-Caveat Lector- > "Cooperation Does Not Work" > By Michael S. Greve, American Enterprise Institute > from the AEI Federalist Outlook, > http://www.federalismproject.org/outlook/9-2000.html ><http://www.federalismproject.org/outlook/9-2000.html> > > > > The federal systems of Switzerland, Germany, and the European Union >. . . all provide that constituent states, not federal bureaucracies, will >themselves implement many of the laws, rules, regulations, or decrees >enacted by the central "federal" body. . . . They do so in part because >they believe that such a system interferes less, not more, with the >independent authority of the "state," member nation, or other subsidiary >government, and helps to safeguard individual liberty as well. >* Justice Stephen Breyer, Printz v. United States (1997) (dissenting >opinion) > > > The fact is that our federalism isn't Europe's. >* Justice Antonin Scalia, Printz v. United States (1997) (majority >opinion) > > > Amerika, du hast es besser. >* Johann Wolfgang von Goethe, Wendts Musen-Almanach (1831) > > > > > American federalism is in practice a cooperative federalism: state >and local governments implement federal programs, typically with federal >financial assistance. A broad political and scholarly consensus sustains >that institutional arrangement. Cooperative federalism is, however, a >terrible idea, regardless of the terms of cooperation. Federalist Outlook >No. 3 pays a visit to Germany, a citadel of cooperative federalism and, >consequently, of economic malaise and civic disaffection. Patient readers >will receive what the authors of the Federalist Papers, concluding their >inspection of European federations, called a "melancholy and monitory >lesson" on the vices of federalism, wrongly conceived. Federalist Outlook >No. 4 will address the sprawl of cooperative federalism here at home. > I Love You, You Love Me > Real federalism's lifeblood is institutional competition. The U.S. >Constitution envisions political conflict and functional separation among >independently constituted states and national institutions. > Contemporary politics and public debate are to that vision what >Barney the Dinosaur is to the World Wrestling Federation: federalism, it is >not so much argued as presumed, should be consensual and cooperative. The >federal government supplies 100,000 police officers, 100,000 teachers, and >numberless nannies. Grateful states, cities, and counties employ those >faithful servants, whereupon the feds volunteer to put roofs over their >heads. (A federal school construction bill is pending as this goes to >press. First dibs on the cash will go to the twenty-three elementary >schools that somehow missed out on a presidential aspirant's recital of The >Very Hungry Caterpillar.) The parties' and the presidential candidates' >programs on environmental protection, education, welfare, and crime >prevention all rest on the common ground of cooperative federalism: > Let the feds provide money and standards ("tough standards," when it >comes to education). Let states, cities, and school boards experiment and >implement. > Yes, the politicians disagree on funding levels and the stringency >of federal grant conditions. Cooperative federalism's devil, however, is >not in its details but in its design and dynamics. Cooperative federalism >in whatever shape or form undermines political transparency and >accountability, diminishes policy competition, and erodes self-government >and liberty. It is a perversion, not an extension, of the constitutional >scheme and its institutional logic. > For reasons to be explained, it is not altogether clear what and how >much can be done to replace government cooperation with competition. A >necessary first step, though, is to crack the consensus on cooperative >federalism and to make sober citizens wretch at the thought. We begin that >task in Germany-a country that, though traditionally proud of its >cooperative federalism, is now conducting a vigorous debate about its >defects. > Federalism, German-Style > Germany is not a happy country these days. Its political leaders >and opinion elites lament the country's lagging economic performance, as >measured by anemic growth rates and sustained high unemployment. Despite a >general consensus that the source of Germany's economic malaise lies in >punitive taxes and in labor and welfare laws that have made German labor the >most expensive in the world, those regimes seem immune to reform. The high >of reunification was followed by recriminations and regrets over the >exorbitant costs. Even without a Robert Putnam to ring the alarm over >Fussball Allein, the Germans worry greatly over civic disaffection >[Politikverdrossenheit], which finds expression in voter disengagement