But there are other examples of decentralized systems, with Canada also deserving plenty of praise.
Today, though, I want to write about Spain.
I had an opportunity to learn about the Spanish system while giving speeches last week in Castellon, Barcelona, and Madrid as part of the Free Market Road Show.
Let’s look at some data from Liberalismo a la madrileña, written by Diego Sánchez de la Cruz, the head of Foro Regulación Inteligente.
His book documents how pro-market reforms in the Madrid region have resulted in greater prosperity.
We’ll start with a look at the level of economic freedom in different Spanish regions. Madrid is at the top and Extremadura (bordering Portugal) is at the bottom.
Does a higher level of economic freedom produce better results, as measured by per-capita economic output?
The answer is yes. Madrid ranks first and Extremadura ranks last.
And one of Diego’s earlier publications graphed the relationship between economic freedom and per-capita output.
Definitely a strong correlation.
But what about causation? For instance, some of my left-leaning friends may wonder if there’s some other reason for the superior performance of the Madrid region. Maybe it was always the richest part of Spain and its current prosperity has nothing to do with current policy.
People always should be skeptical about data, particularly when looking at one-year snapshots.
That’s why I’m a big fan of looking at long-run trends. And this chart showing how Madrid has overtaken Catalonia helps confirm that good policy produces good results.
To elaborate, Madrid enjoyed rapid convergence over the past two decades, a period where there was lots of economic liberalization (including de jure elimination of a wealth tax and de facto abolition of a death tax).
By the way, based on current trends, Madrid and Catalonia now may become members of the anti-convergence club.
P.S. There has been some discussion of decentralizing in Australia and the United Kingdom, but no actual progress so far.
Largely because of my support for jurisdictional competition, I’m a big fan of federalism.
Simply stated, our liberties are better protected when there’s decentralization since politicians are less like to over-tax and over-spend when they know potential victims of plunder have the option of moving across a border.
Now let’s look at some additional scholarly evidence. A study published by the OECD, authored by Hansjörg Blöchliger, Balázs Égert and Kaja Fredriksen, investigates the impact of federalism on outcomes in developed nations.
Here are the key findings from the abstract.
This paper presents empirical research on the potential effects of fiscal decentralisation on a set of outcomes such as GDP, productivity, public investment and school performance. The results can be summarised as follows: decentralisation, as measured by revenue or spending shares, is positively associated with GDP per capita levels. The impact seems to be stronger for revenue decentralisation than for spending decentralisation. Decentralisation is strongly and positively associated with educational outcomes as measured by international student assessments (PISA). While educational functions can be delegated either to sub-central governments (SCG) or to schools, the results suggest that both strategies appear to be equally beneficial for educational performance. Finally, investment in physical and – especially – human capital as a share of general government spending is significantly higher in more decentralised countries.
Here’s some detail from the body of the paper about the pro-growth impact of decentralization (especially when sub-national governments are responsible for raising their own funds).
Across countries, sub-central fiscal power, as measured by revenue or spending shares, is positively associated with economic activity. Doubling sub-central tax or spending shares (e.g. increasing the ratio of sub-central to general government tax revenue from 6 to 12%) is associated with a GDP per capita increase of around 3%. …Revenue decentralisation appears to be more strongly related with income gains than spending decentralisation. This empirical finding may reflect that “true” fiscal autonomy is better captured by the sub-central revenue share, as a large part of sub-central spending may be mandated or regulated by central government. … the estimated relationship never becomes negative and is not hump-shaped, i.e. “more decentralisation always tends to be better”.
The part of “more decentralisation always tends to be better” is a good result.
Though we’re still less centralized than most nations, as you can see from this chart from the OECD study.
Kudos to Canada and Switzerland for leading the world in federalism.
Here are some additional details from the study. I’m especially interested to see that the authors acknowledge how jurisdictional competition helps to explain why nations with federalism perform better.
