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Saturday, July 28, 2012

Tough Bargaining by States: Why Not Just Federalize Spending for the Poor?

Joey Fishkin has an excellent post over at Balkinization on the actual dynamics of federal-state bargaining over Medicaid (or, for that matter, virtually any federal grant that benefits low-income households). As Joey notes, the state recipients of federal grants for the poor hold the beneficiaries of the federal grant hostage: If the federal government pulls the grant to enforce some condition on that grant, then the beneficiaries of the federal program -- the very people whom the federal agency wants to help by enforcing the federal law -- suffer.

I have two friendly amendments to Joey's first-rate post, followed by a question (tentatively answered after the jump).

First, the dynamic Joey describes is not limited to Medicaid: Contrary to popular belief, states turn down federal money all the time, especially when the conditions tied to the grant benefit indigent households. During the 1990s, for instance, states turned down or never applied for various waivers of work conditions available under the TANF block grant program. The notion that federal grants provide an offer that states can't refuse because they are "free money" is purest myth. (As Harry Hopkins complained during the First New Deal about states' misuse of federal relief money, "who gets licked? The unemployed: they always get licked").

Second, as I noted earlier, the SCOTUS's decision in Independent Living Center v. Douglas has extraordinary importance in strengthening states' hands by depriving private beneficiaries of any private cause of action to enforce federal conditions. Federal agencies worry about states' walking away from federal grants; Self-interested private beneficiaries do not face that worry, so long as they will get the payment to which they were individually entitled in the short term. Private causes of action, therefore, are a way for Congress to sidestep federal agencies' worries that states will "walk," by delegating enforcement of conditions to an agent that does not care about the program as a whole.

Third, a question: Why do states implement redistributive federal programs at all?

The normative theory of fiscal federalism maintains that the feds ought to use federal dough to encourage spending on programs with interstate benefits -- say, spending to aid mobile and indigent households. If that encouragement is defeated by tough bargaining in a situation of bilateral monopoly, then federalism is defeated: Justified federal spending can be converted by governors into purest pork. The obvious solution is simply to federalize redistributive spending entirely, administering it through federal agencies. Yet such federalization is surpassing rare: Medicaid, TANF, Unemployment Insurance, CDBGs, etc are all programs of "cooperative federalism" -- funded by feds but implemented by subnational officials.

Why this functional mismatch? One answer suggests a tragedy of federalism -- that the level with the capacity lacks the will, and the level with the will lacks the capacity. The feds have the organizational unity necessary to overcome the collective problems created by beneficial spillover effects (e.g., the beneficial effect of generously funding aid to low-income households that can let neighboring states off the hook by exporting their indigent citizens to their more generous neighbors). But Congress is so politically heterogeneous, divided dramatically by Red and Blue politics, that they cannot take up the task of aiding the indigent with unequivocal zeal. Instead, as Suzanne Mettler has argued, they historically delegate the task of implementation to the states, in part to assuage more conservative regions (aka the South). But the states -- even Blue ones, as Paul Peterson argued -- have incentives to convert redistributive spending into developmental spending. So they bargain tough with the feds, undermining the program.

Is there any way out of the dilemma? I see the design of a system that overcomes the twin problems of political heterogeneity at the federal level and collective action problems at the state level as the real challenge for lawyers interested in the topic. (Typically, I find that lawyers rather than political scientists or economists are most familiar with the detailed nuts and bolts of these statutes).

But here is another functional mismatch in academia to fit the mismatch in federalism. Constitutional lawyers are the ones who set the agenda for arguing about ground rules of federalism, but nowadays they seem to be the least interested in the reality of federalism, instead focusing on the Sixth Virginia Resolution or whether "commerce" includes private inaction. Meanwhile, the heavy lifting about how federalism actually works is done by tax guys like Brian Galle, administrative law profs like Ricky Revesz, and health-and-employment law scholars like Joey. But their work i s marginalized in the debates about how the courts shape the federal system through statutory and constitutional interpretation.

Is there some way that the two groups can be merged? As Plato said (paraphrasing Republic V:473-c): "until fiscal federalists make con law, or con law scholars study fiscal federalism, ... cities will never have rest from their evils."

Posted by Rick Hills on July 28, 2012 at 09:41 AM | Permalink


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Great post. These types of issues provide an answer to the question "Why do we need non-practicioner law professors?"

Posted by: Doug | Jul 30, 2012 12:17:09 PM

Agreeing 100% with Brian and Joey that the feds can bargain more effectively with a DIY option, I'd point out a positive and a normative reason why such an option is not necessarily a practical or good idea.

1) A positive reason against DIY's practicality: DIY requires a level of federal state-building that might be antithetical to American political culture. Take the controversial example of policing as an illustration: Sworn, armed subnational officers outnumber their federal counterparts by a factor of roughly 7:1. If the subnationals "go on strike" (exercising their Printz option), then the feds are unlikely to enforce labor-intensive laws like the Immigration & Naturalization Act very effectively. But the notion that we Americans will build up a residual federal police force, boosting Border Patrol numbers and ICE interior personnel to make up for the shortfall strikes me as implausible.

2) A normative caveat: And, by the way, I do not WANT the feds to build up their personnel to such an extent. At least one point of federalism is to limit governmental power through both mobility and voice: Federal state-building that results in a federal government capable of shadowing subnational government 100% destroys that point.

