The political economy of constitutional federalism

Abstract

Listen

Translate article

Until very recently, most economic analyses of federalism have concentrated on the problems of policy design within a federal polity. Early writers' asked the composite question, 'does the existence of a federal form of government pose new questions to the science of public finance and, if so, how can these questions be answered within the structure of that science?' This enquiry led to a preoccupation with the horizontal equity aspects of federal policy which provided the foundation for the extensive literature devoted to the study of grants-in-aid and revenue sharing schemes. More recently, this basic question has been respecified and split into two: 'Does federalism matter?' and, conditional on an affirmative answer to this question, 'Under what circumstances will a federal structure be desirable?'2 The first of these questions need not detain us for very long. It has long been a commonplace that the outcomes of a social decision process depend not only upon the preferences of the agents involved and the relevant cost constraints, but also upon the particular decision making mechanism employed. Since federalism is, in part, a partial specification of a decision making process it will be the case that a federal society will produce outcomes different from those associated with an otherwise similar non-federal society. Federalism clearly matters in the sense that it influences social outcomes, and it is in this sense that the question is normally put. It is the second question, and a variety of approaches to answering it, that forms the primary focus of this paper. Alongside the economic literature there exists a tradition of political analysis which also originates in the work of Tocqueville and Mill.3 The broad trend of this political literature4 can be characterised as a movement away from the study of the operation of federal states, towards a more comparative and constitutional analysis of federalism which stresses the process