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An American Model for Europe? Tax Policy and Federalism in the United States

Un modèle américain pour l’Europe ? Politique fiscale et fédéralisme aux États-Unis
Gerald Friedman

Résumés

Parce qu’elle a imposé à des pays confrontés à un chômage élevé et croissant une réduction drastique de leurs dépenses publiques, la crise de la zone euro a suscité un regain d’intérêt pour la mise en place, en complément de l’union monétaire, d’une union budgétaire et d’un Trésor fédéral pouvant accorder son soutien aux pays en difficulté. Cette idée se heurte à l’opposition de ceux qui craignent que certains pays, en particulier les moins prospères de la zone euro, utilisent ce Trésor pour subventionner leur laxisme budgétaire. Ses partisans se réfèrent à l’exemple américain pour montrer qu’un pays a réussi à mettre en place un fédéralisme budgétaire, une union permettant de venir en aide aux régions les moins prospères et à celles se trouvant confrontées à des difficultés temporaires sans toutefois imposer aux autres un fardeau indu. Aux États-Unis, en effet, même si des procédures démocratiques permettent aux régions en difficulté d’obtenir des soutiens nationaux significatifs, la constitution encadre la règle majoritaire dans des limites qui protègent les régions prospères qui ne peuvent se voir imposer des transferts excessifs. La réussite du modèle américain ne doit toutefois pas être exagérée. Les différends sur la redistribution entre États ont été à l’origine de certains des conflits les plus violents de l’histoire des États-Unis, y compris la Guerre de Sécession. Quant au système des freins et des contrepoids, non seulement il est en contradiction avec les valeurs démocratiques, mais il rend souvent inefficace l’action du gouvernement. L’hétérogénéité des économies des pays membres de l’Union européenne étant plus importante que celle des régions des États-Unis, les pressions auxquelles pourrait être soumise une union budgétaire européenne pour opérer une redistribution du revenu seraient encore plus fortes, ce qui conduirait à la mise en place de freins encore plus puissants à l’action démocratique, au point de rendre la promesse d’une union budgétaire européenne discutable.

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Texte intégral

A Federal Europe?

1The crisis of the single currency threatens to bring down the entire European project with potentially catastrophic consequences for Europe and the world. For a decade, financial flows from exporters to importers supported an unbalanced trading regime but the financial crisis of 2008 exposed the Eurozone’s fundamental imbalances. The economic crisis threw national budgets into deficit and, worse, brought a dramatic withdrawal of funds from countries on the European periphery, draining their banking systems. The subsequent banking crisis threatens not only the trade regime but the stability of the European economy.

  • 1 Felipe Gonzalez, “Only a United, Federal Europe Can End Its Financial Turmoil,” Christian S (...)
  • 2 Christian Vits, “Trichet Proposes Euro-Area Finance Ministry to Coordinate Fiscal Policies, (...)
  • 3 See, for example, Paul De Grauwe and Yuemei Ji, “The Future of the Eurozone,” The M (...)

2By requiring fiscal contraction in nations facing high and rising unemployment, the current crisis has renewed interest in establishing a European federal union able to support countries in economic difficulties. To prevent abuse, such a union would necessarily have power regulate national fiscal policy. Former Spanish Prime Minister Felipe Gonzales, for example, has called for a unified treasury and common taxation and regulatory policies.1 European Central Bank President Jean-Claude Trichet has proposed establishing a Europe-wide ministry of finance with the power to veto the budget measures of countries that go “harmfully astray” to go with the authority to issue bonds and to provide financing for member states.2 Pointing to the United States where regional economic crises are contained by federal transfers from prosperous regions, economist Paul De Grauwe called for a federal authority able to support needy regions, a common European Treasury to complement the single currency.3 George Irvin, an economist at London and The Hague, agrees:

  • 4 George Irvin, “An Endgame for the Eurozone,” Euobserver.com, June 16, 2011, <http:/ (...)

The eurozone cannot survive unless its citizens benefit from its existence. And here is where serious political courage is needed – the courage to set up a Eurozone unemployment benefit scheme, and/or for that matter, a Eurozone pension scheme. Initially such schemes would complement the national schemes already in place, but as they grew in size, they would come to play the same macroeconomic stabilisation and redistributive functions as the US Treasury.4

3The rest of the paper discusses some of the other issues raised by fiscal federalism. While endorsing the campaign for fiscal union, this paper raises two particular warnings. The wide divergence in incomes within the EU and the Eurozone means that interregional redistribution comparable to what is done in the United States would involve much larger income flows than in the United States. This raises the political question of whether facing the prospect of such large flows, the different European states would insist on the types of constitutional protection for individual autonomy that would paralyze any European federal authority. Furthermore, the proposed fiscal union would not by itself address the fundamental problem facing the Euro: the attempt to force divergent economies with different price patterns into a single economic union. Indeed, by reducing pressure for an “internal devaluation”, the downward adjustment in incomes, wages, and prices to balance intra-European trade, fiscal transfers could delay adjustments needed to restore economic balance.

