A true tour de force on the details of why local governance is "hard mode" here in the US. Honestly, despite your optimism, it seems like a fully general argument that good governance at the city and state level is functionally impossible.
One thing that stood out to me in your section on Medicaid going from 20%-30% and Baumol making all state things more expensive than the private market, the biggest difference I see there compared to some of the "actually functional and well run" places like Singapore, Tokyo, Berlin, and Prague, are that healthcare is covered at the federal level in those places, thereby eliminating this mandated local cost growth (which we only expect to get bigger).
So perhaps there are some federal-level moves that could actually make local governance better. That certainly looked to me like the biggest lever that both existed and could be plausibly pulled.
The pension underfunding mechanic is such a clever political trap. Politicians get to avoid visible service cuts or tax hikes, the problem lands on someone else's desk decades later, and meanwhile the unfunded liabilites just compound. The comparison betwen South Dakota's discipline and states like Illinois really shows how governance choices matter way more than structural constraints. When you see Wisconsin maintaining 100% funding through recessions by actually paying contributions on time every time, it's hard to argue the trap is inescapable.
I wonder what sorts of rule-based (rather than discretionary) policies could (1) counter the brutal pro-cyclicality of state and local governments, (2) avoid creating moral hazard, and (3) give SLGs confidence to build long-term capacity (rather than knowing their successors will likely engage in binge spending and crash austerity).
My initial thought is a program that taxes or subsidizes all state and local spending according to something like 3% × (National U3 Unemployment Rate − 5). For example, if the unemployment rate were 4.5%, all SLGs would pay a 1.5% tax on all spending; if the unemployment rate were 8%, they would receive back a 9% subsidy on all spending. The program would be fully automatic, symmetric, and revenue-neutral over the cycle. (So maybe a different number besides "5" would need to be chosen.)
This would modestly restrain expansion during economic peaks while helping governments retain staff and maintain programs during downturns. By tying adjustments to a national indicator rather than state-level performance, it avoids penalizing fiscally responsible states while still providing a countercyclical boost during recessions. It would also help stabilize prices by discouraging overcrowding or slack capacity, and does not favor either high-spending or low-spending states (nudging the former towards the latter during booms, and the latter towards the former during busts)
This doesn’t mean there wouldn’t also need to be other programs, bailouts, or stimulus, but something written into the rules like this could serve as a baseline, allowing Congress to focus on more specific issues.
A true tour de force on the details of why local governance is "hard mode" here in the US. Honestly, despite your optimism, it seems like a fully general argument that good governance at the city and state level is functionally impossible.
One thing that stood out to me in your section on Medicaid going from 20%-30% and Baumol making all state things more expensive than the private market, the biggest difference I see there compared to some of the "actually functional and well run" places like Singapore, Tokyo, Berlin, and Prague, are that healthcare is covered at the federal level in those places, thereby eliminating this mandated local cost growth (which we only expect to get bigger).
So perhaps there are some federal-level moves that could actually make local governance better. That certainly looked to me like the biggest lever that both existed and could be plausibly pulled.
The pension underfunding mechanic is such a clever political trap. Politicians get to avoid visible service cuts or tax hikes, the problem lands on someone else's desk decades later, and meanwhile the unfunded liabilites just compound. The comparison betwen South Dakota's discipline and states like Illinois really shows how governance choices matter way more than structural constraints. When you see Wisconsin maintaining 100% funding through recessions by actually paying contributions on time every time, it's hard to argue the trap is inescapable.
I wonder what sorts of rule-based (rather than discretionary) policies could (1) counter the brutal pro-cyclicality of state and local governments, (2) avoid creating moral hazard, and (3) give SLGs confidence to build long-term capacity (rather than knowing their successors will likely engage in binge spending and crash austerity).
My initial thought is a program that taxes or subsidizes all state and local spending according to something like 3% × (National U3 Unemployment Rate − 5). For example, if the unemployment rate were 4.5%, all SLGs would pay a 1.5% tax on all spending; if the unemployment rate were 8%, they would receive back a 9% subsidy on all spending. The program would be fully automatic, symmetric, and revenue-neutral over the cycle. (So maybe a different number besides "5" would need to be chosen.)
This would modestly restrain expansion during economic peaks while helping governments retain staff and maintain programs during downturns. By tying adjustments to a national indicator rather than state-level performance, it avoids penalizing fiscally responsible states while still providing a countercyclical boost during recessions. It would also help stabilize prices by discouraging overcrowding or slack capacity, and does not favor either high-spending or low-spending states (nudging the former towards the latter during booms, and the latter towards the former during busts)
(Yes, I am scarred by the Great Recession, when SLGs played a huge [and entirely rational, from their own perspective] role in cratering demand: https://jwmason.org/slackwire/recovery-from-the-next-downturn-may-depend-on-state-and-local-governments/ )
This doesn’t mean there wouldn’t also need to be other programs, bailouts, or stimulus, but something written into the rules like this could serve as a baseline, allowing Congress to focus on more specific issues.