Monday, January 16, 2006

Two words I love

UPDATE: this post gets a surprising amount of traffic from google asking "How do I pronounce Tiebout?" Since it would be embarrassing for you if you took the advice below, here's the answer: it's "tee-boo," with the accent on the first syllable.

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"The economics of federalism" by Ribstein is out--it's an intro essay (10pp) to a book. He actually comes out in favor of Amar's spillover test. Garr. As monty python says, "I fart in your general direction!" But it's very interesting, and a great way to reference The Tiebout Theory at a cocktail party. First I have to figure out how to pronounce Tiebout, though. I think it's french, so none of the consonants are pronounced, so it's something like "ieou".

Besides the Tiebout argument (saying public goods will not be underproduced by state govts as long as there are no spillover effects), the paper also has other good pro-federalism points.

  • First, the possibility of "exit" reinforces the power of "voice". Exit and voice are better together, like peanut butter and chocolate.
  • Second, "market preserving federalism" can encourage states to credibly commit to a self-enforcing structure of limited govt that preserves rights and markets.
  • Third, states can be laboratories, as Brandeis noted in New State Ice Co., 285 US 262. States will have a better understanding of local preferences and which inputs (eg capital v labor) to government outputs are cheap, and local agents have less incentive to be self-dealing. On the other hand, innovation can be costly, and may be underproduced if other states can free ride (as noted by Susan Rose-Ackerman) unless some institutional mechanism allows a first-adopter to internalize a fair bit of the gain.
  • Fourth, state govts may be closer to the optimal size than a unified govt. The costs of bargaining among a bigger group may be even bigger than the spillover costs saved.
On the negative side of federalism:
  • Spillovers. Arrgh! States won't provide for the common defense because they can free-ride, or may permit activities like pollution that harm other states.
  • States may try to attract the more-mobile wealthy, while ignoring the needs of the less-mobile poor. Thus, "exit" has both a positive and negative side.
  • Mobility isn't always that high. It's hard to exit. If capital and labor are differentially mobile, distortions can result.
It also notes an interesting theory of Brennan and Buchanan: the "Leviathan theory" that views government as a tax-maximizing monopolist who will do anything for more money, with the single constraint that if he taxes too much, people will withhold their labor. Federalism would thus lower total govt intrusion. On the other hand, rent-seeking competition between govt units could increase the total size of govt. Anyway, interesting summary of stuff.

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