Comprehensive Study Notes on American Federalism and Fiscal Policy Transformation

Contemporary Fiscal Federalism and the Impact of Restructuring

• The Concept of Federalism: Federalism describes the distribution of power between the federal (national) government and state governments. While states have autonomy to carry out specific policies, they remain beholden to the national government, particularly through fiscal arrangements.

• Fiscal Federalism: This term refers to the system where national policy priorities are carried out through states via the transfer of money from the federal government to state governments. Key examples include:

  • Medicaid: Provides health insurance for those living below or near the poverty line. The federal government provides the vast majority of funding, while states contribute a smaller, additional amount.

  • SNAP (Supplemental Nutrition Assistance Program): Provides food assistance to vulnerable populations. Historically, the federal government covered $100\%$ of benefit costs and $50\%$ of administrative costs.

• The 2025 Budget Bill (July 4, 2025): President Trump and congressional Republicans enacted legislation that significantly altered these programs:

  • Medicaid Alterations: Imposed work requirements with specific exemptions for pregnant women, individuals with disabilities, and caregivers of children aged $13$ and under. It also shifted more care costs to recipients.

  • SNAP Alterations: Forced states to pay for a larger share of benefit and administrative costs. It expanded work requirements to parents with children aged $7$ and older.

• Practical and Financial Impacts of the 2025 Legislation:

  • Access Barriers: While not directly reducing the number of eligible recipients, the administrative hurdles (additional paperwork and tracking systems) are expected to cause eligible people to lose coverage.

  • Uninsured Population: The Congressional Budget Office (CBO) projects that $10,000,000$ more people will be uninsured by $2034$ due to Medicaid changes.

  • SNAP Reductions: Approximately $22,300,000$ families face reduced or eliminated benefits.

  • State Financial Pressure: States must collectively absorb approximately $1.3 \times 10^{12}$ (or $\$1.3 \text{ trillion}$) in costs over $10$ years.

  • Administrative Burden: States must develop complex systems to track work requirements, leading to potential coverage loss due to "administrative barriers" rather than actual ineligibility.

  • State Budgetary Choices: These pressures force states to decide between raising taxes, cutting other programs, or reducing the scope and generosity of benefits.

• Fragmentation of Standards: States with different financial resources and political priorities may make different choices regarding program participation, potentially fragmenting what were previously national standards.

The Federal Government Shutdown and SNAP Funding

• The Shutdown Crisis: Funding for SNAP lapsed on November $1$.

• Legal Action: $25$ states and the District of Columbia filed lawsuits against the U.S. Department of Agriculture (USDA), which manages SNAP. They argued the federal government should use contingency funds to maintain the program.

• Court Orders and Funding Levels: Following federal court orders, the administration initially funded $50\%$ of November benefits, later increasing this to $65\%$.

• State-Level Variations: The timing and amount received by recipients varied by state depending on issuance schedules and whether the state provided supplemental funding.

• Resolution: Full funding resumed in mid-November when the shutdown ended.

Defining Systems of Government

• The Federal System: Power is divided between the central (national) government and smaller units (states). Neither level completely controls the other; both have room for independent action.

• Confederation: A system where constituent states join for common purposes but retain ultimate individual authority, including the power to veto major central government actions. Examples include the United Nations and the United States under the Articles of Confederation.

• Unitary Government: A system where the central government holds all power and can alter or command constituent units. Examples include China, Japan, Turkey, Iran, and France.

The Structure and Tiers of American Government

• Scope of Governance: The U.S. includes the federal government, $50$ state governments, and thousands of local units (counties, cities, towns, school districts, and Indigenous Nations).

• State Government Structure: Mirroring the national level, each state has:

  • Legislature: Often called the state assembly.

  • Executive: The governor.

  • Bureaucracy.

  • Court System.

• Local Governments: These are legal creations of state governments. They are subsidiary to states and can be created, changed, or abolished by state law. Their roles include essential daily services like roads, trash collection, parks, schools, and policing.

Origins and Motivations for American Federalism

• Historical Context: Emerging from independence from Britain, the states moved from separate entities to a confederation, and finally to a federal system. The framers viewed federalism as a "middle-ground solution" between the failed Articles of Confederation and an unacceptable unitary model.

• Protection Against Tyranny: Federalism was designed to guard against an overly centralized government. James Madison, in Federalist 10, argued that a large, diverse country with many factions and layers of government would protect minorities from an oppressive central majority.

• Geographic and Social Factors: Federalism is typically found in large territories with distinct regions (differing in religion, ethnicity, or economy).

  • Historical Difference: The agricultural South (reliant on enslaved labor) vs. the commercial Northeast.

  • Modern Difference: The manufacturing/agricultural Midwest and South vs. the service/commercial economies of the Northeast and West Coast.

Constitutional Underpinnings of Federalism

• Supremacy Clause (Article VI): Establishes that the Constitution, laws, and treaties of the U.S. are the "supreme law of the land."

• Reservation Clause (Tenth Amendment): Declares that powers not delegated to the national government nor prohibited to the states are "reserved to the states respectively, or to the people."

• Enumerated Powers (Article I, Section 8): Specific powers granted to Congress, including taxing, regulating interstate commerce, establishing post offices, declaring war, and the "necessary and proper" (elastic) clause.

• Police Powers: States retain the authority to make laws protecting the health, safety, and general well-being of their citizens (e.g., business regulation).

• State Role in National Affairs:

  • Ratification: Article VII required nine of $13$ states to ratify the Constitution.

  • Amendments: Article V requires three-fourths ($\frac{3}{4}$) of states to ratify amendments.

