Viewing Devolution With Alarm.

Hazardous Crosscurrents: Confronting Inequality in an Era of Devolution by John D. Donahue. The Century Foundation Press, New York, N.Y., 1999. 84 pages, paperback, $10.95.

Can the States Afford Devolution? The Fiscal Implications of Shifting Federal Responsibilities to State and Local Governments by Harold A. Hovey. The Century Foundation Press, New York, 1999. 78 pages, paperback, $10.95.

These two short and readable books from the Century Foundation's series The Devolution Revolution examine some of the social and fiscal implications of the devolution of federal responsibilities to state governments.

Donahue is an associate professor of public policy at the John F. Kennedy School and a former assistant secretary in the Labor Department in the Clinton administration.

He focuses on the growing economic inequality in American society and contends that the long-term impact of devolution will, at best, not move American society toward equality and will, at worst, increase inequality and weaken the American middle class.

Hovey, a well-known authority on state and local finance and policy, contends that fiscal devolution is likely to decrease spending on programs that are devolved to the states, increase disparities among the states, and result in greater fiscal pressure on state and local governments.

Donahue says that in the 1980s and 1990s, the share of personal income going to the top 20 percent of families in the United States has reached levels not seen since the 1920s, that the share going to the poorest 20 percent has remained constant, and that the 60 percent of earners in the middle have been squeezed. He moves quickly over the reasons for the growth in inequality to focus on the way decentralization of power in the United States will affect inequality. He sees a number of reasons for concern:

* Tax competition moves states further toward regressive tax policies that make inequality worse.

* Although state policy so far under welfare reform has been to spend more per recipient, in a recession states are likely to reverse that trend for fear of becoming "welfare magnets."

* The weakness of organized labor has made it unnecessary for additional states to enact measures Donahue labels as anti-labor--like right-to-work laws--but interstate competition for economic development could lead to a resurgence of antilabor legislation.

* Restrictions on the amounts and availability of unemployment compensation will increase with devolution.

* Questions about the quality of public education and states' fiscal vulnerability to recessions make their commitment to public education questionable.

Donahue's views focus on the potential down side of dispersing power to state governments, founded on two basic ideas--that state governments cannot be expected to take a long-range perspective on the needs of American society, and that, even if they were able to take a long-term view, interstate competition for economic development and susceptibility to the short-term goals of big business would corrupt any sense of responsibility they might preserve.

His only explicit prescription is substantially increased federal funding for education. He recommends a national tax on financial property, a capital levy akin to, though not as extreme as, the capital levy Donald Trump has recently floated as a way to pay off the national debt. The implausibility of this recommendation, compared to the severity of the problems Donahue identifies, substantially undermines the forcefulness of his book.

The late Hal Hovey's final book focuses on fiscal and budgetary issues with the goal of answering the questions of whether states have the fiscal capacity to handle devolution, if they have that capacity whether they will do so, and what the consequences will be. The book presents a careful analysis of the different paths state-federal relations could take from increased centralization to genuine decentralization and alternative best- and worst-case scenarios, all succinctly distinguished from one another.

Hovey notes the wide disparities among the states' fiscal resources and willingness to tap their resources--Connecticut with much wealth and relatively few school children has almost 2 1/2 times the fiscal ability of Mississippi, with much less wealth and relatively more kids, for example. That means it's more than twice as difficult for Mississippi to raise a dollar of taxes as for Connecticut. He notes that tax and spending limits and judicial activism increasingly limit the ability of elected officials to control public finances. He notes the limits on states' ability to deal with recessions and reductions in federal aid. With each of these points, Hovey offers the possible--if not politically attractive--ways states can address the issue.

He goes on to point out that the basic nature of devolution carries some straightforward implications:

* Disparities among states will grow, especially in social welfare programs.

* Block grants, like TANF, have the perverse effect of discouraging states from spending their own resources on the program the block grant finances.

* Demands for greater public services will have to be financed from state and local resources.

* State and local programs will be more vulnerable to recessions than in the past because the federal cushion will diminish.

Whether one views these policy outcomes, and those Donahue foresees, as desirable or undesirable, the two books together show vividly that post-devolution federalism will be substantially different and riskier than that of the past. The message of these books is that devolution undoes the New Deal landscape and that the path Americans are following into the future is more perilous than has been imagined.