May 26, 2015

The Rise of Executive Federalism

Summary

Consider, if you will, the administration's controversial initiatives on immigration, marijuana legalization, the No Child Left Behind Act (NCLB) and Common Core academic standards, climate change and "clean power," and the implementation of Medicaid expansion and the Affordable Care Act (ACA): What do they all have in common? First, they are federalism initiatives that affect states in very significant ways (for their ostensible benefit, or to their demonstrable detriment). Second, Congress has nothing to do with any of this beyond writing checks and issuing press releases. Third, the programs operate at the absolute outer bounds of statutory law, and sometimes outside those bounds.

Consider, if you will, the administration's controversial initiatives on immigration, marijuana legalization, the No Child Left Behind Act (NCLB) and Common Core academic standards, climate change and "clean power," and the implementation of Medicaid expansion and the Affordable Care Act (ACA): What do they all have in common?

First, they are federalism initiatives that affect states in very significant ways (for their ostensible benefit, or to their demonstrable detriment). Second, Congress has nothing to do with any of this beyond writing checks and issuing press releases. Third, the programs operate at the absolute outer bounds of statutory law, and sometimes outside those bounds.

To an extent, that reflects the present administration's latitudinarian approach to the law. But there's a larger, structural point: Our federalism is practically guaranteed to produce chaotic government. Generalized appeals to the rule of law cannot alone fix that problem. We have to make our federalism less "cooperative."

With very few exceptions (such as tax collection, Social Security, and Medicare), virtually all federal domestic programs are administered by state and local governments, often under one of over 1,100 federal funding statutes (such as Medicaid or NCLB). Since its inception under the New Deal, this "cooperative" federalism has proven stupendously successful in doing what it was supposed to do: expand government at all levels. However, its stability rested on peculiar conditions: private and public affluence, tolerably homogeneous states, and a functioning Congress. Those conditions have all ceased to operate to some extent. This predicament explains the rise of an executive and often extra-legal federalism — a federalism that is run through waivers, edicts, and transfers payments that are barely distinguishable from bribes.

The End of Affluence
The point of jointly funded federal conditional spending programs (such as Medicaid) is to increase the demand for government, by lowering the perceived tax price of public programs both at the federal and the state level. The programs are built to demand ever-increasing cash infusions. When that can no longer be done or be taken for granted, the federal-state bargain comes apart. And so it has.

The ACA promised states a 100 percent reimbursement for expanding Medicaid. Two dozen states litigated against that largess, and to this day some 20 states refuse to take the money. While ideological resistance to "Obamacare" has contributed to this unprecedented display of resistance, it is also the case that states no longer trust the federal government's promises, for the excellent reason that Medicaid's expansion at the federal level is purely debt-financed. Besides, Medicaid is ruinous to state finances with or without its expansion under the ACA. It is now the single largest state expenditure, eclipsing even spending on education, and it is projected to double again within a decade or so. That will not happen, because it cannot happen.

All the while, the states' costs of matching federal transfers with their own revenue dollars keep rising, chiefly because budget cuts would entail a loss of federal transfers. Unable to raise those revenues, states have responded by racking up debt in off-budget places — foremost, pension and other post-employment benefit accounts. Those debts exceed $5 trillion. They will not be paid, because they cannot be paid. That problem cannot be solved through yet more generous federal transfers. In short, the "cooperative" fiscal game is just about up.

(Un)willing States
Cooperative federalism requires willing states — not a few willing states, but well-nigh all of them. Without that, national objectives would go unmet. Thus, federal-state bargains are structured to produce uniform cooperation through some combination of carrots and sticks, coupled with an assurance of state "flexibility" — that is to say, statutorily guaranteed authority to shirk. But that does not work under conditions of severe state heterogeneity. In fact, ideological divisions among states have become sufficiently severe to make large numbers of states defect from existing arrangements and resist any effort to extend them. The ACA is the most obvious example, but there are others — foremost, energy-producing states' resolute resistance to the administration's climate-change programs. And increasingly, the dissident states are acting and litigating as a bloc and a coalition. There again goes "cooperative" federalism.

Congress
"Cooperative" federalism is supposed to come from Congress and federal statutes. However, practically nothing comes from Congress these days. The legislature is notoriously divided. It lacks the financial resources to rope recalcitrant states in new federalism bargains (witness the ACA), and it cannot even revisit the bargains embedded in old statutes (such as education programs or the Clean Air Act). Thus, to make federal programs "work" under current conditions, agencies rewrite statutes, issue expansive waivers, and negotiate deals with individual states on a one-off basis. That is how the ACA is being "administered." That is how Secretary of Health and Human Services Sylvia Burwell is trying to expand Medicaid. That is how No Child Left Behind is run. And that is how Environmental Protection Agency is trying to impose its Clean Power Plan: "stakeholder meetings" and assurances of regulatory forbearance for cooperating states; unveiled threats against holdout states. This brand of federalism knows neither statutory compliance nor even administrative regularity. It is executive federalism.

The rise of executive federalism is propelled by very potent forces, and it is robust to partisan politics. Expansive administrative waivers, for example, were pioneered by the Reagan administration (under what was then Aid to Families with Dependent Children); the practice has since spread under Democratic and Republican administrations alike. For now, complaints over lawless executive behavior are the stuff of conservative agitation. However, a Republican president would be under enormous pressure to improvise federalism solutions under unworkable, obsolete, and profligate statutes. The fronts might change quite quickly, even as executive federalism continues its ascent. Further along that path lies the fate of Argentina, which practices an advanced form of executive federalism: corrupt, ruinous, unstable.

What can be done about it? A crucial first step is to stop fighting yesterday's federalism battles over "states' rights" or "block grants" — the latter a convenient and supposedly conservative prescription that is in reality a debt-financed, full-scale waiver policy that allows the executive to exercise yet greater authority and states to spend yet more money they haven't raised. Instead, the time has come to fight today's federalism battles over executive federalism and to prepare for tomorrow's — for example, the sure-to-come question of federal bailouts for major cities and entire states. Could the Federal Reserve recapitalize the state of Illinois? A TARP for states: Would that be constitutional? If so, who would enforce the repayment obligations or promises of fiscal discipline, and how?

Obviously (to my mind), we should resist such novel forms of federal-state "cooperation." We have to make our federalism less ruinous and more lawful. And to that end, we have to make it less cooperative, one program at a time.