Decentralised fiscal frameworks can raise TFP through an increase in the efficiency and productivity of the public sector… Public sector productivity is influenced by competition between SCGs and inter-jurisdictional mobility. Most SCGs aim at attracting and retaining mobile production factors, in order to promote investment and economic activity. They can do so by using fiscal policy, among other instruments. Since firms are choosing their location based on where they expect the highest returns on investment, and since returns depend (partly) on public inputs, SCGs have an incentive to raise the productivity of their public sector. SCGs may also try to improve the relationship between taxation and public service levels, by lowering taxes… The more decentralised a country, the stronger these competitive forces could be. Competition and inter-jurisdictional mobility could be weakened by large intergovernmental transfer systems, in particular fiscal equalisation.
Let’s close by looking at the study’s estimates of how nations would enjoy more prosperity by shifting in the direction of decentralization.
…an assessment of what a country might gain in terms of higher GDP if it moved to the benchmark of the most decentralised country. To be more specific, the gains were calculated for each federal country if it moved tax decentralisation to the level of Canada, and for each unitary country if it moved tax decentralisation to the level of Sweden (Figure 6). Further decentralisation could potentially be associated with an average increase of GDP of around 1% to 2% for federal countries and 3% to 4% for unitary countries, with values for more centralised countries being larger.
Here’s the accompanying chart.
Since the U.S. still has some federalism, our gain isn’t very large, but nations such as Austria, Belgium, Slovakia, Ireland, Luxembourg, and the United Kingdom could get big boosts.
P.S. I didn’t focus on the findings about better educational outcomes in decentralized nations. But I can’t resist pointing out that this is an additional reason to abolish the Department of Education.
P.P.S. Here’s a video discussing how Switzerland benefits from federalism.
Since I don’t have any expertise on epidemiology, I’m not arguing that the economy should be opened immediately. I’m simply stating that the people who do make such decisions should be guided by the unavoidable tradeoff that exists between lives lost from disease and lives lost from foregone prosperity.
Which then raises the question of who should make such decisions.
As reported by the New York Post, President Trump claims he has all the authority.
President Trump on Monday said the decision to reopen the country’s ailing economy ultimately rests with him, not state leaders, as he feuds with governors over when to allow Americans to return to work. …Trump is now looking at reopening the economy by May 1, putting him on a collision course with state leaders who are pushing back, saying it would be dangerous to “take our foot off of the accelerator” in the war against the virus. …Rebuffing the president’s claims Monday, constitutional experts say it is state leaders who have the power to police their citizens under the 10th Amendment.
Trump is wrong.
He’s wrong in part because the Constitution limits the powers of the central government.
But he’s also wrong because – as explained by scholars from the Austrian School of Economics – we’re far more likely to get better choices when they’re decentralized.
In some cases, that means allowing individuals to make informed choices about how much risk to take.
But, to the extent government must be involved, it makes more sense to have state and local officials make choices rather than the crowd in Washington.
Opining for the Wall Street Journal, Walter Olson explains why federalism is the right approach.
Public-health merits aside, the president can’t legally order the nation back to work. The lockdown and closure orders were issued by state governments, and the president doesn’t have the power to order them to reverse their policies. In America’s constitutional design, …the national government is confined to enumerated powers. It has no general authority to dictate to state governments. Many of the powers government holds, in particular the “police power” invoked to counter epidemics, are exercised by state governments and the cities to which states delegate power. …Modernizers have long scoffed at America’s federalist structure as inefficient and outdated, especially in handling emergencies. …Today you won’t find these critics scoffing at the states or overglamorizing Washington. One federal institution after another, including the Food and Drug Administration and Centers for Disease Control and Prevention, has been caught flat-footed by Covid-19. …State governments, by contrast, with some exceptions here and there, have responded to the emergency more skillfully and in a way that has won more public confidence. …The record of federal systems—some of the best known are in Canada, Germany and Switzerland—suggests there’s a lot of resilience packed into the model.
Michael Brendan Dougherty elaborates in an article for National Review.
