How To Fix the States

There's a ready-made solution to the deep debt-and-deficit problems facing Midwestern states. The solution is to get rid of the states. Or to get rid of most of what they do.

Somehow, I don't think this idea is likely to be adopted before the winter snow melts. But as we head deeper into the age of global competition, we have to recognize that states -- in the Midwest, but in most of the rest of the country, too -- are more of a hindrance than a help in this competition.

Basically, Midwestern states were born 200 years ago into an entirely different world than the one we occupy now and are simply incompetent to the challenges of the 21st century.

The current deficit crisis may be only a symptom of this incompetence, but it has everyone's attention. The time is right to begin a debate on what states can or cannot do in the future to promote the well-being of the people who live in them.

In other words, states and their functions need to be redefined and reassigned, and now is the time to talk about it.

Wishing won't make states go away. We live in a federal system. States are here to stay. But they have far too many responsibilities, too many expensive chores, too much power over our lives -- and too much debt and too little money to perform any of these functions well.

So the question is: what should states do, and what should they delegate to other jurisdictions, like cities? And then: if the states are to be left with some jobs to do, should they do these jobs themselves, or do them in cooperation with other states, achieving economies of scale and real cost savings?

Earlier posts dealt with the background to this problem -- the artificial history of Midwestern states, the isolation of their governments from the real economy, the drag they place on their major cities and their big universities, the fact that globalization is going to make their dysfunction worse, not better.

"The Midwest's Broken States," January 26, 2010
"The Roots of Dysfunction," February 3, 2010
"What Can We Do?," February 12, 2010
"The Election's Impact on the Midwest," November 8, 2010
"Cities On Their Own," December 14, 2010

All this is on the minds of those of us in Illinois right now because of the income tax hike just voted by the state legislature to plug much of the gaping deficit in the state's budget. Illinois may be a poster child for state government incompetence, but almost every Midwestern state faces big deficits and the need to either raise taxes or cut spending: most, in fact, have already cut spending on education, health care and other necessities. Indiana may be in better shape than most but only because it cut earlier and cut more.

Business interests, in Illinois and in other states, are screaming about the higher taxes, saying it hurts the states' business climate. In fact, higher taxes, while painful, are a lot better than reduced spending on infrastructure, early childhood education, worker training and all the other programs that strengthen a state's capital -- human and otherwise -- and make it a good place to invest. 

But whichever solution is sought, the problem isn't going to go away. For the foreseeable future, Midwestern states are going to be saddled with the huge legacy costs of the industrial age -- decaying old factory towns, impoverished rural areas, unemployed workers -- not to mention the huge public pension obligations they've run up over the years. Between these costs and a lagging economy, the means to cope with the problems of the future just won't be there.

So what to do? This is what the debate needs to ask, and answer. But let me throw out a few quick suggestions:

Renegotiate relations with major state research universities. Midwestern states already pay a small share -- 20 percent or less -- of these universities' expenses. In the meantime, the states keep a crippling hold on these universities -- what they can teach, what they can build, how much they can charge for tuition, how many out-of-state students they can attract. Break these ties and let the universities both run and finance themselves. Most universities would glad trade the money for the freedom.

Renegotiate relations with major cities. Again, state rules and regulations hamper these cities' efforts to reinvent and revitalize themselves, by putting a straight jacket on zoning, taxing powers, local education and other jurisdictional matters. Again, cities hate this and, in this day and age of increasing urbanization, there's no reason for rural-dominated state legislatures to have this power, or to deal with spending on cities.

Consolidate services across state lines. This may be the most useful suggestion of all. There are some things, like running big research universities, that states don't have to do. But there is much else that needs to be done, and all Midwestern states have expensive bureaucracies to do them. This includes state police, highway maintenance, economic development, state parks, higher education, public health, and so on. Each state does this for itself. Almost nothing is done on a regional basis. The duplication is terrific. So is the cost.

None of this fragmentation and duplication makes any sense. There is no reason why a state line drawn 200 years ago should keep Illinois and Wisconsin, say, from merging its departments of transportation.

If the savings could be huge, so would be the political opposition, from the bureaucracies affected and the politicians who control the spending.

But do we have a choice?

Here's one specific suggestion. Each state now runs state offices in foreign cities like Shanghai, Brussels or Sao Paulo, to drum up business -- both trade and investment -- for their state. In many of these countries like China, people don't know the difference between Iowa and Ohio. Why not close all these inadequate state offices and merge them all into one, well-funded Midwestern office, with the goal of drawing trade and investment to the region?

Here's another one -- tourism. Each state has its own tourism program -- most of them so underfunded that they can only reach into the rest of the Midwest and so miss all those non-Americans who might be enticed here. The fact is that Minnesota, Iowa, Wisconsin and Illinois should merge their tourist budgets, on the assumption that visitors to one state might cross the borders into the others. The four states that border Lake Michigan should be united in plugging all their littoral charms, instead of running their own separate and flimsy  programs.  

Clearly, this would require a big change in our Midwestern mindset. Right now, Ohio competes fiercely with Michigan, and Michigan with Indiana, and Indiana with Illinois, when the real competition is 10,000 miles away. The Midwest rose and fell together in the industrial and post-industrial ages, and will only rise again as a unit. Any investment anywhere in the Midwest helps the rest of the Midwest. So long as Midwestern states keep throwing money into this mindless competition with each other, this recovery won't happen.

