Reviving the American Dream: The Economy, the States, and the Federal Government.

There is no better way to clear out a cocktail party than to talk about federalism. Still, the assumptions that go into ordering the relationship among the different layers - federal, state, and local - of the American government remain fundamental to democracy. Boring though it may be, conjuring up as it does the claustrophobia of a long-ago classroom captivity, federalism is a topic as important as it is unavoidable. Federalism invariably shapes the issues of an era even as it is in turn reshaped by them. Like a marriage, in a federal union you have to repeatedly renegotiate the relationship. The constitutional bargain of 1787 hammered out after long months of wrangling between centralists and decentralists was renegotiated first in response to slavery during the Civil War, and again through Roosevelt's response to the Great Depression. Now new voices argue that the internationalization of the economy compels yet another reconstitution.

Alice Rivlin, the founding director of the Congressional Budget Office, a self-described "fanatical, card-carrying mid-of-the-roader," and now one of the most widely respected thinkers in Washington, argues that it is again time to fundamentally reorganize the distribution of governmental tasks. In Reviving the American Dream, Rivlin suggests that "both federal and state governments would function better," and the economy could be successfully reorganized to meet the challenge of international competition, "if a cleaner distinction were made" between federal and state responsibilities.

In the classic conceptualization of federalism, elaborated by Alexander Hamilton in Federalist 31, separate layers of government were to have separate powers over separate purses. In this layer cake ideal, "A government ought to contain in itself every power requisite to the full accomplishment of the objects committed to its care...." With the New Deal and the civil rights revolution we shifted from Hamilton's "layer cake federalism" to "marble cake federalism." Federal and state policy became intertwined as the states became "the errand boys" of a federal government whose success in combating the Depression at home and dangers abroad legitimated its extended authority to take on racial injustice. But despite the initial successes, confusion now reigns as the different levels of government are, at considerable economic and political cost, hopelessly jumbled.

Rivlin doesn't mention it but consider the case of the New Orleans Housing Authority. It's typical of the nation's most troubled housing authorities. Despite the desperate poverty of their clients, these authorities have been unable to spend more than $1.6 billion of the federal dollars allocated to them. In New Orleans, which has been unable to spend $61.5 million, funding and building regulations come from the feds, but the mayor of New Orleans appoints the housing authority's governing board while the authority's employees are state workers operating under state civil service rules. The upshot is endless squabbling in which the dilapidated housing flows from a dilapidated political process which confuses authority and accountability to the detriment of public confidence.

Similarly, the mixture of federal, state, and local involvement in education affords officials at every level plausible denial for the failure of what are mistakenly called school "systems." The only thing that's systematic in most cities is the nonaccountability built into schools which are less single organizations than accretions of federal and state programs scrambled by federal court orders and then folded into fief-like local school boards.

The New Deal case for first concentrating power in Washington and then expanding it to areas like education rested positively on the presumed expertise of technocratic decision-makers and negatively on the assumption that state government was necessarily backward and racist. Neither assumption, Rivlin argues persuasively, still holds. While Washington is paralyzed by the posturing of interest groups, each of which has its own stable of adversarial experts, state government has been organizationally updated and racially integrated.

Although she doesn't use the term, Rivlin is making the case for what the 1930s Catholic critics of modernity known as distributists called "subsidiarity," the notion that whenever possible power should be delegated downwards, "not arrogated upwards." According to the distributists, government works best when it engages people's energies on the local level. To that end Rivlin wants to get the already overburdened federal government out of "education, housing, highways, social services, economic development, and job training."

The states, she says, "should take charge of the primary public investment needed to increase productivity and raise income," especially education and the infrastructure. The federal government should focus on our increasingly complex international economic relations and social insurance, including the development of a national health insurance.

This is more than a pie-in-the-sky proposition. Rivlin proposes an innovative method of taxation, what she calls "common shared taxes," to facilitate the transfer of responsibilities. State taxation, which once varied wildly from state to state, has now converged around a common mix of income, sales, and property taxes. Rivlin would complete the convergence. Under one version of "common-shared taxes" modeled on the relationship between the German "Lander" and Berlin, the federal government would serve as a collection agency for taxes imposed not by Washington but agreed upon by the states themselves.

"Common-shared taxes" initiated by agreement among the states would serve two important functions. First, they would get Washington out of the business of using federal mandates to micromanage local policy. Second, by creating a guaranteed tax base the states would be encouraged to compete with each other, not by offering tax giveaways but by underwriting what Rivlin calls the "productivity agenda" of upgrading industrial jobs skills and enhancing the infrastructure. The states are also best positioned, she argues, to implement an "industrial policy," the government tactic of encouraging cutting-edge industries so successfully employed by the Japanese. Within the welter of Washington's warring interests, it will never be possible to agree on which industries to support, while on the state level there is more likely to be a consensus on which possibilities ought to be promoted.

Reviving the American Dream is a deceptively modest book. Brief and straight-forward, it goes to the heart of debate over American decline by going to the heart of our political and thus our economic arrangements. In the language of David Osborne's Reinventing Government, it shows how by re-sorting the powers assigned to the different levels of government we can get a federal government that does a better job of "steering," that is, setting overall policy, while letting the states go about the business of "rowing," providing the practical services on which our productivity rests.