Writer Molly Jong-Fast complains, “So the states are basically governing themselves because our president doesn’t know how to president at all?” Well, no. It’s simple: Our president doesn’t have dictatorial powers, even in a national emergency. The president doesn’t have authority to shut down your local gin joint. Your state governor does have this power, in extraordinary circumstances. That so many governors have done so, often responding to popular demand for shutdowns, demonstrates America’s genuine practice of federalism — a system that is allowing us to respond to this crisis even faster than the states of Europe… One of the reasons federalism can act faster is that it allows decentralization. It is less politically risky to impose measures in one state than on an entire nation. You can respond where the hotspots are, rather than imposing costs evenly across an undifferentiated mass of the nation where the overall average risk may be low.
Professor Ilya Somin wrote on this same topic for Reason. He noted limitations on federalism in a pandemic, but also pointed out the benefits of decentralization.
The US is a large and diverse nation, and it is unlikely that a single “one-size-fits-all” set of social distancing rules can work equally well everywhere. In addition, state-by-state experimentation with different approaches can increase our still dangerously limited knowledge of which policies are the most effective. Moreover, if one policymaker screws up, his or her errors are less likely to have a catastrophic effect on the whole nation. …There is, in fact, a long history of state and local governments taking the lead in battling the spread of contagious disease. During the 1918-19 flu pandemic, state and local restrictions were the primary means of inhibiting the spread of the virus, while the federal government did very little.
John Daniel Davidson of the Federalist echoes the benefits of having choices made at the state and local level.
The founders wisely chose a federal republic for our form of government, which means sovereignty is divided between states and the federal government. The powers of the federal government are limited and enumerated, while all powers not granted to the feds are reserved for the states, including emergency police powers of the kind we’re seeing states and localities use now. …Much of the media seems wholly unaware of this basic feature of our system of government. …Trump explained that many governors might have a more direct line on this equipment and if so they should go ahead and acquire it themselves, no need to wait on Washington, D.C. This is of course exactly the way federalism is supposed to work. …We should expect the government power that’s closest to affected communities to be the most active, while Washington, D.C., concern itself with larger problems.
And those “larger problems” are the ones enumerated in Article 1, Section 8.
The bottom line is that we should always remember the Third Theorem of Government, which helps to explain one of the reasons why it’s generally a bad idea to give the folks in Washington more power and authority.
Instead, we should try to be more like Switzerland, which is one of the world’s best-governed nations in large part because of a very decentralized approach.
Which may be why economists at the (normally statist) International Monetary Fund found a clear link between federalism and quality governance.
And why does it seem like the size and scope of government keeps expanding around the world?
If I’m feeling optimistic, I’ll disagree with the tone of those questions. There are reasons to be cheerful, after all. the Soviet Empire collapsed and there’s solid data that global economic liberty has increased over the past few decades. And for those who care about evidence, there’s a slam-dunk argument that smaller government means more prosperity.
But if I’m feeling pessimistic, I’ll look at grim numbers suggesting that the burden of government automatically will expand because of demographic change. And I also worry about eroding societal capital, with more and more people thinking it’s okay to live off the government. And let’s not forget “public choice,” the theory that explains why politicians have an incentive to make government bigger.
I go back and forth on whether the glass is half full or half empty, and I’m not sure which side is winning. All I can say for sure is that Americans are getting increasingly polarized as we have big fights about the proper role of government.
Which is why I’ve always thought decentralization would be a good idea. No just for policy reasons, but also for domestic tranquility. All the leftists could move to places such as California, Illinois, and New Jersey and vote themselves Greek-style government. And all the advocates of limited government could move to more laissez-faire states such as New Hampshire, Texas, and South Dakota.
But statists will never agree to that approach. And these two sentences from Reddit‘s Libertarian page succinctly explain the left’s opposition.
This guy nails it.
Libertarians have no objection to a bunch of statists creating some sort of socialist or communist mini-society, so long as it’s voluntary. Indeed, we’ve periodically had experimental societies in America based on Marxist principles. Starting with the Pilgrims (who learned from their mistake). And I still laugh every time I think about Bernie Sanders getting ejected from a hippie commune because he was too lazy to do his share of the common work.
