From the Comments: Types of Federalisms, Good and Bad

Adrián‘s response to responses by me and Michelangelo on his initial response to a comment by Michelangelo that I highlighted in a post of mine (whew!) deserves a closer look:

Guys, thanks for your comments, and apologies for the delay in responding!

1. I share your love for idle speculation. I’d say my fundamental difference with you lies elsewhere: you grew up/are very familiar with a country where federalism has worked pretty well (with notable exceptions, such as slavery and the Jim Crow laws), while I came from another where federal institutions are full of perverse incentives. So, whenever somebody proposes a federal arrangement, I immediately perceive the costs, while you’re more open to the potential benefits.

2. That said, I think an useful way for thinking about federal structures is to analyze the incentives faced by subnational governments. (a) Some subnational governments are accountable to domestic audiences, and thus they seek a federal structure where subnational governments retain considerable autonomy, including autonomy over taxation. This is the kind of federation that fosters tax competition and experimentation, with the US and the EU as good examples. (b) In other contexts, subnational governments are not fully accountable to domestic audiences (even with elections) and thus they devise federal institutions as mechanisms for extracting and distributing rents among themselves, and they use these rents to perpetuate themselves in power. Rather than keeping authority over taxation, they purposefully delegate their tax authority in the federal government to collect taxes for themselves. In other words, the federal government acts as a enforcer of a cartel: it establishes the same tax rate everywhere, collects the money, and distributes it between the states according to some highly politicized formula. This is the kind of federalism that predominates in Latin America: Argentina, Mexico, and to a lesser extent Brazil.

In sum, my point is that creating a federation among governments that are not responsive to voters will lead to the second type of federation. I don’t see the Middle East creating a fully functional federal system unless governments in the region become fully responsive to voters, which will require much more than competitive elections.

3. Michelangelo: I agree with 95% of what you say about Turkey and Israel, especially the EU part, and I obviously believe that it is a good thing these countries trade more and develop better relationship with each other. That said, the main reason why I don’t see these countries forming a federation is a more fundamental one: (a) that neither Turkish nor Israeli politicians have anything to win by creating a federal arrangement, and (b) given Turkey’s enormous size with respect to Israel, this problem is especially important from the Israeli point of view.

There is more on federalism at NOL here. Check out Adrián’s posts here, and Michelangelo’s are here.

5 thoughts on “From the Comments: Types of Federalisms, Good and Bad

  1. Thanks for the re-post, I wouldn’t have noticed Adrian responded otherwise.

    I can see Adrian’s point that you and I might over state the benefits of federalism due to our personal experiences with a (relatively!) successful federation in the form of the United States. I’ll have to mull over his point about the different experience federalism has had in Latin American though.

    • It’s definitely a great point to mull over. My line of argumentation is to instinctively go back to my musings on using the Madisonian constitution to pluck unhappy substates from their current whereabouts and welcome them into our federation, but Adrián’s argument is sophisticated and I need more time to digest it.

    • The problem with that, and I ask Adrian to correct me if I misunderstood his argument, is that the substates (Argentina’s in this case) in question don’t wish to leave their current federations.

      The US federal government serves to provide several goods to the US states, such as ensuring that the other states don’t attempt to restrict inter-state commerce. Argentina’s federal structure on the other hand is devoted largely to redistributing wealth from Buenos Aires to the rest of the country. The former federal structure promotes growth. The latter merely redistributes it.

    • I don’t disagree with Adrián. I think he’s right. However, I don’t think it follows that because one region of the world’s substates have little incentive to join a better federation that all others are in the same boat.

      Why should the tragic case of Argentina be a deterrent to pursuing a more libertarian, more peaceful foreign policy?

      There is also the possibility that US federalism might not be as good as we think it is.

      Finally, if Argentine provinces prefer to leech off of wealthy Buenos Aires, what’s to keep them from pursuing a tastier treat, namely Washington DC? If the US had a policy of welcoming potential substates into its federation, and some rent-seeking Argentine provinces did try to take advantage, they would not be able to do so (Argentine provinces outnumber Buenos Aires 23 to 1, but this would not be the case in the Madisonian republic). They would be free to leave, just as they were free to apply. I don’t think, though, that these provinces would leave once they figured out they couldn’t take advantage of Washington in the same way that they did Buenos Aires. The benefits of federation in Argentina were political. The benefits of federation in the Madisonian republic? Lots, including political ones but also economic and cultural ones. As things stand right now, the leeching provinces of Argentina don’t have any alternatives, and that might be why they are moochers in the first place.

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