What we’re talking about this time
Does voting really have almost no effect on policy? In American Federalism: Competition Among Governments, American political scientist Thomas R. Dye combed through tax data from all 50 states and reached a conclusion many people would rather not face: whether Republicans or Democrats are in power, their impact on taxation and spending is almost indistinguishable. When Republicans ran California, taxes rose by 3.8%; during New York’s Republican Governor George Pataki’s term, tax revenue grew much faster than it did under the Democratic governors who came later.
So what really constrains 80,000-odd American governments? The answer is competition—and, more precisely, residents’ right of exit. When you can pack up and leave, the government has no choice but to care about what you want. Some 3,000 state, city, county, school-district, and special-district governments compete like businesses, each offering its own “taxes-for-services” package. This competition produces astonishing government efficiency: 92% of the variation in education spending can be explained solely by changes in the school-age population—that is, local-government spending rises and falls with demand, while the federal government just keeps getting bigger.
Even more surprising, this competitive system comes with a built-in catch-up mechanism: poor states grow systematically faster than rich states, and the correlation between income levels and growth rates is -0.84. But after the 1913 federal income-tax amendment, federal transfers began to corrode this engine—the money changed from something collected locally to something demanded from Washington, and the incentive for governments to compete began to loosen.
And if you grew up during China’s reform and opening-up era, all of this will sound oddly familiar. Economist Zhang Wuchang’s “interjurisdictional competition,” Justin Yifu Lin and Jeffrey Sachs’s “Chinese-style federalism”—they are almost the Pacific-side version of this same story. The “running to Beijing” that followed the 1994 tax-sharing reform, meanwhile, is a striking mirror image of the story of federal transfers corroding competition in America.
Key takeaways
- Dye’s survey of tax data from all 50 states: whether Republicans or Democrats are in power, their effect on policy is nearly zero—when Republicans ran California, state taxes rose by 3.8%
- The “right of exit” works better than the ballot: 80,000 governments compete like a free market, and 92% of changes in education spending can be explained solely by changes in the school-age population
- The -0.84 correlation between poor-state catch-up and rich-state growth, and how Olson’s “institutional hardening” and “protection racket” explain it all
- How federal transfers corroded the engine of competition: money changed from being collected locally to being demanded from Washington, and the incentive to compete disappeared
- China’s “interjurisdictional competition” and the “running to Beijing” after the 1994 tax-sharing reform—the institutional engines on both sides of the Pacific turn out to be one and the same
Jump to a section
- 00:00 The free market of 80,000 governments
- 04:04 Huge policy differences among states
- 06:14 Competition forces governments to follow demand
- 10:19 What ballots can’t manage, competition can
- 13:55 Poor states catching up with rich states and the protection racket
- 18:14 Fifty laboratories and industrial policy
- 20:18 The two dilemmas of welfare and redistribution
- 22:09 Federal transfers: the corrosion of the competitive engine
- 26:55 Interjurisdictional competition in China
This book
- Title: American Federalism: Competition Among Governments
- Author: Thomas R. Dye
- Publisher: Lexington Books (D.C. Heath)
- Publication year: 1990
- ISBN：9780669214741
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