How Much Economic Sharing in American Federalism?

We present in this paper an economic analysis of American federalism as a system of shared functions. Recent political studies have suggested that the federal, state and local governments may be viewed as closely meshed parts of a single system. Functions are not neatly parceled out among the many units, or along the three planes, of the federal system. Rather, it is difficult to find any governmental activity performed by a given plane of government which does not involve the other planes in important and continuing responsibilities. Decision-making power, as well as administration, is shared. Formally, as in grant-in-aid programs, and informally, as in the cooperation of federal, state, and local law enforcement officers, the three planes of government work substantially as one in the fulfillment of common purposes. It is possible to formulate an economic counterpart to the hypothesis of political sharing, as follows: Despite apparent diversities in the fiscal activities of the federal government, on the one hand, and state-local governments, on the other, an essential consistency marks the economic impacts of these two planes of government. In political analysis the sharing hypothesis relies for demonstration on descriptive studies of the common involvement of the federal, state, and local governments in the entire range of their activities. More quantitative criteria can be applied in testing economic impacts. Three types of economic impacts of government can be distinguished: on the allocation of resources between public and private use; on the level of aggregate demand (income and employment); and on the distribution of income among households. These are the major categories of economic impact with which the economist deals. They are distinct areas: the resource-shifting effect of government, for example, is analytically separate from the equalization-of-income effect.