The Political Economy of Federalism: A Critical Appraisal

In this paper I present a survey of the economic literature which is concerned with federal public finance. I argue that it is difficult to derive policy-relevant normative propositions about federal financial relations, but that it is possible to suggest means by which one could improve the efficiency of policy decisions. There is a review of the discussion of the Buchanan and Scott contributions of the 1950s and 1960s, and it is concluded that it is easier to discover significant questions than agreed answers. Practical considerations of geography, regional economy, and administrative separation of powers are then introduced. The argument is that the normative economic definition of equity and efficiency may have little relevance to the practical policy-question of forming and maintaining a federation. I conclude with a proposal for linking the attempt to solve questions of regional and national policy through a network of committees—one for each of the following areas: budget coordination, regional equalization, common standards, stabilization, and economic growth.