The Best-Ever Argument for Federalism
December 19, 2014 by Dan Mitchell
I’m a big fan of federalism for both policy and political reasons.
And I can’t resist pointing out, for the benefit of those who think such things matter, that federalism is also the system that is consistent with our Constitution’s restrictions on central government power.
Simply stated, federalism is good news because we get innovation, diversity, and experimentation. States that make wise choices will be role models for their peers. And it’s also worth noting that states that screw up will provide valuable lessons as well.
But sometimes a real-world example is the most compelling evidence of all. And the news that Vermont has cancelled its proposed single-payer healthcare scheme (as predicted by Megan McArdle) shows us why federalism is such a good concept.
Let’s start by reviewing what’s happened. Here are some excerpts from a report published by the Daily Caller.
Vermont Gov. Peter Shumlin is canceling his dream plan to create a single-payer health system in the state, he announced Wednesday. …“In my judgment, now is not the right time to ask our legislature to take the step of passing a financing plan for Green Mountain Care.” The problem is, of course, how to pay for it. Even while plans were moving forward for a 2017 launch of the single-payer system, to be called Green Mountain Care, Shumlin had held off on releasing a plan for how to pay for the system, waiting until his announcement Wednesday.
So why didn’t Shumlin simply call for a big tax hike? Or look for more handouts from Washington? Or what about those fanciful assumptions that socialist health care would be more efficient?
Well, that basically was the plan.
Tax hikes required to pay for the system would include a 11.5 percent payroll tax as well as an additional income tax ranging all the way up to 9.5 percent. Shumlin admitted that in the current climate, such a precipitous hike would be disastrous for Vermont’s economy. …the report also admits that the single-payer system won’t save money as Vermont officials had planned. While both previous reports on Green Mountain Care had assumed “hundreds of millions of dollars” in savings in the very first year of operation, Shumlin’s office is now admitting that’s “not practical to achieve.” …Shumlin also cited slow economic recovery in Vermont as reason to delay, and hopes to try again in the future. But its failure, especially on economic grounds, is a resounding defeat for single-payer advocates.
Yes, this is a “resounding defeat” for socialized health care.
But it’s important to understand why Shumlin’s plan collapsed. He and other politicians obviously figured out (notwithstanding their claims when running for office) that a huge tax hike, combined with “free” healthcare, was a recipe for state disaster.
So even though Shumlin is a hard-core leftist, and even though Vermont’s electorate is so statist that the state came in first place in the Moocher Index, all these advocates of socialized healthcare were forced to recognize real-world constraints imposed by the existence of other states.
So the productive people of Vermont (at least the ones that haven’t already escaped) should be very thankful for federalism. Competition among the states, as well as freedom of movement between states, is a wonderful check on the greed and foolishness of the political class.
The crowd in Washington, by contrast, has more flexibility to impose bad policy since moving from one country to another is far bigger step than simply moving from, say, California to Texas.
Nonetheless, this also explains why I like tax competition among nations. I want greedy politicians to be haunted to at least some degree by the fear of tax flight so that they will think twice before imposing new burdens. But that’s a subject we’ve reviewed on many occasions, so no need for further details.
The bottom line is that Vermont did face real-world competitive pressure. And that meant the state’s politicians didn’t think they could successfully raise enough money to finance socialist healthcare.
This reminds me of this famous Margaret Thatcher quote about other people’s money.
Let’s conclude by noting that the nation with the most decentralization and federalism is Switzerland, and that country does very well notwithstanding having different languages and cultures.
Which helps to explain why federalism is a very practical solution to the ethnic division in Ukraine.
P.S. Even though the focus of today’s column is federalism rather than policy, I can’t resist pointing out that the single-payer system in the United Kingdom generates some truly horrifying results.
P.P.S. If socialized healthcare is so wonderful, then why do politicians from countries which have that system travel to the United States for treatment?
P.P.P.S. Shifting to another topic, I’ve written before that left wingers criticize tax havens, yet it seems every rich leftist utilizes low-tax jurisdictions. Well, Business Week reports that “corporate inversions” also were created by a leftist.
John Carroll Jr., invented a whole category of corporate tax avoidance and successfully defended it in a fight with the Internal Revenue Service. …The first corporate “inversion,” as Carroll’s maneuver came to be known, was obscure then and is all but forgotten now. Yet at least 45 companies have followed the lead of Carroll’s client…and shifted their legal addresses to low-tax foreign nations. …A committed liberal, he…once considered leaving the practice to work for antiwar candidate George McGovern’s 1972 presidential campaign. …McDermott’s chief financial officer at the time, says he sometimes puzzled over Carroll’s motivations. “It was always an enigma to me,” Lynott says. “We knew this guy was a Democrat, and yet he would take on the government in a New York minute over a tax issue. There was nothing liberal about his thinking as far as the tax code was concerned.” …The IRS fought the case for seven years, giving up in 1989 only after a federal appeals court upheld a U.S Tax Court decision in the company’s favor.
So I like what Mr. Carroll achieved, but I guess we have to say he was a hypocrite. But, then again, statists specialize in hypocrisy.
P.P.P.P.S. I can’t resist sharing one more unrelated item. The 2008 crisis presumably showed the downsides of too much debt.
Well, time for a quiz: Who do you think has responded most intelligently and least intelligently to the lessons from that crisis?
Your choices are households, financial institutions, corporations, and governments.
I imagine nobody will be surprised by this chart from the BBC.
So what lessons can we draw from the chart?
Well, politicians in developed nations have been raising taxes over and over again, so perhaps we should conclude that higher taxes simply lead to more debt because our “leaders” can’t resist spending other people’s money.
And that’s precisely the point. Experts such as Steve Hanke, Brian Wesbury,Constantin Gurdgiev, Fredrik Erixon, and Leonid Bershidsky have all pointed out the ever-increasing burden of government in Europe.
Higher taxes are only a “solution” if the goal is bigger government and more red ink.