  • Selection of Officials: States determine voting eligibility for the House (Article I, Section $2$), draw district boundaries, and provide two senators (originally chosen by state legislatures until the $17\text{th}$ Amendment in $1913$). Presidents are chosen via the Electoral College, where state votes equal the sum of their senators and representatives.

Relations Among the States

• Full Faith and Credit Clause (Article IV): States must recognize the public acts, records, and judicial proceedings of other states, ensuring contracts and civil judgments (like child support or debt) remain valid across state lines.

• Privileges and Immunities Clause: Citizens of each state are entitled to the same rights in other states, such as accessing courts and owning property.

• Legal Precedents: Obergefell v. Hodges (2015) made same-sex marriage legal nationwide; prior to this, it was a state-by-state policy environment.

Debating Federalism: Nationalist vs. States' Rights Positions

• The Nationalist Position:

  • Belief: Primacy of the federal government to promote the interests of the whole country.

  • Framework: Based on the Preamble ("We the People") and a view of the Constitution as a compact forming a single national community.

  • Constitutional Basis: Commerce clause, supremacy clause, and necessary and proper clause.

  • Proponents: Alexander Hamilton, John Marshall, Abraham Lincoln, Theodore Roosevelt, FDR, LBJ, and Barack Obama.

• The States' Rights Position:

  • Belief: States and national government are sovereign and coequal in their spheres.

  • Framework: Constitution as a compact among the states; ratified by states, not a direct public vote.

  • Constitutional Basis: Tenth Amendment.

  • Arguments: States are closer to the people, more responsive to diverse needs, and serve as laboratories for policy experimentation.

Historical Evolution of Federalism

• Layer Cake (Dual Federalism): A system where state and national powers are neatly divided into separate layers with clear boundaries.

• Marble Cake (Cooperative Federalism): Intermixed responsibilities where national and state elements swirl together. This has been the dominant model as the national government took on more responsibility.

• Key Milestones:

  • Virginia and Kentucky Resolutions (late 1790s): Jefferson and Madison argued for nullification, claiming states could disobey unconstitutional national laws.

  • Judicial Review (1803): Established the Supreme Court's authority to declare national laws unconstitutional.

  • The Civil War: Settled that the Union is indissoluble and states cannot secede.

  • Post-Civil War Amendments:

    • 13th Amendment: Abolished slavery.

    • 14th Amendment: Included the Due Process Clause and Equal Protection Clause, eventually used to apply Bill of Rights protections against state actions.

    • 15th Amendment: Guaranteed voting rights regardless of race (though largely ignored until the $1965$ Voting Rights Act).

  • Economic Expansion and WWI: The Sherman Antitrust Act ($1890$) allowed federal suits against monopolies. The War Industries Board during WWI involved the federal government in manufacturer supply and labor disputes.

  • The New Deal (1930s): Expansion of federal power to address the Great Depression. In Wickard v. Filburn (1942), the Supreme Court ruled that Congress could regulate state economic activities even if they only indirectly related to interstate commerce.

  • WWII and Internment: Total economic mobilization occurred. In Korematsu v. United States (1944), the Court infamously upheld the relocation of over $120,000$ people of Japanese ancestry to internment camps.

  • Great Society (1960s): LBJ's programs targeting poverty and discrimination (Medicare, Medicaid) positioned the national government as a primary policy actor.

Devolution and Modern Federalism

• Devolution: The movement to return power and responsibility to the states.

  • Ronald Reagan: Reduced federal funding but increased state flexibility with remaining funds.

  • Bill Clinton: Oversaw welfare reform ($1995$-$1996$), replacing Aid to Families with Dependent Children (AFDC) with block grants to states.

• Compassionate Conservatism (George W. Bush): Used federal power for conservative ends, such as the No Child Left Behind Act (2001), which imposed federal testing mandates on schools.

• The Affordable Care Act (Obama): Required states to expand Medicaid or risk losing federal funding. The Supreme Court in National Federation of Independent Business v. Sebelius (2012) ruled this mandate unconstitutional as it was deemed too "coercive."

• COVID-19 Response: Demonstrated a patchwork of policies. The Trump administration acted as a "backup" while agencies like the NIH and CDC provided guidelines. Operation Warp Speed was a public-private partnership developed to facilitate vaccines.

The Mechanics of Fiscal Federalism

• Categorical Grants: Money given to states for specific categories of activity with strict rules on usage (e.g., LBJ's anti-poverty initiatives).

• Block Grants: Money given for general purposes (e.g., secondary education) with fewer rules, offering more state autonomy.

• General Revenue Sharing: A system (ended in $1987$) that distributed money with no federal controls.

• Conditions on Aid: These are "voluntary" in theory, but states often cannot afford to refuse them.

  • Example: The federal government used highway funds to force states to raise the drinking age to $21$ in $1984$.

  • Example: Civil Rights Act requirements forbidding discrimination in programs receiving federal aid were used to desegregate schools.

Federalism and Indigenous Nations

• Sovereign Entities: The Constitution (Article I, Section $8$, Clause $3$) recognizes Indigenous Nations as sovereign, similar to foreign governments.

• Rights: Indigenous Americans view sovereignty as the right to self-governance and self-determination on their land.

• Disputes: Conflicts often center on land rights and the degree of federal vs. tribal control over territory.

Questions & Discussion

• Prompt: It is often argued that state governments are supposed to serve as an important check against excessive national power. How and why has this power balance shifted over the last $100$ years? Explain.

• Prompt: Do you believe that some alteration of the US Constitution is necessary to rebalance this shift, or is the current power balance working? Explain your reasoning.