Month: April 2025

In the US system of government, the federal government has shifted its empahasis toward becoming a pass-through device for money: it passes through funds to individual through Social Security and various safety net programs; it passes through money to the health care industry through Medicare and Medicaid; it passes through money in the form of interest payments to those who loaned money to the government by purchasing Treasury securities; and it passes through money to state and local government. (About one-fifth of all federal spending goes to state and local governments; about one-third of state revenues come from the federal government.)

But while much of the public attention to government focuses on the federal level, many activities of “government” actually happen at the state and local level: for example, K-12 schools and public higher education, roads and bridges, public transit, airports, water and sewage treatment, policing and traffic rules, firefighters, housing policy, homelessness, regulating the production and transmission of electrical power, regulating insurance companies, direct administration of programs like Medicaid and unemployment insurance, and others. The overwhelming majority of “government” workers in the US are employed by state and local governments, not by the federal govermment.

To what extent do state and local governments have the capacity to handle the tasks they face? David Schleicher and Nicholas Bagley tackle this question in “The State Capacity Crisis” (Niskanen Center, January 1, 2025). They write: “The old joke is that the federal government is really an insurance company with an army. It doles out checks for old people through Social Security and Medicare, but does not much involve itself in service provision.” Here’s a flavor of their argument (footnotes omitted):

Three areas are of particular concern to us. First, the linchpin of the usual story about the lack of state capacity is the claim that Congress is broken. … State legislatures, however, aren’t broken in the same way that Congress is. Polarization notwithstanding, in 39 out of 50 states, both houses of legislatures and the governor come from the same party and only rarely have institutional limits like the filibuster. As a result, majority parties can usually do what they want. Gridlock is not the problem. Yet state legislatures are in an even worse spot than Congress. Voters know almost nothing about what is happening in state politics, and increasingly vote for the same party for state legislature that they do for president and Congress. This pervasive nationalization of state and local elections means that state legislative performance has little connection to electoral outcomes. Gerrymandering is also a much worse problem at the state level than at the federal level .. as is the lack of staff capacity and resources. The natural consequence is inattention to genuine public priorities.

Second, a key plank of the state capacity literature is that administrative law imposes too many procedural rules on government agencies. However well-intentioned, these rules bog agencies down in often-senseless red tape, augment the power of narrow interest groups to twist agency outcomes to private ends, and license courts to halt agency action for ticky-tack or partisan reasons. But while this “procedure fetish” is a big problem for the federal administration … it is in many ways a bigger problem for states and localities. State administrative law is as strict, and often stricter, than federal administrative law, both with respect to the procedures it imposes and the intensity of judicial review. State and, in particular, local governments have extremely powerful rules requiring lots of public participation in administration. Because small groups with members that care intensely about state and local decisions are much easier to form than groups representing a diffuse public interest, unrepresentative private interests—whether that’s the Chamber of Commerce or neighborhood NIMBYs—overwhelm administrative process at the expense of majoritarian preferences.

Third, there’s a blind spot in the state capacity literature about budgets. The reason is that the federal government has extraordinary fiscal capacity, including the ability to deficit-spend during recessions. … The picture looks very different at the state level. Every state (save Vermont) is legally required to balance its budget, no state can print money to inflate away its deficits, and all states face both legal and market limits on their capacity to borrow. When a recession depletes tax revenue, states have few choices except to increase taxes or reduce spending—right when public services are needed most. States’ limited fiscal capacity thus contributes mightily to poor governance, especially during recessions. Budget constraints are becoming increasingly salient as Medicaid consumes ever-larger fractions of state budgets, the costs of state and local public services increase faster than inflation, and states and localities deal with the consequences of underfunding their pension obligations.

Taken together, these forces—the unaccountability of state and local politics, the excessive strictures of state and local administrative law, and the sharp limits on state fiscal powers—dull officials’ incentives to govern well, privilege narrow interest groups at the expense of the majority, and frustrate efforts to build capacity.

In short, your state and local government are not run by the federal government. If you care about the practical side of state and local government actually getting things done, and in a timely and cost-effective manner, then you need to pay attention to the practicalities of what happening and vote accordingly. A classic example here would be the heavily Democratic New York City electorate sometimes voting for Republican mayors like Rudolph Giuliani or Michael Bloomberg. (If you react to those names based on their actions in the federal political arena, rather than their performance and actions in local government, you are illustrating the problem.)

Personally, I wince every time I hear state or local policymakers taking a stance on what’s happening at the federal level, because to me, it suggest that they are not focused on their actual jobs. When the streets are safe and in good repair, the K-12 schools are educating students at a high level, and the public pension funds are all well-financed, then I’m willing to hear the opinions of state and local policymakers about national politics–but not before then. Schleicher and Bagley conclude:

Whatever the right approach may be, our point is that reformers seeking to build state capacity need to think about where to concentrate their efforts. In our view, you won’t make that much headway in the Beltway. You need to go to Lansing and Hartford, Sacramento and Austin, Los Angeles County and New York City. State capacity—in America at least—is about states and localities.

