than the national government to address most of their citizens’ needs.  The democratically elected officials of those state governments live among the people they represent.  They are far more likely to know the people, their strengths, their problems and their sensibilities, and are therefore the appropriate representatives of the people’s most critical economic and political desires.

In essence, state governments are both better aware of the strength and need of their constituents, and are better able to respond promptly and efficiently, unlike the often slow and distant national government.  Devolution of economic, health, labor, agriculture, education, housing, energy and urban development policy setting to the States, will not only allow them to better pursue their own (unique) ‘industrial policies’, but also free the federal government to better focus on the vital task of addressing global economic and security developments.

But how can we effectively and meaningfully devolve the government powers for managing the economy to the States?  For more, keep reading on the next pages…

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