Break up the United States!

The central government in the United States is too big

A modern society needs a lot of governance. But a modern society also has many institutions that can provide governance: corporations, trade groups, professional associations, standard-setting bodies, homeowners’ associations, school boards, cities, states, and more.

There are very few problems that require solutions to emanate from a central government in a country with the geographic size and population of the United States. Countries as small as Singapore (6 million) , Norway (5 million), Denmark (6 million) and Switzerland (8 million, with a lot of autonomy for its 26 cantons) work quite well.

The United States is the third largest country in the world, by population. The quality of government in the other countries that make up the top ten is abysmal.

The other largest countries are China, India, Indonesia, Pakistan, Nigeria, Brazil Bangladesh, Russia, and Mexico. One can never be sure, but it seems very plausible that the world would be a better place if every one of these polities were broken up into about a dozen countries.

Smaller countries would give rise to more issues that must be settled internationally. But this could be done through treaties.

The choice between one large polity and many smaller polities is reminiscent of the problem identified by Ronald Coase, Oliver Williamson and other economists in which a firm chooses to outsource an activity rather than manage it in house. With many countries, there are the transaction cost of negotiating treaties. Within one country, there are diminishing returns to governing ability. Relatively speaking, it appears to me that negotiating treaties would be less of a problem.

As for the United States, the Federal government’s role in areas like transportation and public health could be much reduced and far less heavy-handed than it is today. Some agencies are not needed at all—their functions could be performed by state and local governments. These include the Department of Housing and Urban Development, the Department of Education, the National Science Foundation, the Federal Bureau of Investigation, the Consumer Financial Protection Board, among others. The list of Federal crimes should be pared way back, if not discarded completely.

It would be easier to manage a Federal government with limited scope. One can hope that the government would do a few things well, rather flailing at many problems unsuccessfully.

What do we need to do, or undo, to reduce the size of the Federal goverment? For the growth of the Federal government, I blame two factors: progressive taxation; and Keynesian economics.

Villain Number One: Progressive Taxation

Think of taxation as a pricing system for government services. Progressive taxation is a form of price discrimination, where you charge more for the people who are able to pay more. Price discrimination always enables the provider to obtain more revenue than it could otherwise. In this case, a lot more.

If government services were unbundled, we would pay fees for specific services. We would pay tolls to use roads, entrance fees to use parks, tuition to use schools. But unbundling government services is a topic for another essay.

In practice, government provides many services, without charging separate fees for each. It is like one of those housing developments in Delray or West Palm that has a golf course, tennis courts, a dining hall, a swimming pool, groundskeepers, a security gate, and so on. For these bundled services, residents pay a single annual membership fee.

One can imagine taxation taking the form of a membership fee. If every adult resident had to pay a flat fee to the United States annually, the Federal government could not engage in price discrimination. It would have much less revenue, and it would have to be more modest and selective about the areas for which it chooses to make policy.

Smaller polities, like Norway, have progressive taxation. Comparably small units within the United States should be able to employ progressive taxation. To get units the size of Norway, we could have to move power down to the county level. Giving counties but not the Federal government the ability to price discriminate would shift the balance of power away from Washington and toward counties.

Unlike today, most government benefits would come from counties, not from Washington. Counties would compete with one another, as people vote with their feet. They would negotiate with one another, particularly over what happens to people’s taxes and benefits when they migrate.

It is not realistic, and perhaps not sensible, to hope for progressive taxation at the Federal level to go away. But too many people celebrate tax progressivity, and not enough people question it. I think that it is worth recognizing that the ability to price discriminate makes for a Federal government that is fatter and lazier than it would be otherwise.

Villain Number Two: Chronic Deficits

Even with price discrimination, government’s reach exceeds the revenue it can grasp. According to Keynesian economics, the government should run deficits to alleviate bad times and run surpluses in good times. Politicians have taken the deficit idea and run with it. But they have ignored the idea of running surpluses in good times. The result is that new government spending initiatives appear to provide benefits without costs. Imagine what would happen if President Biden had to specify exactly whose taxes would be raised to pay for his student loan debt calculation. Or imagine that Congress had to pay for “stimulus checks” by offsetting spending cuts elsewhere.

The ability to run chronic deficits creates a bias toward larger government. Even if we believe in Keynesian economics, we could devise a scheme in which the size of deficits is determined automatically rather than through discretion. A fiscal rule could force the government to run surpluses as the economy approaches full employment. There was once a time when progressive economists called for such a rule.

Conclusion

When someone says, “We should have a welfare state like Norway,” a libertarian answer should be “Yes! We should have many welfare states, each about the size of Norway. We just need to drastically shrink the size of the Federal government and distribute governance responsibility to smaller entities. To move in that direction, it would really help to reduce the Federal government’s use of progressive taxation and deficit spending.”