Radical Federalist

When it comes to relations between the states and Washington, the Reagan era is still going on.
by | August 2004

Ronald Reagan's funeral stirred some remarkably warm reflections about his life and legacy. But amid the retrospectives, analysts largely ignored his impact on federalism, where he tore down a wall every bit as imposing as the one in Berlin.

Until the Reagan administration, federal spending for grants to state and local governments had been steadily growing in America for decades. As a share of the economy, federal aid had increased from 1.6 percent of the Gross Domestic Product in 1965 to 3.4 percent in 1980. Reagan's tight budgets stopped that growth. By the end of his two terms, federal spending for intergovernmental aid had shrunk by almost a fifth (after accounting for inflation). As a share of the economy, grants fell by a third.

Even more important than Reagan's decrease in spending was the change in the way the federal government distributed the money. In the 1950s, the federal government began big grant programs for urban renewal and interstate highways. In the 1960s, Lyndon Johnson's Great Society expanded these categorical programs dramatically. Richard Nixon, succeeding Johnson as president in 1969, believed that the categorical programs relied too much on federal control, so he replaced the old job training, community development and social service programs with block grants--money distributed by formula with relatively few strings. Local governments loved them, but critics increasingly questioned what value the nation got for the money spent.

Reagan and his team came to office wanting to go much further: They were convinced that the existing federal aid system was broken. They transformed old categorical programs and some of the newer block grants into still broader programs, which coupled even more administrative flexibility with less money. Reagan's argument: With a greater ability to fit federal programs to local needs, state and local governments did not need as much cash.

By the time he left office in 1989, Reagan had eaten away at a large part of the Great Society's core. To be sure, the federal aid bureaucracies remained in existence and billions of dollars continued to flow. But the Reagan presidency put a cork in the steady growth of spending and ended the federal government's long "big brother" tradition of dominance in the intergovernmental system.

Even more fascinating is a bold move that failed but nevertheless shook the system. In his 1982 State of the Union address, Reagan stunned congressional Republicans and governors alike with a plan to swap responsibility for Medicaid and welfare. The federal government would assume the burden for Medicaid, while the states would take over welfare programs, including food stamps and Aid to Families with Dependent Children.

The plan seemed too risky for almost everyone. The states worried they would end up on the short end. Members of Congress worried they would spend enormous political capital in exchange for uncertain gain. No one but Reagan and his staffers seemed very enthusiastic about the swap, and within weeks Reagan's dramatic proposal died.

With his radical plan, however, the conservative president had tapped into the emerging issue of federal-state fiscal relations. In backing away from the deal, the states ended up with prime responsibility for both welfare and Medicaid. The rising caseload swelled their welfare costs. In response, some states--notably Wisconsin and Michigan--tried creative experiments that eventually produced the revolutionary 1996 welfare reform block grant.

Meanwhile, Medicaid costs started to soar at an even more alarming rate. By the turn of the 21st century, Medicaid was the fastest growing item in many state budgets. Faced with the biggest fiscal crunch in generations, governors looked to Washington for help. They got little in return.

More than one state official looked wistfully back at the Reagan swap proposal and concluded that the states should have taken the deal when they had the chance. Had they done so, states could have pursued the Wisconsin welfare reform strategy and ridden welfare costs down, while passing Medicaid, their biggest budgetary nightmare, to the feds. And with the federal government in control of both Medicaid and Medicare, the nation would have been a step closer to a system of national health insurance.

Johnson's Great Society brought the federal government into more programs than ever before, and on a scale and scope previously unimagined. Reagan ended the Great Society era by capping the size of the federal government's commitment. He shaped the new generation of grants, highlighted by welfare reform, that define the basic administrative relationships of 21st-century federal grant programs. And with the welfare-Medicaid swap proposal, he identified the nastiest issue in the fiscal relationship.

Johnson stretched the fabric of American fiscal federalism into its modern form. Reagan tailored it to the clothing we wear today.

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