Comp poli exam 3 (Unit 1 - Federalism)

What is federalism?

A federal state has a constitutionally defined division of power between central and regional governments. 

“a political organization in which the activities of government are divided between regional governments and a central government in such a way that each kind of government has some activities on which it makes final decisions.”

States that are not federal are known as…

unitary states

Common elements of federal systems

• Constitutional language protecting sovereignty and autonomy of units

• Constitutional language specifying which types of decisions will be taken by which levels of government

•  A strong, independent constitutional court to police the federal bargain

• Representation of subnational units at national level (ex: US Senate – each state, no matter population, gets two votes) 

What is Devolution?

Devolution occurs when a unitary state grants powers to subnational governments but retains the right to unilaterally recall or reshape those powers. 

Devolution vs. Federalism 

Devolution is different from federalism because devolved powers can be recalled or reshaped by the national government. 

What is Decentralization?

Decentralization refers to the extent to which actual policymaking power lies with the central or regional governments in a country. 

All three types of decentralization occur because

they are within a unitary state through devolution)

Fiscal decentralization

•  raising and/or spending revenue occurs at a subnational level. 

Policy decentralization

• particular policies are reserved to subnational governments

Political decentralization

• politicians are elected at the subnational level

What types of countries do better with federalism? 

• Countries with large territory and/or population like US, India, Brazil, Canada, Russia

• Ethnically diverse countries like Switzerland, Spain, Belgium

German federalism

• Division of Powers (enshrined in “Basic law”) – Federal: defense, foreign affairs, immigration, transportation, communications, currency, customs

• Joint: civil law, refugee policy, public welfare, land management, consumer protection, public health, taxation

• Länder: All powers not reserved to the federal government in the Basic Law.

• Subsidiarity -- devolve autonomy to lowest government unit capable of making decision

Reducing incentives for regional party strength: 

• Simultaneous elections (national and subnational)

• Many elected subnational positions

• States collaborating in national policymaking

• Limited fiscal decentralization

Three classic views about role of federalism in provision of public goods: 

1. The Assignment Problem (Oates)

• Public goods should be provided by the level of government that can do it most efficiently.

• Local governments → local public goods

• National government → national public goods

• Goal: match jurisdiction size to spillover of the public good.

2. Competitive Efficiency (Tiebout)

• Federalism creates a “market” for public goods:
  citizens “vote with their feet” → move to jurisdictions with preferred tax/spending mix.

• Competition pressures governments to be efficient.
  

3. Leviathan Control (Hayek)

• Federalism constrains government growth.

• More veto points + competition between states prevent a “Leviathan” state from overspending or overtaxing.

What specific spheres are reserved for subnational governments? 

• Infrastructure (roads, utilities, airports), education, security (policy), health care

To what extent are subnational governments autonomous in these spheres?

•  Total autonomy, shared between central and subnational, shared across subnational

What is Fiscal decentralization

the transfer of financial authority and responsibilities from a central government to subnational governments, such as states, provinces, or local municipalities

What affects bailout beliefs

• Percentage of subnational budget that comes from central government.

What is “Vertical fiscal imbalance”

• Large proportion of subnational revenues from central government.

Two recipes for fiscally responsible subnational governments:

• Low vertical fiscal imbalance - States collect the revenues they spend

• High vertical fiscal imbalance but no borrowing

Core Elements of a federal system

• Constitutional protection of regional sovereignty
  Federal constitutions explicitly protect the autonomy of subnational units.
  

• Clear constitutional division of powers
  Specifies exactly what the central government can do and what states can do.
  Illustrated through Article I (powers of Congress) and Amendment 10 (reserved powers).
  

• Independent constitutional court
  Ensures neither level violates the “federal bargain.”
  

• Subnational role in constitutional amendments
  Amendments often require supermajorities including state participation.
  

• Representation of subnational units at the national level
  Example: U.S. Senate gives each state equal representation.
  

The German Approach to Federalism

German federalism is structured by the Basic Law (Grundgesetz).

German Division of Powers

• Federal (exclusive) powers: defense, foreign affairs, immigration, transportation, communications, currency, customs
  

• Joint powers: civil law, taxation, refugee policy, welfare, consumer protection, land management, public health
  

• Länder powers: all powers not explicitly assigned to the federal government
  

• Principle of Subsidiarity: decisions made at the lowest capable level.

Why German federalism is unique

• Strong role of states in national policymaking

• Heavy use of joint responsibilities

• Consistent with both decentralization and central coordination

Decentralization vs. Federalism

• Federalism is a constitutional structure; decentralization is an empirical reality of policymaking.

What are the three forms of decentralization

Fiscal decentralization, Policy decentralization, Political decentralization

Why do we see federal systems?

