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The Follies of Federalism

by Adam S. Posen, Peterson Institute for International Economics

Op-ed in Welt am Sonntag
August 5, 2007

English version © Peterson Institute, 2007

Sometimes it is important to emphasize the similarities across the Atlantic rather than the differences. For all the distinctions between Germany and the United States on a host of dimensions, from foreign policy to the welfare state to cuisine, both countries are afflicted by the same misery: too weak a central government. Federalism, of the sort that the United States displays and that was put in place in the Basic Law in Germany after the war, is a bane to liberal values, economic and social. Chancellor Merkel was right to start tackling federalism reform within Germany, even as she was wrong to compromise so much on the draft EU treaty—on the European front, major steps remain to be taken to prevent reactionary patterns emerging.

Usually, those cloaking themselves in the mantle of defenders of liberalism are quite opposed to centralizing government decision making. The claim is made that centralization is contrary to accountability. It is one thing to fear a government that intrudes into areas it should not, but that does not justify leaving the government unable to act in those areas where it has and should have competency. So people speak about strengthening the notoriously weak European Parliament to alleviate the accountability problem.

If the goal of accountability is to assure that the executive’s actions are competent, transparency to a free—and one hopes actively critical—press and to market judgments should be the first resort. It is very rare for a legislature to exercise oversight in real time that is meaningful, and when they come in ex post, it usually is to allocate blame as much as to improve processes. If the goal of accountability is to prevent the abuse of power, executive excess, and the like, at least in theory there is a far greater role for checks and balances, such as a stronger legislative branch. This was often invoked in American constitutional theory.

As American history demonstrates, however, the exercise of executive power is usually a function of the degree of popular support, and the majority of popularly elected Congress goes with that wind. That was true when Andrew Jackson forcibly resettled the Cherokee Indians to Oklahoma on the “Trail of Tears;” Franklin Roosevelt tried to pack the Supreme Court to stop them from overruling his policy initiatives; or when George W. Bush circumscribed numerous civil liberties following September 11, 2001.

It was even more evident in the various military actions undertaken with supine authorization by Congress or without congressional opposition or authorization since the 1820s right up until today. And no one should put much faith in the ability of the European Court of Justice to be more of an independent voice for liberalism and rights in the face of political pressures, since we know that the US Supreme Court has mostly followed political trends from the infamous Dred Scott case legitimating slave capture to its decisions in the 2000 election. And that is within a single nation’s borders.

Put differently, yes, Madison and Hamilton authoring the Federalist Papers wrote about limiting executive power, but their concern about limiting “majority faction” (i.e., populist politics in the legislature) and protecting minority rights from that majority that was their issue. Remember that they were writing their papers in favor of a relatively strong central government against the “anti-Federalists” (e.g., Patrick Henry), and Hamilton went on to argue for a national bank and the national assumption of states’ Revolutionary War debts. Something that excessive federalism in the United States setback for over a century until the founding of the Federal Reserve in 1913, with huge costs in terms of macroeconomic stability, for the sake of distrust of central government.

If we need strong independent legislatures to assure accountability of the executive power, as is claimed by the states’ rights partisans in the US Congress or the advocates of the European Parliament, what then is the state of governance in the vast majority of the world’s democracies which are parliamentary systems and have party discipline, such that the executive runs the legislative between elections? Are they places of abuse of power inherently or at least recurrently? The examples of the United Kingdom, Sweden, and Australia all suggest that such situations can still lead to liberal outcomes.

In the European debate, which Chancellor Merkel compromised around, there are those who agree on the free market objectives, and even acknowledge the European Union’s limited room for abuse of its limited power, but still wish to constrain the Commission’s ability to act. Yet, for all the United Kingdom’s professed fears, there never was any social intrusion for example from the Delors Commission, the strongest one ever seen. So what will happen on European energy or liberalization or security or migration with such weak governance as exists at present?

We are thus into the empirical discussion and analysis which I think is the right one for policymakers in Europe: How likely is a strong commission to pursue liberal goals rather than excessive statism if it were to be given greater competency and authority? And how bad is the status quo in terms of liberalism versus statism in the absence of a stronger supranational European authority in economic and other matters?

On the second question first, claims that competition between jurisdictions leads to good results ignores reality for theory. As economists, we would like to think that competition felt through investment and labor mobility, as well as political response to bad governance while seeing better alternatives, should produce better outcomes. My reading of the evidence to date, both European over the last 50 years and American over the last 230, is rather more skeptical.

That presumption does not accord with the recurring collaboration between subfederal governments, be it in the Congress or in the Council of Ministers, to protect the status quo and politically privileged interest groups. Of course, it still would depend upon a strong government having liberal goals to get the desirable result. Even if a strong central government bears the risks of abuse, however, such capability may be necessary (even if not sufficient alone) to getting past this kind of illiberal coalition of national governments or interest groups.

Which brings us to the first question: How likely is there to be abuse by a stronger central European authority in economic matters? Illiberal demands for a “social Europe” by Eurocrats should not be invoked to demonstrate more than an outside risk, for they resoundingly failed to get through such efforts, while Delors did push the Single Market in the end.

I would argue that Europe is so very far at present from having a capable executive in the sense of having the authority to implement policies for liberal economics over nation states’ opposition—look at Monti’s and Kroes’s successive brave and largely frustrated attempts to enforce competition policy on state aid or at the failures of the proposed Services and Takeover Directives—that the risks to economic liberalism are almost totally from government weakness.


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