Europe, the single currency, and fundamental imbalances

4An unprecedented experiment in nation-building by currency integration, the European experiment in a single currency depends on similar price movements across the Eurozone so that trade flows will balance in the absence of currency adjustments. The architects of the euro understood this and made inflation balance a condition for admission to the euro. They achieved considerable success and widely divergent inflation rates converged dramatically towards the German rate in the run-up to the inauguration of the single-currency. Unfortunately even after currency union, a significant gap remained with inflation rates in other Eurozone members remaining persistently above the German level. After a decade in the common currency, prices had risen relative to the German level by 20 percent in Greece, 17 percent in Spain, and 9 percent in Italy.

5Had the separate countries maintained independent currencies then these differences in inflation regimes would have led to a realignment of the currencies; a Greek drachma, for example, would have lost something like 20% of its value relative to a German mark so that German and Greek prices would have remained the same in marks or in drachmas. Because the single currency has prevented such adjustments, Greeks (and others) have found that they can buy things for less in Germany while Germans have found Greece (and others) to be a relatively expensive place to shop or to visit. This has led to a dramatic shift in European trade and commerce towards Germany whose trade balance has soared. Germany’s surplus with France went from $17 billion in 2001 to $37 billion in 2007; with Italy from $11 billion to $27 billion; and with Greece from $3 billion to $7 billion (see Figure 1).

Figure 1. German trade balance (in billions $)

Figure 1. German trade balance (in billions         $)

Source: OECD.stat

6By 2007, Germany’s trade surplus was over 10% of its total gross domestic product, creating employment opportunities for workers and profits for businesses. The corresponding deficits in Greece and elsewhere would have led to reduced economic activity, bringing down prices and wages even in the absence of a currency adjustment. Through 2007, Germany’s trading partners were spared the pain of Germany’s surpluses by large capital inflows, attracted, it seems by the idea after the Treaty of Maastricht that investing in a Greek or Portuguese bank or bond was the same as investing in Germany. So great was the flow of funds to the periphery that even Greece was able to borrow at virtually the same interest rate as Germany. Capital flows from Germany, and other northern countries, to Greece and others were large enough to balance the enormous trade imbalances produced by the single currency in a Eurozone with widely varying inflation rates. From 2001-10, Greece received inflows of nearly $400 billion, or 167% of its GDP (see Figure 2). These flows allowed German businesses to sell their products without forcing austerity and retrenchment elsewhere. German foreign investment was like American home equity borrowing: fuel for an economy which would otherwise suffer from a lack of consumer demand because of the unequal distribution of income. As in the United States, Europe’s debt-fed boom was fundamentally unstable.

Figure 2. Cumulative capital flows compared to GDP

Figure 2. Cumulative capital flows compared to         GDP

Source: OECD.stat

  • 5 Government deficit as share of GDP from the OECD.stat.

7When the economic crisis hit in the summer and fall of 2008, depositors and investors sought to withdraw their money from the European periphery. The crisis may have been exacerbated by fears of sovereign default in Greece (whose government debt in 2008 was 110% of GDP) or Italy (98%); but government spending was not at the root of the financial panic in other countries with debt burdens less than Germany’s, including Ireland (debt burden 28% of GDP) or Spain (33%).5

Federalism in theory and in the American model

  • 6 Quoted in Binyamin Appelbaum & Jack Ewing, “Amid Warning Signs, Hints That Europeans May St (...)

8These days, many Europeans look longingly across the Atlantic for a model of successful economic integration. In America, Trichet sees a federal state with a unitary treasury where a problem like the Greek debt would be submerged within a much larger system of strong and solvent institutions (see Figure 3).6

Figure 3. Central government debt compared to GDP, own country, Eurozone, or EU

Figure 3. Central government debt compared to         GDP, own country, Eurozone, or EU

Source: OECD.stat

  • 7 A good introduction to the undemocratic feature of the American constitution is Robert Alan (...)