But this tolerance isn’t a two-way street. Libertarians will let socialists create statist systems inside a free society, but the left won’t allow libertarian outposts in statist societies.
Heck, our statist friends don’t even like it when other nations have pro-market policy. That’s one of the reasons international bureaucracies always persecute so-called tax havens. Folks on the left may be misguided, but they’re usually not stupid. They know that statist systems will quickly fail if productive people have the ability to move themselves (or at least their money) across national borders.
The bottom line is that federalism is good because it means people can easily move when a government imposes bad policy. This is also a recipe for tolerance and tranquility, though only one side sees it that way.
This Thursday, Scottish voters decide whether they want to break away from the United Kingdom and reclaim their independence.
Do advocates of economic liberty in America have a dog in this fight?
Well, there’s very solid academic evidence from economic historians that Europe originally became rich precisely because power was decentralized among lots of small jurisdictions that had to compete with each other.
Scotland regained its own Parliament in 1999, following an earlier referendum on so-called devolution, which significantly increased the country’s autonomy. Since 2007, there has been a Scottish government, which is currently run by the Scottish National Party. So much power has already been devolved to Edinburgh that you may well ask why half of adult Scots feel the need for outright independence. The economic risks are so glaring… What currency will Scotland use? The pound? The euro? No one knows. What share of North Sea oil revenues will go to Edinburgh? What about Scotland’s share of Britain’s enormous national debt? …Petty nationalism is just un-Scottish. And today’s Scots should remember the apposite warning of their countryman the economist Adam Smith about politicians who promise “some plausible plan of reformation” in order “to new-model the constitution,” mainly for “their own aggrandizement.”
I’m sure that many pro-independence politicians in Scotland are looking out for themselves, so that’s a compelling argument.
And David Frum is similarly skeptical, arguing that the United States should worry about an independent Scotland.
A vote in favor of Scottish independence would hurt Americans…a ‘Yes’ vote would immediately deliver a shattering blow to the political and economic stability of a crucial American ally and global financial power. The day after a ‘Yes’ vote, the British political system would be plunged into a protracted, self-involved constitutional crisis. …a ‘Yes’ vote would lead to a longer-term decline in Britain’s contribution to global security. The Scottish separatists have a 30-year history of hostility toward NATO. …a ‘Yes’ vote would embitter English politics and empower those who wish to quit the European Union. …The United States has traditionally preferred an EU that includes the U.K. …a ‘Yes’ vote would aggravate the paralysis afflicting the European Union.
But there are other voices that have a more optimistic assessment.
Here’s Ewan Watt, one of the few Scotsmen I personally know, arguing in the Daily Caller that independence will force his statist countrymen to rein in their big-government impulses.
I’ve often been asked to try and summarize the tortuous Scottish independence campaign from a libertarian perspective to an American audience. …this nicely sums up the independence campaign: Scots and other Scots fighting over who can further spread the specter of socialism, inhibit individual liberty, and, ultimately, ruin Scotland. Both sides have strived to out-promise each other on more public spending, greater economic centralization, and cradle-to-grave public services.
Statists fighting for more statism? Sort of like Bush v Obama? That doesn’t sound like someone who thinks independence will produce good results.
But keep reading.
And yet…, independence could ultimately provide a boon to the movement and rejuvenate classical liberal ideas in the land that helped give them life. Given that Scotland lacks the tools that even a U.S. state possesses to attract external investment, it’s little surprise that at times it’s been nothing but a laboratory for successive socialist experiments. …Under independence Scotland will be forced to create an economic environment that can compete with both the lure of London and Ireland’s 12.5 percent corporation tax, while also avoiding the very government largesse and fragile financial system that the Bank of England has been able to artificially prop up. Far from becoming a socialist utopia, the conditions of independence will not only force Scotland to live under strict fiscal discipline, but embrace the very free-market philosophy that she helped export to prosperous nations around the world.
And my Cato colleague David Boaz also thinks an amicable divorce will lead to more economic freedom.