Structural Factors

• Large territory or population: U.S., India, Canada, Brazil
  Ethnic, linguistic, or regional diversity: Switzerland, Belgium, Spain

Functional Reasons

• To integrate diverse communities

• To maintain stability by distributing authority

• To combine advantages of small and large polities

Classical Arguments For Federalism

• Promotes good governance in small units (Rousseau): citizens monitor each other.
  

• Combines benefits of small and large states (Montesquieu):
  

  • Small → responsive, free

  • Large → secure, stable
    

• Balances local and national interests (Madison):

  • Local issues handled by states

  • National issues handled centrally
    

Empirical Arguments For Federalism

• Can reduce conflict by giving autonomy to diverse groups.

• Decentralization → lower probability of anti-regime rebellion and intercommunal conflict (when institutionalized parties are weak).

Arguments Against Federalism

• May strengthen regional parties → increase secessionist pressures.
  

• Can create policy inequality between states.
  

• Increases coordination problems across regions.

• Potential for fiscal indiscipline when states believe central government will bail them out

What is fiscal indiscipline

a government's failure to manage its finances responsibly, characterized by excessive spending, accumulating large deficits and debt, and ignoring long-term economic health for short-term political gains, leading to economic instability, reduced credibility, and potential crises. It's the opposite of fiscal discipline, which involves controlling spending, keeping deficits low, and ensuring sustainable public finances. 

Strategies for Self-Enforcing Federal Systems

• Simultaneous elections

• Many elected subnational positions

• States participate in national policymaking

• Limited fiscal decentralization

Limited fiscal decentralization leads to

fewer incentives for regional parties to demand more autonomy.

Many elected subnational positions reduces…

monopoly of regional parties

Fiscal Federalism: Overspending & Institutional Combinations Key Concepts

• Vertical Fiscal Imbalance (VFI):
  The degree to which subnational governments rely on central government transfers for revenue.
  High VFI = states get most money from national gov.
  

• Borrowing Autonomy:
  Whether states can borrow freely (issue debt).
  

What is Vertical Fiscal Imbalance?

The degree to which subnational governments rely on central government transfers for revenue.

High VFI =

• states get most money from national gov.

High VFI + High Borrowing Autonomy =

Overspending

Low VFI →

More responsible spending

High VFI + No Borrowing Autonomy =

Fiscal Discipline

(Central government limits borrowing, so states cannot accumulate debt even if transfers are high.)

The “Bad” Recipe

• High VFI + borrowing autonomy → worst for fiscal stability (Rodden)

Ordeshook, P. C., & Shvetsova, O. (1997) Main argument

stable federalism depends on institutions that make political elites’ self-interest align with cooperation across national and regional levels, especially through integrated party systems and weak, decentralized executive authority that forces leaders to rely on those parties.

Self-enforcement is the core requirement of

stable federalism.

Party integration is the key mechanism that binds

national and regional elites.

Weak executives + simultaneous elections =

strong federal integration.

Economic prosperity, constitutional allocations, or culture cannot

ensure stability.

U.S. & Germany =

integrated federations

Canada & Russia =

fragmented

Why federalism?

• Begin as a defense alliance to solve a coordination problem

• Multinationalism creates demand for dividing power among groups

• To weaken the central state

• Bringing government closer to the people

• Often big, ethnically diverse

Subsidiarity decentralization

devolve autonomy to lowest government unit capable of making decision

Benefits of federalism (when self enforcing) (Madison, Rousseau)

Understand the needs of the people better while not being too inefficient (

Benefits of federalism (when self enforcing) (Montesquieu)

Balance internal and external threats

Assignment Problem

government decisions should be made at the right level

Competitive Efficiency

states can compete among citizens by offering services that will attract different citizens - allows people to sort themselves (vote with their feet) so that the right public goods go to the right people

Federalism and Leviathan

• creates competition between states for smaller government since citizens want to move to places with low taxes

Self-enforcement:

• subnational and national leaders have an incentive to uphold a federalist system (having governance at both levels) because it is in their self-interest: improves their electoral chances

Three classic views about role of federalism in provision of public goods

• Federalism and the assignment problem: How federalism can help ensure that policy issues are addresed at the level of government that best address the issue

• Federalism and competitive efficiency: How federalism can promote efficiency in the provision of pubic goods by allowing subnational units to offer different levels of public goods and then having people move to subnational unit that suits their preferences

• Federalism and constraint on Levianthan: How federalism constrains the size of government by having subnational governments compete for citizens by keeping taxes low

Accountability works best in

MC-like systems (clear responsibility)
➡ Breaks down in PR systems with coalitions.