9American federalism performs important reasonably well but its achievements come at a price, including the tolerance of fundamentally undemocratic features of the American constitution that Europeans may hesitate to imitate. The American experience, however, has been that such limits on democracy may be necessary to establish a fiscal union between regions with widely varying incomes and economic circumstances.7

  • 8 See The Federalist Papers. Alexander Hamilton, James Madison, John Jay, A Mentor Book, MT32 (...)

10The argument for American federalism dates back to James Madison’s writings in the Federalist papers of the 1780s.8 Against those who harkened back to Greek and Roman models to argue that democracy could only survive in small and homogeneous community, Madison proposed that democracy could survive better in a larger space where no single faction could achieve dominance. Madison defended a federalist system as a way to protect liberty in the face of entrenched “factions”, or competing groups based in different regions of large nation states, or in different economic or ethnic groups. As he argued in Federalist 10:

  • 9 James Madison, “The Federalist No. 10: The Utility of the Union as a Safeguard against Dome (...)

The smaller the society, the fewer probably will be the distinct parties and interests composing it; the fewer the distinct parties and interests, the more frequently will a majority be found of the same party; and the smaller the number of individuals composing a majority, and the smaller the compass within which they are placed, the more easily will they concert and execute their plans of oppression. Extend the sphere, and you take in a greater variety of parties and interests; you make it less probable that a majority of the whole will have a common motive to invade the rights of other citizens; or if such a common motive exists, it will be more difficult for all who feel it to discover their own strength, and to act in unison with each other. Besides other impediments, it may be remarked that, where there is a consciousness of unjust or dishonorable purposes, communication is always checked by distrust in proportion to the number whose concurrence is necessary.9

  • 10 See Robert Alan Dahl, How Democratic Is the American Constitution? op. cit..

11But if large size is protection against tyranny, this comes at the price of moving government further from the people, imposing a rigid uniformity while separating government from the people with a single regime imposed over diverse communities. Madison would balance the large state with local autonomy by devolving some governmental powers out to the states while giving particular (geographical) minorities disproportionate power within the federal government through malapportionment of the Senate and in the vote for the Presidency. When Madison looks to federalism, “states’ rights”, to protect give local groups, he leaves intact not only repressive local governments but also gives geographical minorities excessive power in the national government. Struggles over the balance of local autonomy and centralized government have produced some of the bitterest conflicts in American history including a long and bloody civil war. Conflicts come from the inherent contradiction at the heart of Madison’s work. On one side, fear of the tyranny of faction led Madison to push for a broader union, a strong federal state. On the other, decentralization as a barrier against the imposition of a homogeneous national policy over the wishes of diverse local communities.10

12There are hard lessons here for European federalists. Regional power, “states’ rights” left intact by Madison’s compromises, hamstrung the development of American democracy and undermined effective national government. While modern Europe is spared the slavery issue that provoked the American Civil War, regional differences remain and will be exacerbated by any significant attempt to redistribute income across Europe.

The roles of a democratic federal government

13A federalist Europe would face grave economic challenges because Europe includes a range in income and divergent interests wider than the United States. While poorer Europeans have an interest in promoting a federal system and intra-European solidarity; the redistribution needed to equilibrate incomes within Europe is so great that it threatens major interests in richer European countries who might resist federalism unless there are protections included, strict conditions limiting democratic authority over the central government and, perhaps, limiting democracy in the poorer regions.

14A strong federal government can perform important common functions: maintaining national security, providing public goods and infrastructure, and maintaining national interest in trade and other economic dealings with foreign powers. Social insurance can be provided much more efficiently by a central federal government with the resources and range to support any particular crises. While all Europeans would benefit from such services, their funding necessarily involves a redistributive federal state. Additional programs to support poorer regions and to bind together Europe into a system of social solidarity might also have common benefits. A European-wide program of social insurance might, for example, ease the transition to a European-wide market by protecting those who might suffer during the transition. Such programs, however, would involve further transfers from affluent to poorer Europe.

  • 11 See Paul De Grauwe & Ji Yuemei “The Future of the Eurozone,” op. cit.; and Jeffrey Sachs (...)

15American federalism provides both models and lessons in designing programs of interregional insurance and redistribution. National support for programs of unemployment insurance, health insurance (Medicaid), food stamps and other income supports shields states from the impact of adverse economic circumstances including the consequences of federal policies enacted to promote the general economic welfare. Federal policy compensates for regional economic downturns, redistributing back to depressed regions about 30 per cent of their reduced income.11 These programs produce significant redistribution from richer to poorer states. In 2005, for example, receiving states were net recipients of federal spending over and above their taxes of over $259 billion. Over 2 percent of national gross domestic product, this fiscal stimulus raised per capita income in the poorest 10 states by over 11% while raising per capita income in the next three groups of states by 4.9%, 3.5%, and 1.0% respectively (Figure 4).