and, >more troubling, in growing support for radical parties, left and right. > Germany's grumpiness is nothing new, good cheer never having been a >hallmark of her politics. What is new and noteworthy is that academics, >opinion leaders, and politicians have come to tag an unexpected suspect as >the source of Germany's problems-cooperative federalism. > Unlike our federalism, Germany's federalism is cooperative by >constitutional design. Under the German Constitution, originally enacted in >1949 as the "Basic Law" of the Federal Republic of Germany, the federal >government administers a few institutions, such as the armed forces and the >Bundesbank. On the other hand, schools and the local police are left to >state and local governments. The general constitutional rule, however, is >that the Laender-that is, the states-administer federal statutes and >regulations "as their own affair" [als eigene Angelegenheit] (Article 83 of >the German Constitution) or, in a few cases, on behalf of the federal >government [im Auftrag des Bundes] (Article 85). The Laender participate as >political entities in the formation of federal policy: federal statutes that >substantially affect the states (especially their budgets) require the >assent of the Bundesrat, an assembly of the states' delegations. But the >states' "independent authority" lies, as Justice Breyer correctly observes, >in their administrative autonomy. The Laender enjoy certain protections >against direct federal interference in the administrative process; on the >other hand, they must do the administering on their own nickel. [1] > Independent administration, if taken seriously, poses a risk that >the country might disintegrate into a confederation. To prevent that >outcome, the German Constitution matches independent state administration >with a mechanism to ensure that the Laender will toe the federal line. That >mechanism is money. > The operational core of German federalism is the Financial >Constitution [Finanzverfassung]. It is contained in Articles 104-109 of the >German Constitution, encompassing thirty long, often amended, and, to all >but a few experts, impenetrable paragraphs. The constitutional principle is >general revenue sharing: personal and corporate income taxes as well as >value-added taxes raised in the states-all told, some 75 percent of the >total tax take of government at all levels-are shared among the federal >government, the Laender, and the local governments. The states' share is >subject to a constitutional scheme of "horizontal financial compensation": >revenue-rich states must support poorer states so as to achieve an >"assimilation of living conditions" [Angleichung der Lebensverhaeltnisse] in >the various states. In addition, the federal government may use its own >funds to supplement the poorer states' budgets. > The Financial Constitution bears enormous institutional weight. The >vertical division of funds among the federal and the subordinate governments >must be calibrated to prevent one from becoming parasitic on the other(s). >Horizontal compensation must be sufficient to produce consensus and >solidarity among the Laender-and yet not so extensive as to prompt the donor >states' resentment. Those conflicting and crosscutting demands have >rendered the Financial Constitution and its implementing legislation a >permanent work in progress-the subject of ceaseless legislative revision, >constitutional amendment, and litigation. [2] Germany's Constitutional >Court has issued four comprehensive rulings on the matter. In its most >recent decision of November 1999, the court found that the existing >revenue-sharing laws and regulations bear no rational relation to the >constitutional requirements. Reluctant to void an arrangement that is, >after all, central to the operation of German federalism, the court gave the >politicians two years to fix the system. [3] > Cooperative Federalism's Discontents > The essence of cooperative federalism, as just seen, is >intragovernmental conflict, both vertical and horizontal, over a pot of >money. And yet, for well over three decades, German federalism generally >produced an outward appearance of the consensus for which German politics is >famous. Why? > The short and simple answer is: tax increases. Hold revenues >constant, and the distributional conflicts will soon become unmanageable. A >growing revenue pie, in contrast, makes it possible to produce periodic >intergovernmental equilibrium points-by growing government at all levels. >[4] Cooperative federalism requires government growth. > At the same time, cooperative federalism facilitates government >growth. Intragovernmental cooperation means shared political >responsibility, which in turn means that citizens cannot easily