Following a "crucial" election, unsatisfactorily decided, the young partisan's thoughts often turn towards secession. But the truth is that state and local governments are heavily dependent on the federal government.
Charts 1 and 2 show the history of federal grants to state and local governments since 1960. In 2012 dollars, total spending has increased from slightly more than $50 billion to over $600 billion. The purpose has changed, too. "Transportation" (infrastructure) was #1 in 1960. Up until that point in American history, infrastructure had been the main purpose for which the federal government gave aid to the states. By 1965, transportation would be permanently supplanted by social welfare spending (health, income security, and education programs), a trend that the New Deal began and Great Society accelerated. In 2011, over 80% of federal aid was spent on social welfare.
Many argue that state and local governments should not be so dependent on the federal government, or at least certainly not in this way. "Fiscal federalism" is said to be bad public policy because it allows state and local governments to spend other people's money (non-own source revenues). "Fiscal federalism lowers the perceived cost of government and thus drives up its actual cost," and inefficiency, waste and fraud are the inevitable results. It would also seem to violate the 10th Amendment, strictly read: ''The powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people.''
Some federal grants-in-aid programs are now threatened by the fiscal cliff (although not as many as you might think). Neal McCluskey of the Cato Institute argues that we shouldn't flinch from applying the fiscal cliff's "sequestration" cuts to federal K-12 programs such as Title 1, since there is scant evidence that the increased federal involvement in K-12 since the 1960s has actually boosted student performance.
From the perspectives of good government and constitutionalism, these are important questions. But with respect to the more immediate concern of the day-fiscal crisis at the federal, and state and local level-the problem is healthcare. Probably the most striking feature of Chart 2 is how healthcare spending (mostly Medicaid) has come to dominate the scene, and is now the main driver of unsustainable costs within the fiscal federalism system, just as it is for federal, state and local budgets independently.
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