Devolution? What's That?

A few months ago, I attended a large dinner where I sat at a table with a fellow who runs the business improvement district in downtown Washington, D.C. That night, he was downright ecstatic because he had just received a report from a consulting firm predicting a new golden age for the Washington area. In an era of dynamic and free-spending federal government, the report said, finance, energy, telecommunications and other industries would be focused on the nation's capital more than ever before. More and more corporations would be moving to D.C. to be close to Congress and the White House. I didn't share his enthusiasm--to his surprise--but I could understand it. The future from his perspective had to look pretty good.

Nobody could have imagined a year ago what the federal government would be up to these days. It is the major stockholder in the world's largest insurance firm, many of the nation's largest banks and two of the three American auto companies. It will pump $223 billion into state governments over the next two years, along with plenty more for locals. Federal money is now the single largest source of revenue for states and localities--more than income, sales or property taxes.

In July 2007, Time ran a cover that featured California Governor Arnold Schwarzenegger and New York City Mayor Michael Bloomberg embracing one another with large self-satisfied grins. The headline read: "Who Needs Washington?"

Back then, many of us had convinced ourselves that the nation's states, cities and counties really weren't all that dependent on the federal government anymore; devolution had progressed to the point where states and locals could make policy and administer programs themselves. What the feds mostly needed to do was stay out of the way.

That summer, California and a dozen or so other states were taking the lead on global warming, stem cell research, consumer protection and many other issues. State and local governments in general were feeling a heady sense of power.

Two years later, nobody is asking who needs Washington. If they did, the answer would be simple. States do. Cities do. Everyone does. Governments all over the country are short of money, and only the feds can print it. Washington is paying the piper, and it is calling the tune. The interesting question is whether the relationships in the federal system have altered for a while--or for good.

Unquestionably, the Obama administration is determined to reassert federal authority across a wide range of areas, particularly in the regulation of insurance, banking and finance. That is making state regulatory officials very nervous, even though the administration insists it wants to exert authority as a partner with the states, not as an adversary. The president personally has ordered federal agencies to stop preempting state laws and even to rescind past preemptions. "Throughout our history," his recent directive read, "state and local governments frequently have protected health, safety and the environment more aggressively than has the national government."

One thing seems clear: The states that were more aggressive than Washington in regulating industry before this year are likely to be comfortable with the Obama approach. Those that tended to go light on regulation will have a hard adjustment.

But the current situation abounds in ironies. A case in point: In May, the White House handed California and 13 other states a significant victory in their long battle with Washington over energy and environmental policy by adopting California's tough standards for greenhouse gas emissions and automobile fuel efficiency. In a flash, the dispute was over, the states had prevailed, and longstanding federal resistance had been reversed.

At that very moment, however, the Golden State was in such a fiscal mess that it was requesting federal guarantees for $13 billion in short-term state debt, a request the administration has declined. California isn't alone. A number of municipalities, through their members of Congress, are requesting federal assistance to offset losses suffered when Lehman Brothers went bankrupt. And House Finance Chairman Barney Frank is preparing legislation to have the feds in effect insure municipal bonds in order to thaw out a frozen muni-bond market.

If you're a governor or a mayor, and you want to put a bright face on what is happening, you can call it "collaborative federalism." But that doesn't just mean the federal government talking to governors and mayors about what they need; it means the feds telling them to start cooperating more with each other. We may finally be on the road to some version of regionalism, but it will very likely be crafted and monitored from the nation's capital.

Make no mistake. My friend from the business improvement district has a perfect right to be gleeful. Washington is back in charge.