finger the >culprits for government bloat and train wrecks, much less hold them to >account. It may be that democratic governments of all stripes-unitary or >federalist, competitive or cooperative-tend toward expansion. But if one >had to invent institutions that will reliably maximize government, >cooperative federalism would be a splendid choice. > As the intragovernmental conspiracy cheerfully moves outward and >upward on the Laffer curve, expanding political commitments produce further >interdependencies and conflict. The ineluctable tendency is toward a >pathology that German scholars and highbrow journalists call >Politikverflechtung, meaning a political meshing or entangling. Among the >symptoms are lack of transparency, civic discontent, the stifling of >political competition, and political paralysis. > Lack of Transparency and Civic Discontent. As government grows and >the range of cooperative arrangements expands, transparency, accountability, >and responsibility diminish exponentially. Germans know that their >government claims an ever larger share of their income, but they no longer >know why or for what. > Stifling of Political Competition. Germany's Financial >Constitution- particularly its commands to harmonize living conditions and >to equalize financial resources across the various states-diminishes every >state's incentive to improve its lot by providing a favorable economic >climate. The Financial Constitution systematically punishes wealthy, >successful states, while rewarding the basket cases. > Political Paralysis. Cooperative federalism does not so much >enhance the states' autonomy; rather, it rewards the most intransigent >participant. In the end, every player becomes a holdout, and reform becomes >impossible. Scholars, journalists, and leading politicians have tagged >cooperative-federalist arrangements as a principal cause of Germany's >Reformstau [reform jam, as in "traffic jam"] -- that is, Germany's inability >to adjust its institutions and policies to the demands of a modern, global >economy. [5] > In early summer, to the acclaim of the international financial >markets, the Social Democratic government managed to enact a corporate tax >reform that will modestly reduce tax rates and allow tax-free sales of >corporate stock holdings and thus facilitate their transfer from German >banks into the hands of investors who have a higher and better use for the >assets. As if to illustrate the pathology of cooperative federalism, the >tax reform was accomplished through a dramatic break with the operating >principles of the Financial Constitution. Anticipating opposition from a >majority of Laender in the Bundesrat, Chancellor Gerhard Schroeder took the >unprecedented step of purchasing the votes of three fence-sitting Laender >delegations by promising them several hundred million marks in federal >assistance outside the bounds, and arguably in derogation, of the Financial >Constitution. > The Competitive Alternative > Many Germans, including the Christian Democratic opposition and the >Frankfurter Allgemeine Zeitung, have complained bitterly about Mr. >Schroeder's extraconstitutional tax escapade. Others have cheered the >long-overdue reform and its proximate cause-a chancellor with the >authoritarian streak of Third Way politicians across the globe. Broad >consensus exists, however, that occasional policy improvisation is no >substitute for institutional reforms that would produce a more open, >competitive federalism. > That insight does not come easily to a country accustomed to >consensus. The past decade, however, has made the need for more competitive >institutions inescapable. >* Luxembourg and the Saarland are two adjacent, bathmat-sized >jurisdictions in the heart of Western Europe, both once heavily dependent on >the region's steel and coal production. Luxembourg has turned itself into >Europe's Delaware-a prosperous haven for banks and investors. The Saarland, >in contrast, has become an impoverished backwater, whose main export is its >citizens. Some 25,000 commuters work in the Saarland but live in >neighboring France to escape Germany's confiscatory taxes. Tax flight-of >all places, into France-is a sure sign of trouble at home. It has dawned on >the politicians that the Saarland's travails, and Luxembourg's good fortune, >have to do with the fact that Luxembourg has had the energy and the freedom >to compete, whereas the Saarland is locked into Germany's federalism cartel. >[6] >* Reunification put Germany's political institutions, and especially a >Financial Constitution designed for a cartel of approximate equals, under >enormous strain. Political competition would have provided an attractive >solution: Had the new Laender remained exempt from West Germany's