In the global era, it makes no sense to turn virtually everything over to Balkanized states, all of them too small to compete globally. Needs like education and infrastructure aren't going to disappear, but they will be met regionally or not at all, if only because the states can't afford to do this any more.

For more information on globalization in the Midwest, visit the In the News section of the Global Midwest Web site.

Comments

[Aaron M. Renn]

There's no lipstick you can put on the pig of what the Illinois legislature just did. Tax hikes coupled with no reform and no long term resolution of the budget problems. All states have problems, but let's not impute all of Illinois' dysfunction to the rest of the Midwest.

I am skeptical that it makes sense to merge any core functions of state government. In particular, where is the basis of generating value in merging state DOTs or parks departments? Very few government mergers generate the savings that were touted. There's no prima facie case I can make for any efficiencies here. If there's something like that it makes sense to consolidate regionally, then it's probably better a federal than state responsibility. (Things like harmonizing road standards and such might be something we could get value out of without a full merger).

I'm all in favor of cutting loose the state universities. Also, the notion of devolving responsibility to local governments in many cases is excellent. In particular Indiana has a very weak tradition of home rule. The real city council of Indianapolis is in effect the Indiana General Assembly. Cities and regions need to be empowered to do what they need to do to address their own problems.

The areas like tourism, overseas marketing, and econdev competitions are the ones I see the greatest potential benefits for collaboration. It won't be easy to make happen, of course. But this is where I'd focus my efforts. Companies are laughing all the way to the bank playing these places off against each other - including cities and counties inside the same state.

How can we make it happen?

[Joel David Malkin]

I'm not as negative on the Illinois tax hike. Given the billions in outstanding obligations, revenue had to be raised or the state would have defaulted. The job is not over. But IF and WHEN (note the emphasis) state government addressed its long term deficits, Illinois may well be in better position than its neighbors. Because it will not have gutted its education and infrastructure spending to fulfill its neighbors' mantra of "no new taxes."

On another note, I don't see how Midwestern states are ever going to cooperate on anything. The strutting of Wisconsin and Indiana executives over Illinois' tax hike certainly doesn't portend any mutually productive relationship.

[Aaron M. Renn]

Joel, everybody knows tax increases were going to be part of the equation in Illinois. I'm disappointed that this isn't a long term fix, and that there's no real reform. Just a plain and simple tax hike.

[ChicagoDan]

I think tying the region together with a properly funded HSR system would go a long way towards getting Midwestern states to play nice. If we can get Milwaukee~Chicago, Chicago~St. Louis, and Detroit~Chicago high speed service it would help erode the invisible boarders that contribute to resource/idea hoarding. Going to "the city" has to become a quick and relatively inexpensive day trip. Once everyone is that close, that integrated, accomplishments cease to become something that one city or one state owns.

You're right when you say that these states need to start cooperating or be left in the global dust, however I think there are some very thick mental barriers that need to be broken down before more progressive ideas can take hold. My worry is that it will be too late. Illinois seems to be on board with HSR, but what about Missouri and Michigan? Wisconsin, as we all know, is going backwards unfortunately.

Protectionism and isolationism seem to be the soup du jour in politics, and unfortunately is grossly misguided. I don't think that state vs. state is a problem unique to the Midwest either, you can see evidence of this all over America. It would be nice to see governors playing a more active roll in cross state collaboration, and I mean governors themselves, not some panel that no one cares about. It should be a big deal, televised even. One state at a time if need be. A systematic buildup of government, university, corporate collaboration between states until it's benefits are undeniable even to the dumbest of us.

I think the most logical first partners would be St. Louis and Chicago. As the rest of the planet quickly catches up and becomes less 3rd world, the need for food, and genetically modified crops is going to skyrocket. The Midwest was once the breadbasket of America, and it did quite well, how about breadbasket to the world? St. Louis's agro-centric business like Monsanto for instance paired with Chicago's access to service and global markets, done and done. Next would be Chicago and Detroit. GM had a stellar year overseas, and with more people in China and India buying cars, the same St. Louis/Chicago formula would apply.

I'm sure I'm touching on things all of us know. My question is this: is there anyone at the helm of our state governments that sees this potential? It seems that if the Midwest got its act together we would be situated quite well for globalization. Cars and crops alone won't save us, we have to take on new specialties and adapt for sure, but lets use what we have, what we know as well.

[Foraker]

Separation between major universities and their benefactor state government is in the works for Ohio. I would agree that trade missions and tourism departments could benefit from regional collaboration. A regional health insurance collaboration for all state/municipal employees could be another huge cost savings. But I'm not so sure that some of the other ideas would give you savings.

Any time you have to have a physical presence in a location, you're probably not going to see any savings. Consolidating highway departments is not going to remove the need for salt trucks or other maintenance vehicles to be stationed in each state, nor would consolidation of state highway patrol services seem to provide any advantages since they also would need to maintain local facilities, and the same for state parks. They might be able to achieve some savings in buying materials, but that would not require or benefit from regional consolidation.

I also agree that the big cities are greatly constrained by state government, which is dominated by rural interests. How exactly would you reverse that?