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."