labor and >welfare laws, capital and jobs would have moved east and thus would have >facilitated a reasonably prompt economic integration. Instead, Chancellor >Kohl's Christian-Democratic government inflicted those >entitlements-unsustainable even in productive West Germany-on the East and >showered that economic wasteland with subsidies. Over 80 percent of >revenue-sharing proceeds wind up there. In addition, the government >legislated an income-tax surcharge to pay for East Germany's reconstruction. >(The surtax is not called a tax but a "contribution" so as to remove it from >the constitutional revenue-sharing arrangements. Otherwise, even poor >states in the old West would have turned into net payers.) Jobs and capital >still went east-all the way to Poland and the Czech Republic, while East >Germany's youthful unemployed found occupation, in a manner of speaking, as >neo-Nazi skinheads. > >The lessons have not been lost. Academic experts are calling for >institutional and constitutional reforms that would produce a more >competitive federalism. [7] Proposals to that effect have been taken up by >one political party (the Free Democrats) and by a handful of state >governments. [8] In the latest round of litigation over the Financial >Constitution, the plaintiff-states urged the Constitutional Court to pay >heed to the perverse-incentive effects of a compensation-oriented, >revenue-sharing arrangement. "Competitive federalism" has found its way >into the political lexicon and into public debate. [9] >No Way Out? >Germany's debate over competitive federalism comes alarmingly late in the >day, long after shocks and dislocations (especially reunification) that >should by all rights have led to fundamental reforms. While existing >jurisdictional competition provides a learning experience, it also produces >ham-fisted, statist responses. For instance, the German government has >conducted a dragnet operation against thousands of citizens with investments >in Luxembourg, where the proceeds are hidden-though not exempt-from German >tax laws. (The government obtained the transfer records not from >Luxembourg, where they are guarded by bank secrecy laws, but by threatening >the customers' German banks with prosecutions for aiding and abetting tax >evasion.) While thus endearing itself to prosperous taxpayers, the German >government is also pressuring the European Community to "harmonize" the tax >treatment of financial instruments, the better to wipe happy little >Luxembourg's experiment off the map. Cooperative federalism's first choice >is not to reform itself but to export its distortions. >Moreover, Germany's cooperative federalism rests on very old and stubborn >political traditions-in fact, the same traditions that horrified the authors >of the Federalist Papers. (Federalist Papers 19 and 20 contain an >instructive account of the political and financial dynamics of European >confederacies that purport to be countries.) The constitutional dimension >of the federalism debate ensures that it will be dominated by legal >scholars, most of whom believe that competition has no place in law and >government. Unlike private actors, the hoary theory goes, government will >automatically act in the public interest. >The revision of the revenue-sharing system, necessitated by the >Bundesverfassungsgericht's November 1999 ruling on the Financial >Constitution, provides the best and most urgent opportunity for >procompetitive reforms. Unfortunately, however, the court roundly ignored >the plaintiff-states' arguments concerning the anticompetitive effects of >the existing regime. Instead, the court instructed the federal legislature >to design a new, fair, and rational compensation scheme behind, so far as >possible, a Rawlsian "veil of ignorance"-that is, without regard to the >immediate fiscal effects or the various governments' actual political >interests. >From the politicians' original position shall emerge a law that >meets the criteria of practical reason and, moreover, binds all future >politicians. [10] The politicians will do all that because doing so is >their duty. Forget politics and economics. Immanuel Kant, meet the welfare >state! >Finally, the competitive reform impulse is likely to disappear in what >scholars have called the "trap of cooperative federalism." [11] Federalism >reform, the Frankfurter Allgemeine Zeitung has editorialized, is not hard to >figure out: segregate revenue sources among states, localities, and the >federal government; segregate the governments' tasks and functions; put >competition in play. But a tangled, cooperative government apparatus is >probably incapable of acting on that insight. [12] The institutional >structures and dynamics that make competitive reform imperative