Figure 4. Impact of Federal fiscal policy on state per capita income, the United States 2005

Figure 4. Impact of Federal fiscal policy on         state per capita income, the United States 2005

Source: Tax Foundation Special Report No. 158, “Federal Tax Burdens and Spending by State,” and U.S. Census Bureau’s Consolidated Federal Funds Report for 2005; Census Bureau, Statistical Abstract of the United States: Table 680. Personal Income Per Capita in Current and Constant (2005) Dollars by State.

16By raising income in poorer states and lowering it in the wealthier states, fiscal transfers reduce the variation in income across state lines (see Table 1).

Table 1. Effect of federal fiscal policy on interstate variation in per capita income, the United States, 1981 and 2005. The coefficient of variation in state per capita income, pre- and post-fisc.

1981

2005

Change in row

Prefisc

14.9%

13.8%

-6.9%

Postfisc

14.3%

11.0%

-22.7%

Change in column

-3.9%

-20.2%

Source: Tax Foundation Special Report No. 158, “Federal Tax Burdens and Spending by State,” and U.S. Census Bureau’s Consolidated Federal Funds Report for 2005.

17Insurance and redistributive programs comparable to those of the United States would be much more difficult to execute in Europe because of greater variation in income and economic structure across European regions. To achieve a reduction in inequality comparable to that done in the United States would involve much larger transfer payments, supported by heavier tax burdens on affluent regions of Northern and Western Europe.

18Especially since the extension of the EU to Eastern Europe, there is much more variation in economic conditions in European countries than is the case in the United States, raising the cost of fiscal federalism. Comparing per capita income among EU members and states in the United States, there is much more variation in European income levels. Little Luxembourg, with a per capita income of over $100,000 and Bulgaria, with a per capita income of less than $8,000 are extremes. Even after trimming the top and bottom state or country, the coefficient of variation in EU member per capita income is nearly four times as great as across US states; and the range in per capita incomes is over three times as great (see Table 2).

Table 2. Range in per capita income, EU27 and US states, around 2005

EU27

USA

Mean

$ 38,013

$ 34,236

SD

$ 23,696

$ 4,736

CV

0.62

0.14

Max

$ 119,031

$ 48,503

Min

$ 7,640

$ 26,686

Range

$ 111,391

$ 21,817

Truncated (dropping top and bottom)

Mean

$ 35,987

$ 34,096

SD

$ 17,090

$ 4,221

CV

0.47

0.12

Max

$ 68,363

$ 44,060

Min

$ 11,992

$ 26,819

Range

$ 56,371

$ 17,241

Source: Census Bureau, Statistical Abstract of the United States: Table 680. Personal Income Per Capita in Current and Constant (2005) Dollars by State; OECD.stat.

19Greater variation in per capita income reflects the greater variation in the types of economic activity in different EU members compared with across the United States. Over the entire EU, over 5 percent of the labor force is employed in agriculture but this includes a range of over 20 percentage points between the agricultural share in countries like Germany, the Low Countries, and the UK and Romania and other southern and eastern countries. In the United States, by contrast, the range in the agriculture share is only from 2.1 percent (South Dakota) down to 0.1 percent in New Jersey, one-tenth the range in Europe (see Table 3).

Table 3. Agricultural share of labor force: Europe 27 and the United States 51

EU27

USA

Mean

6.3%

0.8%

SD

5.3%

0.6%

CV

0.84

0.69

Max

23.5%

2.1%

Min

1.2%

0.0%

Range

22.4%

2.1%

Source: OECD.stat. Census Bureau, Statistical Abstract of the United States: Table 616. Employed Civilians by Occupation-States.

20Some American states, notably farm states and states with significant oil and gas production, have fared relatively well in the Great Recession that began in 2007. Nonetheless, there is less variation in industrial mix between states within the United States than between EU members, and, as a result, there is less variation in the economic shocks experienced by American states experience than is the case in the EU. Common economic conditions reduce the political conflict over programs for countercyclical spending; what is good for New York is also, more or less, good for Texas.

  • 12 This is less than the transfers achieved in the US: about $260 billion or nearly 5% of the (...)
  • 13 This would transfer to the poorer European states enough to set their per capita income rel (...)

