Coronavirus Is Straining the Concept of Federalism

(Bloomberg Opinion) -- Crises tend to widen fault lines that already exist. The Covid-19 pandemic has been no exception. Before the virus hit, the unbalanced nature of recent economic growth was already straining federal structures around the world, from the U.S. to India to Europe. The current crisis threatens to open new disagreements and deepen old ones — and transform some political entities beyond recognition.

This isn’t just a question of how central governments should distribute revenues and aid, although in most cases that’s the matter at hand. When Senate Majority Leader Mitch McConnell suggested that he’d rather see “blue states” go bankrupt than have the federal government bail them out, he wasn’t making only a crass political calculation. He legitimately didn’t want states to receive aid if he felt they had overspent on, say, pensions.

He raises a fair point: How, in this crisis, should the federal government fairly deal with states that hold completely different visions of what government is and what it should do? Why should states that are so allergic to government that they would reject even Medicare expansion funds agree to finance states that have readily taken on debt to pay pensions?

Of course, there’s an easy retort to that argument, summarized by the former U.S. Attorney for the Southern District of New York, Preet Bharara: Many of those populous and economically vibrant “blue” states are already providing more than their share of federal revenues. “I, too, am sick and tired of subsidizing Kentucky,” Bharara said, referring to McConnell’s home state.

The irony is that, across the world, it is these wealthier, more globalized parts of federal systems that have been hit hardest and earliest by the pandemic. The virus travelled across the world in airliners and cruise ships, carried by tourists and traders. Rich northern Italy, not the southern provinces that it has long subsidized, became the grim example of how deadly the new coronavirus could be. New York is the epicenter of the virus in the U.S., not deep-red states such as Kentucky.

A lack of solidarity at moments like this will be remembered. The European Union will at some point have to deal with its failure to support Italy when that country was at its most vulnerable. Whatever deal the EU’s leaders finally cut, the fact is that when northern Italy’s health system was overloaded, no trains of medical supplies and doctors crossed the Alps to help. European Commission President Ursula von der Leyen has admitted, “too many were not there … when Italy needed.” That failure will cost the taxpayers of northern Europe – and it should. If money isn’t a cure for hurt feelings, big intra-regional transfers are therapeutic at least.

To some economists, that’s all that a federal structure really is — an excuse for such fiscal transfers. Countries that are unable to agree on how much to send and where are facing another form of fiscal paralysis. In India, for instance, state governments are responsible for healthcare and face straitened budgets as a result. Yet not only does the federal government seem unconcerned, it has absurdly banned liquor sales for the duration of the lockdown, even though taxes on alcohol are one of the few ways left for India’s state governments to raise money.

As a result, monetary authorities everywhere are once again having to hold things together. The U.S. Federal Reserve has promised to expand its municipal lending program. The European Central Bank is underwriting the euro area’s governments while its politicians remain divided. The Reserve Bank of India has raised the cap on short-term advances to India’s state governments.

The populists and budding authoritarians that have sprung up everywhere see this crisis as an opportunity to expand their authority; they are unlikely to recognize how strained federalism is becoming. It’s not just the U.S., where President Donald Trump has tried to turn residents of certain states against their own governors. In India, the ministry of home affairs – run by Prime Minister Narendra Modi’s No. 2 – has begun sending out “investigation teams” to harass states run by the opposition, such as West Bengal.

This is neither moral nor wise. It could force states and regions to discover that they have common interests – and that the federal government doesn’t share them. Already, in the U.S., three groups of governors have emerged – in the West, Midwest and East – declaring they will coordinate pandemic policy within each region. The governor of Minnesota compared the approach to “a loose Articles of Confederation.”

That prospect should make rulers in their distant capitals quake. If solidarity is not offered by the center, it very well might be found by the provinces anyway. 

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Mihir Sharma is a Bloomberg Opinion columnist. He was a columnist for the Indian Express and the Business Standard, and he is the author of “Restart: The Last Chance for the Indian Economy.”

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