There is probably no better way to clear out a cocktail party than to talk about federalism, the set of assumptions that go into ordering the relationships between the different layers—federal, state, and local—of American government. But boring though it may be, federalism is a topic as important as it is unavoidable. Federalism invariably shapes the issues of an era even as it is in turn reshaped by them. Like a marriage, a federal union is a relationship that must be continually renegotiated. The constitutional bargain of 1787, hammered out after long months of wrangling between advocates and opponents of a strong Federal Government, was renegotiated first in response to slavery and the Civil War, and again through Franklin Roosevelt's response to the Great Depression. Now new voices argue that competition in the global economy demands yet another reconstitution.

Among these voices is Alice Rivlin, founding director of the Congressional Budget Office, a self-described “fanatical, card-carrying middle-of-the-roader” and Bill Clinton's nominee as deputy director of the Office of Management and Budget. In Reviving the American Dream: The Economy, the States, and the Federal Government (Brookings Institution), R1vlin calls for a fundamental redistribution of tasks between the federal and state governments. —Ed.

The performance of the economy and the functioning of the political system are usually discussed by different people in separate books. One set of authors diagnoses the ills of the economy and offers policy prescriptions; another set focuses on the failings of politics or politicians and recommends reforms in the process. Both groups, acting on assumptions that date from the 1930s, seem to believe that the Federal Government is the only government that matters and that all new public policies must be made in Washington.

My book attempts to bring economic and political issues together and to reexamine the roles of the federal and state governments. My central theme is that government at both levels would function better—and the policies needed to energize the economy could be carried out more effectively—if a cleaner distinction were made between the responsibilities of the Federal Government and those of the states.

The blurring of state and federal roles contributes to cynicism about politics. Presidential campaign rhetoric, for example, often concerns issues over which presidents have little control: crime, drugs, education, child care, and industrial development. Candidates for federal office undermine their credibility by implying that these problems have national solutions and by refusing to address serious federal issues such as the budget deficit.

Until the 1930s, the powers of the Federal Government and those of the states were viewed as separate and distinct. But, first in the Depression and then in the 1960s, activists and reformers turned to Washington out of frustration with the way states and localities were performing. Washington responded, taking on a wide range of new responsibilities for social and economic policy.

The surge in federal activities had many positive results but also diffused responsibility and directed the energies of reformers toward Washington. The proliferation of federal programs, projects, offices, and agencies in so many parts of the country made the Federal Government increasingly unmanageable. It came to resemble a giant conglomerate that has acquired too many different kinds of businesses and can no longer coordinate or manage all its activities effectively from central headquarters.

As a result, the perception of superior federal competence in all areas of government has faded. Meanwhile, reforms have given states stronger governors: Colonial-era antagonisms toward a strong governorship were not overcome until the 1960s, when governors' terms in many states were extended from two to four years. The modernization of state government continued in other ways: Budget and planning offices were created for governors, state legislatures became more representative and professional, and a sophisticated civil service was developed at the state level.

In recent years, American business has undergone a revolution in response to foreign competition that has changed our ideas about what constitutes an effective organization. We now understand that successful companies have well-defined missions; they develop expertise in a set of closely related lines of business; they do what they do well and resist excursions into unrelated businesses where they do not have proven competence. In line with this thinking, some unwieldy conglomerates have dissolved into more manageable units.

Government must take its cue from the business revolution. In an age of global competition, the Federal Government and the states should divide the public tasks needed to ensure that the economy functions well. The Federal Government's priorities should be controlling the growth of health-care costs, ensuring that everyone has health insurance, and moving from a budget deficit to a surplus. States, meanwhile, should take primary responsibility for education and training, social services, housing, community development, and public infrastructure. And a new system of “common shared taxes”—either collected by the Federal Government and distributed to the states, or collected directly by a consortium of states—should be adopted to put state financing on a more secure and equal footing.

The idea of states sharing common taxes is a radical departure from the American tradition. In other federal systems, tax sharing is more typical. In Germany, for example, the central government collects most of the taxes and shares the proceeds with the Länder (states). Like federal grants, common shared taxes could be designed to improve the relative position of the least affluent states. Unlike federal grants, however, they would not impose federal rules and guidelines on local authorities or cause confusion about which level of government has responsibility for which programs.

Common shared taxes would have other benefits: They would simplify the tax system for businesses operating in more than one state. And under such a system states would no longer compete for business on the basis of taxes, but on the basis of a “productivity agenda” for improved local services and institutions, such as schools and infrastructure. These, in turn, will help the United States compete in the global economy.

Reviving the American dream in the face of burgeoning international challenges requires restoring the public's sense of control over government. Americans must break down the old hierarchies and replace them with new patterns of citizen and worker involvement. We can do this in part by sorting out the various functions of government, then dividing these responsibilities more clearly between the states and the national government. This approach can make government more responsive and accountable, revitalizing not only the government and the economy but our national spirit as well.


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