21Smaller variation in income levels and economic structures reduces the political stress on the American federal government. If less is being redistributed, those who anticipate losing from any particular program have less to fear and, therefore, less need to dominate the political process. Comparing the EU and the United States, countries like Denmark or the Netherlands would have much to lose in any federal system. To achieve in the EU the same reduction in inequality achieved in the United States, would cost over $224 billion, or about 1.5 percent of income for the affluent countries who would fund these transfers.12 Because of the greater range of income within the EU, this would do relatively little to reduce European inequality: it would reduce the coefficient of variation in member per capita income only from 0.62 to 0.59, a level over five-times that of US state post-fisc per capita income. Redistribution sufficient to bring the EU’s income distribution across members to something similar to the US would involve transfers of $2 trillion, over 12% of income in the more affluent countries.13 At a cost of almost three-times the cost of US transfers, this would lower the CV for EU members’ per capita income to the US level of 0.12.

The struggle to develop US federalism

22The possibility that a voting majority in other regions would use a strong federal government against their interests leads regional interests to oppose federalism. To win their adherence, American federalism has developed with constitutional compromises that have hindered the social development of the United States and limited the effectiveness of American government. The compromises needed to win the adherence of different regions to a federal union have reduced the ability of the federal government to act effectively.

  • 14 See Garry Wills, James Madison, The American Presidents Series. New York: Times Bo (...)

23A rich slave owner from one of the country’s wealthiest states, James Madison and the other so-called Founding Fathers established a federal government deliberately limited in order to ensure that it would not use its power to interfere with the “peculiar institution” of southern slavery or to redistribute significant income away from the south.14 The structure of American federalism was to be radically altered during the Civil War decade of the 1860s and changed again in the Progressive Era (when constitutional amendments provided for the direct election of senators and direct federal taxes) and during the New Deal and Civil Rights eras of the 1930s through 1970s. Notwithstanding these changes, basic structures remain to protect local elites by limiting the effectiveness of the central government.

  • 15 Small southern states have more influence in choosing the president because their e (...)
  • 16 The 20 smallest states have about 10% of the total population of the United States.

24Following Madison, the essential balance in the American federal system is between a central power strong enough to act effectively to advance the common interest and to limit the power of local factions and local governments that represent the peculiar interest of different regions and localities. Throughout American history, the most important of these peculiar interests has been the white slave owners and land owners of the South, and the American government institutions and practices have been structured to inhibit interference. The compromise that established the Senate with equal representation for every state regardless of population, for example, has limited the influence of large industrial states in the North in favor of agricultural interests in southern states and mining interests in the West.15 These regional interests gained further power in the late 20th century with the establishment of the filibuster rule where senators from 20 states (40 senators of 100) can block action on any legislation or appointment.16

  • 17 This was under the Social Security Act’s program of “Aid to Families with Dependent Childre (...)
  • 18 See Jill S. Quadagno, The Color of Welfare: How Racism Undermined the War on Poverty, New (...)
  • 19 As many as 22 states, mostly in the South and West, continue to reject expansion leaving ne (...)

25Restrictions on the actions of the federal government have maintained local discretion over a wide range of policies. Since the First World War, military affairs have been largely left to the national government; this might be seen as a reaction to the debacle of the War of 1812 where state militias refused to cooperate with each other against the British except that similar problems emerged during the Mexican War and the Civil War when the federal government continued to rely on state action to raise and equip soldiers. The Roosevelt Administration was able to push through a national program of social security in the 1930s and, since then, old age security and health care have been delegated to the national government and the social security administration. But in areas where social insurance threatened to intrude more on the authority of landowners and racial hierarchies, southern politicians and some conservative northern allies were able to limit the federal government’s role. Unlike old age pensions, unemployment insurance, also part of the Social Security Act of 1935, has been locally administered, as has welfare support for the non-elderly, non-disabled.17 Despite efforts from presidents dating back to the administration of John Quincy Adams (1825-29), education and other social programs have remained locally administered and largely locally funded. Except for brief periods during Reconstruction after the Civil War and during the Civil Rights movement of the 1960s, efforts to extend federal support for education have foundered on the resistance of the white south.18 The Supreme Court decision in the Patient Protection and Affordable Care Act cases in March 2012 strengthened the protection of local interests by allowing states to refuse to expand the federal Medicaid program.19

26The founders of the American republic had to defer to entrenched local interests as a price of establishing a national government encompassing diverse regions and interests. This deference has important ramifications today. Social policy in the United States continues to be made locally, by 50 states and over 87,000 counties, municipalities, towns, villages, and other governments. Decentralized federalism leaves the power of local elites unchallenged even while limiting the scope of national policy. Because the federal government finances national defense, this activity benefits from the elastic revenue sources and the ability to borrow that goes with the national government. Spending on the state and local level nearly equals federal spending but it is largely in areas neglected by the federal government: education and human services (see Figures 5 and 6).

