Macroeconomic Control of Subcentral Governments: Experience from the USA and Scandinavia

Abstract

Subcentral governments have gradually become more and more important in the general level of public economic activity in Western nations, To an increasing extent, macroeconomic management implies that the economic activity of subcentral governments is taken into account. But how can central governments coordinate the economic activity of numerous subcentral governments? What kind of intergovernmental arrangement is necessary? The author argues that fiscal federalism, the traditional approach to this problem, cannot answer these questions satisfactorily. The focus of fiscal federalism is on economic incentives in intergovernmental relations. The author argues that this is not sufficient. Fiscal federalism must be supplemented by a focus on political methods of influence. An analysis of Scandinavian and US ways of involving subcentral governments in macroeconomic management shows that the role played by subcentral government associations is crucial in the effectiveness of macroeconomic management.