Volume 6, Issue 3 - Ex Uno Plures. Welfare Without Illusion

Two competing visions of federalism have long held sway. The first is centered on the idea of an administrative system of delegation based on a geographic partitioning of the polity. The second view sees federalism as a bottom-up structure in which the larger polity is a construct of the smaller polities of which it is composed. In this edited collection, the object is to use these rival visions of a federal structure as a lens through which to analyze the various interconnections between the welfare state and its financing. Specifically, the claim is that the effects of federalism cannot be fully understood without consideration of the vision of federalism that the participants in their various roles adopt. The works collected in this special issue represent a selection of the papers presented at the conference “Ex Uno Plures. Welfare without Illusion,” held in September 2009 at the Faculty of Economics of Sapienza University of Rome, Italy, organized by the European Center for the Study of Public Choice (ECSPC).

Federalism is commonly described in contradictory fashion as involving both competition and decentralization. These descriptions may appear similar on the surface, but they emanate from contradictory analytical orientations. Competition entails a polycentric arrangement of competitors where there is no locus of control over the arrangement. In contrast, decentralization is a monocentric arrangement that involves a locus of control. To treat federalism as a method for decentralizing governments leads to a spurious form of federalism because the object that has been identified is not genuinely a competitively organized system of government. Genuine federalism requires a polycentric arrangement that is organized through openly competitive processes. In contrast, the spurious form of federalism allows hierarchy to trump open competition.

This paper examines the normative foundations of fiscal equalization – an issue handled, apparently decisively, in a classic paper by James Buchanan (1950). Contrary to Buchanan's claims, we argue that fiscal equalization requires extremely strong value judgements – at least in the case where fiscal differences arise from the interaction of public goods provision under different population size – effectively committing one to a Rawlsian maximin rule. Much weaker forms of the 'social welfare function' in this public goods case will generate the requirement that private consumption levels be equalized, but specifically not public consumption levels – in which sense private goods equalization seems normatively weaker than public goods equalization, If this is so, the hope of justifying federal fiscal equalization on the basis of relatively uncontroversial individualistic norms seems illusory.

In 2009, new debt restrictions in the Grundgesetz (the German constitution) and in federal legislation passed both chambers of the German parliament by two-thirds majorities, imposing a more rigid debt regime on federal and Länder (states’) fiscal policies than previous constitutional provisions entailed. In this paper, the new provisions are evaluated against the background of the problems of German fiscal federalism that they are supposed to solve, as well as the possible solutions discussed in constitutional economics. We thereby mainly draw on recent evidence from Switzerland. This reform is an important step to remedy the shortcomings of German fiscal federalism, but we argue that it needs to be complemented by tax autonomy for the German Länder.

From the politico-economic perspective, federalism is a protector of the present generation. But what about future generations? In federal states, Ricardian equivalence cannot be assumed to work properly, as migration between local jurisdictions undermines intergenerational redistribution based on parental altruism. However, we argue that there exists another equivalence mechanism which also works with purely selfish individuals: Public debts capitalize into property values. Jurisdictions with larger net debts exhibit, ceteris paribus, lower property prices. Debt capitalization in property values is the more pronounced the less elastic land supply is and the more mobile the other factors of production are. Therefore, capitalization is more relevant for local than for national debts, i.e. it is more pronounced in a federal than in a centralized state. Thus, federalism also becomes a protector of future generations.

This paper contrasts raising and leveling as alternative conceptual frameworks regarding the social organization of welfare. At least since Richard Musgrave’s (1959) tripartite organization of the theory of public finance, most fiscal scholars have treated the redistributive activities of governments as necessarily belonging to the national level of government. More significantly perhaps, that literature has treated the problem of promoting welfare as one of leveling incomes through programs of taxing-and-transferring. In contrast, this paper treats the problem of promoting welfare as one of raising incomes. This alternative formulation leads, in turn, to an alternative orientation toward the relationship between federalism and welfare. In particular, there is good reason to think that genuinely competitive federalism offers a sounder institutional framework for the promotion of raising than can redistribution through a central government, mostly because the knowledge that is required for a program of raising is distributed and incapable of meaningful summarization through aggregation.

The size and development of the shadow economy of 21 OECD countries is estimated, using the MIMIC estimation procedure. The analysis finds that an increased burden of taxation and social security payments, combined with intensive labor market regulation, quality of state institutions, and tax morale, are the driving forces for the shadow economy. The public institution of federalism has no statistically significant effect on the shadow economy. Finally, on the one side, incentive-oriented policy means are suggested so that any “black” value added can be transformed into official value added, and on the other side, it is important to have public institutions which work efficiently and act as a constraint for selfish politicians.

This paper explores the impact of citizens’ motivation to vote on the pattern of fiscal federalism. If the only concern of instrumental citizens was outcome they would have little incentive to vote because the probability that a single vote might change an electoral outcome is usually minuscule. If voters turn out in large numbers to derive intrinsic value from action, how will these voters choose when considering the role local jurisdictions should play? The first section of the paper assesses the weight that expressive voters attach to an instrumental evaluation of alternative outcomes. Predictions are tested with reference to case study analysis of the way Swiss voters assessed the role their local jurisdiction should play. The relevance of this analysis is also assessed with reference to the choice that voters express when considering other local issues. Textbook analysis of fiscal federalism is premised on the assumption that voters register choice just as ‘consumers’ reveal demand for services in a market, but how robust is this analogy?

Many governments as well as terrorist experts see the use of military and police forces as the only way to effectively counter terrorism. The most effective negative sanctions are considered to be military strikes, aggressive actions (including kidnapping and killing) against individuals known or suspected of being terrorists, or against persons supporting and harboring terrorists. Overt and covert military and paramilitary action is also thought advisable to pre-empt and prevent actions by terrorist groups, as well as against states suspected of hosting or tolerating terrorists. This paper argues that decentralization constitutes a powerful antidote as it strongly reduces the incentives for terrorists to attack and because the expected damage suffered is much smaller than in a centralized society. It moreover strengthens society, as economic, political and social decentralization (or polycentricity) is an essential element of a free and vigorous society. This in turn makes a society less vulnerable to terrorist attacks. Indeed, terrorism has no chance of success against a society that actively guards its fundamental liberal institutions, of which decentralized decision-making forms an essential part.