Figure 5 Federal government spending by activity, United States 2007

Figure 5 Federal government spending by         activity, United States 2007

Source: U.S. Office of Management and Budget, Budget of the United States, 2006.

Figure 6. State and Local Government Spending by Activity, 2005

Figure 6. State and Local Government Spending         by Activity, 2005

Source: Census Bureau, Statistical Abstract of the United States: Table 418. State and Local Governments – Revenue and Expenditures by Function

27The division of labor between the levels of government squeezes education and human service budgets because states and localities have access to smaller and less elastic revenue sources. There are several problems coming from this division of labor. First, state and local spending is strongly cyclical driven down in business cycle downturns by the need to maintain balanced budgets on the state and local level. States and local governments are bound by their constitutions to balance their budgets, and this legal mandate is enforced by bond and credit markets who write down their debt if they are seen to be running deficits. Under no obligation to balance its budget, able to run deficits and to borrow on the assurance that it can always print money to pay its bills, the federal government does not need to cut expenditures when revenues fall. The business downturns that lead to sharp cuts in state and local expenditures for education and human services therefore have little effect on military spending by the federal government.

28Military spending and other activities funded on the federal level also have access to stronger revenue sources that grow with the economy. State and local governments depend on taxes charged directly to consumers for visible activities, including sales taxes on commodities and property taxes on land, and on fees charged for goods and services (such as tuition, lotteries, and alcohol sales). States and localities avoid income or corporate taxes or sales taxes on services because these are harder to enforce and because they fear that rich people and corporations would move to another locality or state to avoid taxation. Such concerns count for little on the federal level where the government has a bureaucracy with the capacity to police even complicated tax codes and because evaders would have to flee the country to avoid taxes. As a result, taxes tied to income account for less than 20% of state and local revenue compared with 90% of revenue to the federal government. Because of the progressive nature of the federal income tax, federal revenues grow even faster than national income. But tied to inelastic sources, state and local revenue grows slower than income, limiting the capacity of states and localities to fund increases in spending. Because state and local government spending accounts for nearly half of total government spending, state and local taxes also substantially reduce the progressive tilt of American taxes (see Table 4).

Table 4. Revenue sources, United States governments 2005

Revenue source

State and Local

Federal

Income

34%

93%

Sales

18%

0%

Property

17%

3%

Other taxes

3%

4%

Fees

28%

0%

Source: U.S. Office of Management and Budget, Budget of the United States, 2006; Census Bureau, Statistical Abstract of the United States: Table 418. State and Local Governments – Revenue and Expenditures by Function.

29In the United States, “states’ rights” has been the slogan of those who would use their control over the provision of local government services to maintain oppressive political and economic systems. Such local tyrannies violate the principles of equality and justice on which the American republic was founded. Worse, local oppressions do not stay local in a federal system because they influence national policies that bear on everyone. It has been the price paid for any sort of federal system. Looking at governments looking to oppress ethnic and religious minorities in Hungary, Romania, and elsewhere, how far are Europeans ready to go to expand a federal Europe?

Lessons for Europe?

  • 20 Quoted in Gordon Canfield Lee, The Struggle for Federal Aid, First Phase. A History (...)

30Since the 1820s, measures have been filed in Congress to expand the federal role in education, to establish a national right to an education. In 1870, for example, Massachusetts Senator George Hoar proposed to “compel by national authority the establishment of a thorough and efficient system of public instruction throughout the whole country.” He was joined a few years later by Senator Henry W. Blair of New Hampshire whose so-called Blair Bill would have provided federal funds to states for education with limited strings attached. In an effort to win southern support, extra funds were provided states with high levels of illiteracy. Despite this provision, white Democrats from southern states repeatedly voted down Blair’s bill in the House of Representatives. They objected to the requirement that funds be expended on free common schools to all children without distinction of race or color. This was anathema to southern planters and politicians who feared, as one put it, “the difficulty of controlling more educated Negroes.”20

31The determination of southern politicians to limit access to education and welfare benefits in order to control their black and poor-white labor force killed the Blair Bill, and measures like it. The Hoar Bill or the Blair Bill could have been enacted and under our constitution the United States could have financed education and other social welfare programs nationally using the relatively abundant and elastic federal tax system. The defeat of these measures, and others, left the financing of education and welfare on the state and local level because that was a decision made by politicians to accommodate entrenched southern oligarchs.