…whatever thebenefits of unionmight have been in 1707, surely they have been realized by now. And independence for any country ought to appeal to Americans. So herewith a few arguments for independence. …England and Scotland are both nations with history and culture. They need not be combined in one state. …There’s some evidence that small countries enjoy more freedom and prosperity than larger countries. …Alex Salmond, the leader of the Scottish National Party and the likely first prime minister of an independent Scotland, may be a socialist, but he’s not an idiot. He knows that a tax hike in Scotland wouldn’t work. Asked in a televised debate, he responded, “We don’t have proposals for changing taxation. We certainly are not going to put ourselves at a tax disadvantage with the rest of the UK.” …With a top British tax rate of45 percent, and41 percentin Ireland, Salmond doesn’t want to raise the Scottish rate to 50 percent and push out top earners. …An independent Scotland would have to create its own prosperity, and surely the people who produced the Enlightenment are smart enough to discover the failures of socialism pretty quickly if they become free, independent, and responsible for their own future. …Scotland had a successful independent monetary system from 1716 to 1845,… So maybe it doesn’t need the pound sterling.
By the way, the independent monetary system David mentions was based on competitive currencies and it is perhaps the best example of a free-market monetary policy. But that’s a topic for another day.
Back to the issue of Scottish independence, a former Cato Institute expert, Patrick Basham, also writes that an independent Scotland will have no choice other than capitalism.
Scotland is an anachronistic place where leftist thinking remains in vogue. Scots strongly dislike, for example, the UK government’s introduction of market forces and fiscal discipline into the provision of health care, education, and welfare. …Although the Scots are ideologically to the left of their English neighbors, in practice their semiautonomous government is comparatively frugal. For example, Scotland has a lower deficit and lower public spending relative to GDP than the UK. …Given that Scotland’s top parties, the nationalists and Labor, are left-wing, it’s also possible that an independent Scotland will tax, spend, and regulate itself into an economic tailspin. That would be a travesty for many individual Scots, but not a national tragedy. Hitting the economic wall without a UK-size safety net would teach an invaluable lesson. It would rapidly cure Scotland’s entitlement culture, as a critical mass of taxpayers learned the true cost of fiscally unsustainable statism. …Ultimately, such a self-reliant, market-friendly political culture may transform Scotland into an international center of commerce and finance, such as Hong Kong, or perhaps into a tax haven, such as Guernsey or Jersey. The bottom-line is that, if Scotland decides to go it alone, it will become a very different place. An even better place.
I’m very sympathetic to sentiments in these columns, though I’m not as optimistic about an independent Scotland.
What happens, after all, if a newly independent Scotland goes through a five-year learning period of statism before it becomes clear that big government doesn’t work?
Does that mean Scottish voters will suddenly become libertarians? I hope so, but what if a non-trivial number of productive people emigrate during that period and the majority of those left still vote for handouts and dependency?
On the other hand, maybe they’ll have no choice, sort of like the piglets in this Chuck Asay cartoon.
If you’re undecided on the issue, there is a very good role model for independence. Writing for the Washington Post, Professor Ilya Somin of George Mason University’s Law School adds a very persuasive argument in favor of secession.
One relevant precedent is the experience of the “Velvet Divorce” between Slovakia and the Czech Republic, whose success is sometimes cited by Scottish independence advocates as a possible model for their own breakup with Britain. Like many Scottish nationalists, advocates of Slovak independence wanted to break away from their larger, richer, partner, in part so they could pursue more interventionist economic policies. But, with the loss of Czech subsidies, independent Slovakia ended up having to pursue much more free market-oriented policies than before, which led to impressive growth. The Czech Republic, freed from having to pay the subsidies, also pursued relatively free market policies, and both nations are among the great success stories of Eastern Europe. Like Slovakia, an independent Scotland might adopt more free market policies out of necessity. And the rump UK (like the Czechs before it), might move in the same direction. The secession of Scotland would deprive the more interventionist Labor Party of 41 seats in the House of Commons, while costing the Conservatives only one. The center of gravity of British politics would, at least to some extent, move in a more pro-market direction, just as the Czech Republic’s did relative to those of united Czechoslovakia. If the breakup of the UK is likely to resemble that of Czechoslovakia, this suggests that free market advocates should welcome it, while social democrats should be opposed.