also render >it impossible. >In one sense, though, Germany is ahead on the competitive federalism curve: >her politicians, academics, and opinion leaders are conducting a serious >debate about cooperative federalism, its ill effects, and the need for >political competition. Our own politicians, in contrast, are busier than >ever inventing federally funded programs to have state and local officials >mow our lawns and tuck in our kids. Their acts of statesmanship are >accompanied by a unisonal burble about the glories of cooperation and >devolution. >All that will change, or so one hopes, with the next issue of the Federalist >Outlook. > > >Notes >1. For example, the feds will pay the direct costs of child-support >payments but not the cost of administering them. The protections are >contained in Articles 84 and 85 of the German Constitution; the financial >obligations, in Article 104a(2), (5). >2. The continuously revised and amended Financial Constitution >represents the latest chapter in modern Germany's unending effort to find a >satisfactory institutional arrangement between the Laender and the national >government. Each successive arrangement was criticized as rendering one >overly dependent on the other. (A famous phrase, "Reich als Kostgaenger der >Laender," meaning the Reich as the states' parasite, was coined by >Bismarck.) A mind-numbingly thorough account is Juergen W. > Hidien, Der Bundesstaatliche Finanzausgleich in Deutschland: > Geschichtliche und Staatsrechtliche Grundlagen (1999). >3. In other words, the revenue-sharing system is unconstitutional in >principle, but not just yet. The court's decision and opinion, 2-BvF-2/98 >(November 11, 1999), appear at http://www.bverfg.de <http://www.bverfg.de> . >4. Aaron Wildavsky observed the same tendency, with respect to American >cooperative federalism, in his spirited essay "Fruitcake Federalism or >Birthday Cake Federalism?" in Wildavsky, Federalism and Political Culture, >edited by David Schleicher and Brendon Swedlow (Transaction, 1998), p. 55. >5. See, for example, Fritz W. Scharpf, "Die >Politikverflechtungsfalle," Politische Vierteljahresschrift, vol. 26 (1985), >p. 323; and, more recently, Thomas Koenig's trenchant observations on >"Regieren im Deutschen Foederalismus," Aus Politik und Zeitgeschichte, vol. >B13/99 (1999), p. 24. >6. Thomas Christmann, "Vom Finanzausgleich Zum Massstaebegesetz," Die >Oeffentliche Verwaltung, vol. 53, No. 8 (April 2000), p. 321. >7. See, for example, Adrian Ottnad and Edith Linnartz, Foederaler >Wettbewerb statt Verteilungsstreit: Vorschlaege zur Neugliederung der >Bundeslaender und zur Reform des Finanzausgleichs (1997); Thomas Apolte, Die >Oekonomische Konstitution Eines Foederalen Systems: Dezentrale >Wirtschaftspolitik zwischen Kooperation und Institutionellem Wettbewerb >(1999); and Karl-Heinrich Hansmeyer, "Federalism in Europe-Problems and >Questions for Research," Beiheft der Konjunkturpolitik, vol. 49 (1999) > (English abstract available at > http://smith.diw.de/Konjunkturpolitik/english) ><http://smith.diw.de/Konjunkturpolitik/english)> . > >8. For the Free Democratic Party, see Friedrich Naumann Stiftung, ed., >Wider die Erstarrung in Unserem Staat-Fuer die Erneuerung des Foederalismus >(1998). For state governments, see Christmann, "Vom Finanzausgleich zum >Massstaebegesetz," p. 315. >9. Competitive [kompetitiv] is not actually a German word. But since >it has no equivalent measuring under three inches in print, the Germans have >adopted the Anglicism. See, for example, Horst Siebert, "Mehr >Standortwettbewerb beim Finanzausgleich-Ein Kompetitiver Foederalismus >Gehoert zur Modernisierung Deutschlands," Frankfurter Allgemeine Zeitung, >August 8, 2000, p. 17. >10. See the court's opinion, 2-BvF-2/98 (November 11, 1999), p. 282 >(Internet version at http://www.bverfg.de <http://www.bverfg.de> ) (citing >John Rawls, A Theory of Justice). The court's call for a >quasi-constitutional revenue-sharing superlaw is endorsed, with >reservations, by Hans Peter Bull and Veith Mehde, "Der Rationale >Finanzausgleich-Ein Gesetzgebungsauftrag Ohnegleichen," Die Oeffentliche >Verwaltung, vol. 53, No. 8 (April 2000), p. 306. It is rejected, on >constitutional grounds, by Joachim Linck, "Das 'Massstaebegesetz' zur >Finanzverfassung-Ein Dogmatischer und Politischer Irrweg," Die Oeffentliche >Verwaltung, vol. 53, No. 8 (April 2000), p. 325. >11. Martin T. W. Rosenfeld, "The Present Problems and the Future of >Cooperative Federalism in Germany," Beiheft der Konjunkturpolitik, vol. 49 > (1999) (English abstract available at >http://smith.diw.de/Konjunkturpolitik/english ><http://smith.diw.de/Konjunkturpolitik/english> ) (visited August 31, 2000). >12. 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