32Conflicts like these have bedeviled American political history down to today where the combination of minority veto and the power of entrenched reactionary southern interests threaten to prevent effective government in the United States. There are lessons about the dilemmas of federalism. The income gains possible through regional cooperation and inter-regional social insurance and solidarity are balanced by the threat that a distant government can pose to democratic governance and the problems that entrenched local authorities and hierarchies can pose to central government. Will Europeans accept a powerful central authority able to override local governance? Or will they fear to give power, and money, over to a government that will be dominated by the votes of Europeans from other nationalities? Can a Europe built on top of existing national authorities ever achieve the massive income redistribution needed to achieve the gains expected from regional trade and solidarity? Without these gains, will Europeans continue to support the European project?

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Notes

1 Felipe Gonzalez, “Only a United, Federal Europe Can End Its Financial Turmoil,” Christian Science Monitor, January 10, 2011, <http://www.csmonitor.com/Commentary/Global-Viewpoint/2011/0110/Only-a-united-federal-Europe-can-end-its-financial-turmoil>, retrieved February 8, 2015.

2 Christian Vits, “Trichet Proposes Euro-Area Finance Ministry to Coordinate Fiscal Policies,” Bloomberg, June 2, 2011, <http://www.bloomberg.com/news/2011-06-02/trichet-proposes-euro-area-finance-ministry-to-coordinate-fiscal-policies.html>, retrieved February 8, 2015.

3 See, for example, Paul De Grauwe and Yuemei Ji, “The Future of the Eurozone,” The Manchester School, Vol. 82, September 2014, 15-34.

4 George Irvin, “An Endgame for the Eurozone,” Euobserver.com, June 16, 2011, <http://www.ocnus.net/artman2/publish/Business_1/An-Endgame-for-the-Eurozone_printer.shtml>, retrieved February 8, 2015.

5 Government deficit as share of GDP from the OECD.stat.

6 Quoted in Binyamin Appelbaum & Jack Ewing, “Amid Warning Signs, Hints That Europeans May Step Up Action,” The New York Times, September 23, 2011, <http://www.nytimes.com/2011/09/24/business/global/amid-warning-signs-hints-that-europeans-may-step-up-action.html?pagewanted=all&_r=0>, retrieved February 8, 2015.

7 A good introduction to the undemocratic feature of the American constitution is Robert Alan Dahl, How Democratic Is the American Constitution? The Castle Lectures in Ethics, Politics, and Economics, New Haven: Yale UP, 2001; also see Pauline Maier, Ratification: The People Debate the Constitution, 1787-1788, New York: Simon & Schuster, 2010.

8 See The Federalist Papers. Alexander Hamilton, James Madison, John Jay, A Mentor Book, MT328. New York: New American Library, 1961; also see the discussion in Pauline Maier, Ratification: The People Debate the Constitution, 1787-1788, op. cit..

9 James Madison, “The Federalist No. 10: The Utility of the Union as a Safeguard against Domestic Faction and Insurrection (continued),” November 22, 1787, <http://www.constitution.org/fed/federa10.htm>, retrieved February 8, 2015.

10 See Robert Alan Dahl, How Democratic Is the American Constitution? op. cit..

11 See Paul De Grauwe & Ji Yuemei “The Future of the Eurozone,” op. cit.; and Jeffrey Sachs & Xavier Sala-i-Martin, “Fiscal Federalism and Optimum Currency Areas: Evidence for Europe and From the United States,” in P. Masson, M. Canzoneri & V. Grilli (eds.), Establishing a Central Bank: Issues in Europe and Lessons from the US, Cambridge: Cambridge UP, 1992.

12 This is less than the transfers achieved in the US: about $260 billion or nearly 5% of the income of more affluent states funding the transfers.

13 This would transfer to the poorer European states enough to set their per capita income relative to France’s at the same relative level as US states are relative to Connecticut’s. Note that this does not raise income relative to the richest European country, which is Luxembourg, or even relative to one of Europe’s eight more affluent countries.