3) A compromise position: Just as the cure for speech is more speech, so too, the cure for decentralization is more decentralization. The feds can get some leverage over recalcitrant state officials, as Joey notes, by bypassing them in favor of municipalities and counties (and vice versa): Single Principal + multiple agents = More Power for the Principal. State constitutional rules on home rule powers can facilitate or impede such bypass. I tend to be in favor of the broadest construction of such powers to allow the feds to play subnationals off against each other.

Posted by: Rick Hills | Jul 30, 2012 10:43:53 AM

It's nice of Rick to say so, but I don't know that us tax geeks do real "heavy lifting." What we do seem maybe a bit more attentive to is the fact that many things that are often asserted about federalism (e.g., the NFIB dissent's claim that federal taxes "crowd out" states' ability to raise revenue) are actually empirical propositions for which there is or could be an empirical literature.

On Joey's comment here, I agree. My small contribution to Rick's own theoretical spending clause work was to point out that the bargaining dynamics are quite different when the federal government has a "DIY" option. That's why I think the limits on non-spending authority also affect the spending clause: if states know the federal government has no alternative, their hold-out demands can be much larger.

Posted by: BDG | Jul 30, 2012 9:35:36 AM

The government has already had annual budget for the poor each year. If they want to spend more then they can just increase the budget. The money spend on the poor have diminishing returns, so spending more does not equal to benefit the poor more. Therefore spending across the states won't always be a wise idea.

Posted by: DHgate | Jul 30, 2012 4:07:05 AM

Thanks for the kind words and for this fascinating intervention. I'm very curious about what gives rise to those rare instances of federal programs aimed at the poor that do bypass states. Some, like Title I grants to local educational agencies, bypass the states in favor of smaller governmental units; Head Start goes even further down, directly to community organizations; the EITC is cash directly to individuals with no intervening organization or layer of government at all. But these are rare exceptions, as you say; almost everything flows through states. I wonder if a ramped-up Spending Clause jurisprudence will alter this dynamic and make it more attractive to Congress to use models that bypass states. In other words, if the dominant current model of cooperative federalism is destabilized by invigorated judicial restrictions on the conditions Congress can place on states, perhaps one solution is to be found in federalism "all the way down."

Another strategy for the federal government would be to create statutory schemes that give federal agencies forms of leverage other than cutting off funds. In the ACA itself, I think the setup of the exchanges is an interesting model: the statute allows states to set up exchanges and thereby retain some control over them, but as a backup, the federal government is creating its own exchange for citizens of the states that refuse. This changes the bargaining dynamics in an interesting way. The state's "exit" option actually leads to the largest role for the federal government (and, I would think, tends to disempower state insurance regulators). The state cannot hold the poor hostage, because the feds have an option other than cutting off funds if the state won't play ball.

In interviews, Governor Perry has lately suggested what his preferred outcome would look like here: "just block grant" the Medicaid expansion funds and let Texas do what it wants with them. It's nice work if you can get it, running a sovereign state that provides services but doesn't need to tax its citizens much because some larger, more distant level of government is writing the state big checks with no strings attached. But I don't think that is a model of federalism that Congress will, ultimately, think is worth whatever it is that is gained, politically or administratively, by working through states.

Posted by: Joey Fishkin | Jul 29, 2012 6:24:14 PM

Rick: I think that once upon a time many labor advocates would have instinctively preferred federalization. But I think things have become much more nuanced given how ensconced "empty preemption" has become(and here I think ERISA s. 514 is the best example). By the time the federal package emerges from the sausage grinder who knows what you'll have. (Not far from Gompers' position b/t/w). Still I do think it varies by state because in some places (one needn't name names) there is so little structure that even the ERISA-type shell might seem an improvement. To answer your question on UI, while I can't presume to know what most labor advocates think, my best guess is that the majority would opt in the current political environment to defend the status quo.

Posted by: Michael Duff | Jul 29, 2012 9:04:58 AM

Thanks, Michael: Very helpful example.

There ARE contexts, however, in which beneficiaries of federal programs have preferred state implementation. For instance, Governor Pete Wilson (back in 1987, I believe) turned over California's OSHA implementation to the feds, much to the dismay of the labor unions of California, which thereupon launched a successful ballot initiative to re-instate state implementation. The idea, I think was that California would hire more and better inspectors than the feds.

California, of course, is such a big state that it can sometimes function in a "federal" way, because industry exit is costly. But I imagine that a similar dynamic could lead to ambivalence about federal takeovers in any "Blue" state, right? That's why supporters of more governmental action want to keep states in the mix by having the feds set a baseline but allowing the states to "top up" the federal benefit with a state benefit.

So pure federalization might not be satisfactory to someone on the Left. But neither are "mixed" state-federal programs -- at least, not all the time. (Here's a question for you, Michael: In your experience, how do UI programs fit on this scale? Is there a consensus among unions and labor advocates more generally that pure federalization would be beneficial? Or not? Or does the answer vary based on the state -- in which case, do labor advocates in different states take different approaches, sometimes lobbying for federalization and sometimes not?)

Posted by: Rick Hills | Jul 29, 2012 8:28:16 AM

I think this has been going on for some time. I've handled many social security disability cases, for example, and the "federal" structure - which was created decades ago - is that claimants apply for benefits at the state level and resolve disputes at the federal level (before a federal ALJ). The consistent dynamic is that there are routine denials by state officials that are then routinely reversed (though the obvious no merit determinations are upheld)by the federal ALJs. VERY inefficient (talk about nuts and bolts!) but the product of horsetrading that went on well before my time as the price for getting the federal program out the door in the first place.

Posted by: Michael Duff | Jul 28, 2012 9:59:33 AM

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