Ilya is right. The Czech Republic and Slovakia have better policy as separate nations. And I say that even though I’m very disappointed that both nations recently repealed their flat tax systems.
Last but not least, let’s add a bizarre voice to the debate.
It seems that the crazies from North Korea support an independent Scotland.
North Korea is quietly backing the Yes vote in Scotland and would be keen to increase trade with a newly independent Edinburgh, according to officials of the Pyongyang regime. “I think that independence would be a very positive thing for Scotland,” Choe Kwan-il, managing editor of the Choson Sinbo newspaper, told The Telegraph. …”I believe that every person has the right to be a member of an independent nation, to have sovereignty, to live in peace and to enjoy equality,” he said. “And I believe that a majority of Scots feel the same and will vote for independence.”
There’s nothing objectionable in those words, but they come from someone who almost surely is a puppet of one of the most malignant regimes on the planet, so you can’t trust him or his statements.
This doesn’t necessarily mean Scottish independence is a bad idea, to be sure, but I surely would understand if an undecided person voted no simply because North Korea wants a yes.
But now let’s see what a true public policy expert has to say about the topic. Here’s Groundskeeper Willie from The Simpsons.
And since I’m sharing videos, here are the Scots in a very un-European display of patriotism. Gives these Americans a run for the money.
That’s almost enough to make me think they’ll vote yes. But my prediction, for what it’s worth, is that Scottish voters will get cold feet and vote no by a 56-44 margin.
And if my prediction is right, I’ll offer my two cents on what should happen next. The U.K.’s politicians should agree on a plan of radical decentralization. Sort of what’s already been happening, but on a much bigger scale.
The national government should maintain the military, but almost every other function of government should be devolved. England, Northern Ireland, Scotland, and Wales should each decide how much to tax and how much to spend.
P.P.P.S. The tiny nation of Liechtenstein is comprised of seven villages andthey have an explicit right to secedeif they become unhappy with the central government in Vaduz.
Republicans have been spouting lots of good rhetoric, but what really matters is shrinking the burden of government. One very attractive option is federalism. There are things that perhaps should be done by government, but there is absolutely no reason why they require a remote, expensive, one-size-fits-all, redistributionist, unconstitutional bureaucracy in Washington.
Writing for Real Clear Markets, Diana Furchtgott-Roth of the Hudson Institute uses highway funding as an example of how we can get much better results if Washington butts out and lets states make their own decisions. She doesn’t take this argument to its logical conclusion and urge the dismantling of the Department of Transportation, but I’ll unabashedly take that extra step. Don’t just shut it down. Bury it in a lead-lined coffin, cover it with six feet of concrete, and then add a foot of salt to make sure it doesn’t somehow spring back to life.
By ceasing to authorize expenditures from the Highway Trust Fund, and ending the 18-cent federal gasoline tax, Congress could let the trust fund expire and turn highway spending authority back to the states-along with the ability to levy the fuel tax for their own coffers. Such devolution of responsibility to states would release them from expensive federal laws and regulations associated with current highway spending, such as environmental laws that add years to project construction (remember “shovel-ready” road projects?). Nor would states be bound by Davis-Bacon prevailing-wage requirements and Project Labor Agreements, which require the use of costly union labor on construction projects. …Removing federal restrictions would expand states’ opportunities to raise revenue by imposing highway tolls, which could ease traffic congestion by varying prices depending on when traffic is heavy or light. Such toll roads in southern California have eased congestion and raised revenue for the state. Each state would be able to fund and build the roads it wants, using a combination of taxes, bond issues, tolls, and public-private partnerships.
But there are other examples of decentralized systems, with Canada also deserving plenty of praise.
International Liberty 