Mankiw on Jurisdictional Competition

Greg Mankiw has a good column explaining why competition among governments produces benefits much like competition among firms.  This is one of the arguments for federalism. Yet Mankiw also explains why what some conservatives see as a feature of federalism strikes some liberals as a bug.

While conservatives embrace governmental competition, liberals have good reason to worry about it. The left has a more expansive view of the role of public policy. Liberals want the government not only to provide public services but also to redistribute economic resources. In the words of President Obama, they want to “spread the wealth around.”

Yet redistribution is harder when people and capital are free to move to other jurisdictions that offer better deals. If you are going to take from Peter to pay Paul, Peter may well decide to leave. It is perhaps no surprise that state and local tax systems are less progressive than the federal one.

Whether competition among governments is good or bad comes down to the philosophical questions of what you want government to do and how much you fear government power. If the government’s job is merely to provide services, like roads, schools and courts, competition among governmental producers may be as good a discipline as competition among private producers. But if government’s job is also to remedy many of life’s inequities, you may want a stronger centralized government, unchecked by competition.

Interjurisdictional competition is not only about disciplining governments, however.  It is also about discovery.  Different states will enact different policy responses to various problems, and other states can learn from the results.  This is one reason why federalism has failed to produce a “race to the bottom” in areas like environmental protection.  States want economic growth, but they also want a clean environment.  Thus when one state discovers how to achieve environmental goals more effectively or at lower cost, other states tend to follow suit.

Interjurisdictional competition and discovery is not universally acclaimed on the right.  Just ask Rick Santorum.  Just as some liberals to fear federalism will restrain progressive government interventions, some social conservatives fear federalism’s effect on restrictive social policies.  Take gay marriage.  Several states now recognize same-sex marriages.  This creates the opportunity for people to move to jurisdictions more compatible with their preferences.  It also provides an opportunity to see whether conservative fears that allowing gay couples to marry will somehow undermine broader social mores — and if (when) the sky fails to fall, other states will become more likely to follow suit.  The discovery process federalism facilitates often makes people more amenable to social change, as they can observe the likely effects of such changes in other jurisdictions.  In this way, federalism is not just about advancing policies preferred by the left or the right.  Rather it’s a way to help us discover which sets of policies actually work best.