The 2008-2009 financial crisis that effected the entire US banking and fiscal ecosystem, led to the loss of millions of jobs and crippled the entire economy from which the country is barely recovering. The confidence of Americans in their political institutions to deliver a solution in time is at an all-time low. Despite the multitude of government schemes to pump the economy, growth has been slow. In fact, according to a 2010 CNN poll, cited by Hansen, over 80% of respondents believed the US system of government broken. Interestingly, people at the same time also believe that things can be fixed. (Hanson, 2012) This paper outlines complexity that exists in intergovernmental relations between different levels of the government and attempts to explain the complexities and challenges in the development and implementation of fiscal policies. Considering the increasing budget constraints on the state and local governments, the paper also suggests some measures and reforms required to alleviate the resulting economic pressures.
In United States, the governance scheme is split into national, state and local governments. Federalism alludes to the relationship between government at the national level and the 50 states. In other words, federalism describes the relationship between the national government and various state governments. The states themselves have confederal relations with each other i.e. they have equal status though they might differ in terms of the political power and influence they exert. The relationship between state and local governments is unitary, which means that the latter do not enjoy sovereignty and exist only as extensions of the state government. (Hanson, 2012)
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"Intergovernmental Relations, Institutional Design and Fiscal Policy".
Intergovernmental relations essentially refers to the practical coordination aspects between the different elements of a federal system. In this case, intergovernmental relation refers to the interactions between the federal, state, and local government officials including nonprofit organizations that are required to effectively deliver public services. (Donovan, Smith, Osborn, & Moone, 2014) American federalism was original designed and practiced as a dual system of governance and evolved into its present form of cooperative federalism after 1933 with the rise in congressional regulation over intergovernmental relations following the New Deal and economic modernization. Evolution and description of modern day intergovernmental relations is however highly debated. While one school of thought argues that following Regan era, the federal government has cut back on its interventions and states have managed to assets their rights, an opposing school of argues that centralization has continued and occupies a dominant position in today’s policy making. (Hueglin & Fenna, 2006) One fact that everyone agrees with is that the intergovernmental relations and policy implementation is an extremely complicated and intricate process.
The general public perception is that national government takes care of issues that affect all citizens, such as social security and civil rights; state government are responsible for economic development, creating and maintain infrastructure and education; and local government focuses on issues such as public safety and urban development. However, in reality, things are hardly as clearly demarcated as this. The government entities at all levels are interdependent when designing and implementing policies and most of the policies involving public goods and services in the country as a result of partnerships between various levels of government. For instance, while public education, which is essentially the exclusive responsibility of local school boards, is developed in accordance with the state government regulation and is usually evaluated under performance standards set at the national level. Other policies show similar examples of interdependence between different levels of the government though the specific levels of cooperation is dependent on the policy area. (Hanson, 2012)
Fiscal policy, developed at the national level, uses a combination of taxing and spending to affect the aggregate demand and point the economy in the desired direction. States and local governments also engage in taxing and spending, however, national economic forces overwhelm the fiscal effects of these choices. In addition, there are several statutory and constitutional restrictions on fiscal policy making, many of which were adopted at the time individual states were created. Many of these seek to restrict the scale of fiscal policy relative to the local economy and discourage accumulation of large amounts of debt. This all state and local governments are expected to balance their budgets. Because of these restrictions, the state and local government’s decisions regarding taxing and spending often run contrary to national fiscal policy directions. For instance, a recession like the recent financial crisis, reduces revenues and increase the cost of public goods and services.
States have no choice but to raise taxes and/or fees or cut spending and reallocate the budget to other areas that are deemed more crucial. (Lowry, 2012; Gosling, 2008) A classic example happened in the aftermath of the current financial crisis. Following the 2008 recession, federal government decided to stimulate the economy by increasing federal spending over the next two years and cutting the payroll taxes. States that had faced the brunt of the crisis used the stimulus to natural balance their balance sheets and reduce deficits. The federal government could not sustain the spending levels, which led to massive cuts in 2011. This meant a reduction in money that goes to the states. As states had already cut their spending and some had even increased taxes, the net effect over the 5 years following recession was essentially anti-stimulus. The recent sequestration compromise has further resulting in an average loss of $400 million in federal funds received by each state. (Donovan, Smith, Osborn, & Moone, 2014)
Because the existing interdependence only increase the complexities in developing budgets in an already unfavorable economic climate, the best measure states should adopt is, as Wallace suggests ‘to think outside the box’. The confederal relations between different states means that each state can use this opportunity to review and reform their tax and revenue structures and policies as per their individual economic pressures, for instance replacing California’s Proposition 13 by alternative policies. States can also look at each other to adopt creative measures, for instance the controversial ‘no income tax’ policy of the Washington state. (Wallace, 2010)
- Donovan, T., Smith, D., Osborn, T., & Moone, C. (2014). State and Local Politics (4th ed.). Stamford, Connecticut: Cengage Learning.
- Gosling, J. J. (2008). Economics, Politics, and American Public Policy. New York: M.E. Sharpe.
- Hanson, R. L. (2012). Intergovenrmental Relations. In V. Gray, R. L. Hanson, & T. Kousser, Politics In The American States: A Comparative Analysis (10th ed., pp. 30-62). Thousand Oaks, California: CQ Press.
- Hueglin, T. O., & Fenna, A. (2006). Comparative Federalism: A Systematic Inquiry. New York: University of Toronto Press.
- Lowry, R. C. (2012). Fiscal Policy in the American States. In V. Gray, R. L. Hanson, & T. Kousser, Politics In The American States: A Comparative Analysis (10th ed.). Thousand Oaks, California: CQ Press.
- Wallace, S. (2010). State and Local Fiscal Policy: Thinking Outside the Box? Northampton, Massachusetts: Edward Elgar Publishing.