14 See Garry Wills, James Madison, The American Presidents Series. New York: Times Books, 2002; Garry Wills, Lincoln at Gettysburg: The Words That Remade America, New York, Simon & Schuster, 1992; J. David Greenstone, The Lincoln Persuasion: Remaking American Liberalism, Princeton Studies in American Politics, Princeton (NJ) Princeton UP, 1993; and Richard Franklin Bensel, Sectionalism and American Political Development, 1880-1980, Madison, Wisconsin: University of Wisconsin Press, 1984.

15 Small southern states have more influence in choosing the president because their electoral college vote is the sum of the number of senators and representatives.

16 The 20 smallest states have about 10% of the total population of the United States.

17 This was under the Social Security Act’s program of “Aid to Families with Dependent Children” program. It remains the case for the post-1996 program of Transitional Assistance to Needy Families.

18 See Jill S. Quadagno, The Color of Welfare: How Racism Undermined the War on Poverty, New York: Oxford UP, 1994; Lawrence A. Cremin, The American Common School: An Historic Conception, Teachers College Studies in Education, New York: Bureau of Publications, Teachers College, Columbia University, 1951; Michael K. Brown, Race, Money, and the American Welfare State, Ithaca: Cornell UP, 1999; Gordon Canfield Lee, The Struggle for Federal Aid, First Phase. A History of the Attempts to Obtain Federal Aid for the Common Schools, 1870-1890, New York: Bureau of Publications, Teachers College, Columbia University, 1949.

19 As many as 22 states, mostly in the South and West, continue to reject expansion leaving nearly 5 million people without health insurance; see <http://www.whitehouse.gov/share/medicaid-map> , retrieved February 8, 2015.

20 Quoted in Gordon Canfield Lee, The Struggle for Federal Aid, First Phase. A History of the Attempts to Obtain Federal Aid for the Common Schools, 1870-1890, op. cit., 121.

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Table des illustrations

Titre Figure 1. German trade balance (in billions $)
Légende Source: OECD.stat
URL http://lisa.revues.org/docannexe/image/8375/img-1.jpg
Fichier image/jpeg, 78k
Titre Figure 2. Cumulative capital flows compared to GDP
Légende Source: OECD.stat
URL http://lisa.revues.org/docannexe/image/8375/img-2.jpg
Fichier image/jpeg, 95k
Titre Figure 3. Central government debt compared to GDP, own country, Eurozone, or EU
Légende Source: OECD.stat
URL http://lisa.revues.org/docannexe/image/8375/img-3.jpg
Fichier image/jpeg, 82k
Titre Figure 4. Impact of Federal fiscal policy on state per capita income, the United States 2005
Légende Source: Tax Foundation Special Report No. 158, “Federal Tax Burdens and Spending by State,” and U.S. Census Bureau’s Consolidated Federal Funds Report for 2005; Census Bureau, Statistical Abstract of the United States: Table 680. Personal Income Per Capita in Current and Constant (2005) Dollars by State.
URL http://lisa.revues.org/docannexe/image/8375/img-4.jpg
Fichier image/jpeg, 81k
Titre Figure 5 Federal government spending by activity, United States 2007
Légende Source: U.S. Office of Management and Budget, Budget of the United States, 2006.
URL http://lisa.revues.org/docannexe/image/8375/img-5.jpg
Fichier image/jpeg, 87k
Titre Figure 6. State and Local Government Spending by Activity, 2005
Légende Source: Census Bureau, Statistical Abstract of the United States: Table 418. State and Local Governments – Revenue and Expenditures by Function
URL http://lisa.revues.org/docannexe/image/8375/img-6.jpg
Fichier image/jpeg, 73k
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Référence électronique

Gerald Friedman, « An American Model for Europe? Tax Policy and Federalism in the United States », Revue LISA/LISA e-journal [En ligne], vol. XIII-n°2 | 2015, mis en ligne le 20 mars 2015, consulté le 24 juin 2017. URL : http://lisa.revues.org/8375 ; DOI : 10.4000/lisa.8375

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Auteur

Gerald Friedman

Gerald Friedman is a Professor of Economics at the University of Massachusetts at Amherst. He graduated from Columbia College in 1977 and received his Ph.D. in Economics from Harvard University. In addition to his 1998 book, State-Making and Labor Movements. The United States and France, 1876-1914, and Reigniting the Labor Movement (2008), he is the author of numerous articles on topics in the labor history of the United States and Europe, the evolution of economic thought, and the history of slavery in the Americas.

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Les contenus de la Revue LISA / LISA e-journal sont mis à disposition selon les termes de la licence Creative Commons Attribution - Pas d'Utilisation Commerciale - Pas de Modification 4.0 International.

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