It will take some time for the effects of President Trump’s “Liberation Day” announcement of higher US tariffs to become apparent. Here, I’ll just offer some notes and quick reactions.

1) The announced tariffs represent a very large increase. Here’s a figure showing historical US tariff rates. You will notice that the average rates have been under 10% for the entire post-World War II era. If you squint, you can see the Trump tariff increases from his first term in 2017. The jump in 2025 represents tariffs already announced earlier this year, which by historical standards were already substantial. Yesterday’s announcement of a universal tariff on US imports of 10%, plus more for many countries, comes on top of all earlier announcements. I’m sure that estimates of the average US tariff rate are being calculated even now, but it will surely be above 10%, perhaps in the range of 20%. In short, Trump is taking US tariff levels back to the time of the Great Depression, and the late 19th century.

2) For better or worse, the announced tariffs are fully the political responsibility of the Trump administration. This tariff increase was not a bill proposed within Congress, debated and analyzed, and then subject to a vote. It was concocted behind closed doors.

3) It is not clear that President Trump actually has authority to impose these tariffs by decree. Article 1 of the US Constitution–which lays out the structure and powers of the legislative branch–states in Section 8: “The Congress shall have Power To lay and collect taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defence and general Welfare of the United States …” On its face, this certainly seems to suggest that new tariffs need to start in Congress and be signed into law. Over time, Congress has passed laws that give the president the power to impose tariffs in specific settings for specific industries, but Trump is in effect claiming that these partial and piecemeal laws have delegated him complete power over tariffs, because it is a “national emergency” that the US economy has trade deficits–which it has had since the 1980s. Maybe! But Trump’s declaration of “national emergency” to claim of complete power over tariff-setting is contrary to the plain text of the Constitution.

4) The amount of the tariffs seems arbitrary and unclear, because the US import tariffs are, in theory, set at half the foreign level, or 10%, whichever is higher. But James Suriowecki reports that the Trump administration apparently took the trade deficit in goods with each country, divided by total US imports from that country, and called the result the “tariff rate” for that country. A minor problem with this calculation is that it involves only trade in goods, not including services. A major problem is that this isn’t actually the tariff rate that other countries are charging. My guess is that there will be a blizzard of adjustments to these announced tariff rates, which means the uncertainty surrounding them will continue.

5) Promises have been made by the Trump administration about the benefits of this proposal. For example, there have been promises that tariffs on imports are all paid by foreigners, so the new tariffs will not cause price increases for US consumers. There are promises that the new tariffs will raise $600 billion per year in additional federal revenue, promises that the number of US manufacturing jobs with high wages will climb dramatically, and promises that US trade deficits will be eliminated. For example, when President Trump was talking about the tariffs to come, he said: “All I know is this: We’re going to take in hundreds of millions of dollars in tariffs, and we’re going to become so rich, you’re not going to know where to spend all that money! I’m telling you – you just watch. We’re going to have jobs, we’re going to have open factories, it’s going to be great.”

6) These predictions about the positive effects of tariffs need to be remembered. The predictions do not fit with standard economic beliefs about the effects of tariffs. (Indeed, given all these promised benefits, one wonders why Trump did not set the tariffs at a much higher level?) If the benefits are realized, Trump will deserve enormous credit; conversely, if they are not realized and more dire economic outcomes emerge instead, Trump will deserve enormous blame.

7) Whether one like it or not, US multinational firms have in fact invested in global networks both for purchasing supplies and exporting products in the last few decades. With much higher inport tariffs, the value of those investments by major US firms takes a real hit. If and when other nations retaliate against US exports, these major firms–and all US exports, including farm products–will take a hit as well. The costs of reorganizing supply chains and export sales for US firms will be very real. The costs of losing a share of the existing gains from trade will be very real.

8) I’m no political savant, but it seems to me that President Trump is making a potentially enormous unforced error by raising tariffs so dramatically. For many of Trump’s policies–say, tougher immigration, pushing back against the so-called “DEI” efforts, hunting down government waste and abuse, and others–he has a considerable wave of popular support behind him. But I have not observed a similar popular outcry for substantially higher tariffs. Instead, many Trump voters expressed strong concerns over a rising cost of living. These voters will not be amused when they find that prices of imported goods are rising (or that such goods are much less available) and that with a lack of competition from imported goods, prices of domestic producers will tend to rise as well. Trump voters who are working in industries that rely on exports will not be amused to see their international markets reduced, either. In addition, by enacting these tariff policies near the start of his term, the effects of the policies will play out while Trump is still president. The credit or blame will be his.

9) The US enacted high tariffs during the Great Depression–the infamous Smoot-Hawley tariffs of 1930. Those tariffs were not a primary cause of the Depression, but they didn’t help, either. My sense is that the experience of those failed tariffs was part of the shared US political consciousness for some decades. However, that experience eventually faded in popular memory. My expectation about Trump’s tariffs is that there will be waves of lobbying and renegotiations, and with each one, Trump will claim another victory for his approach. But I confess to a darker thought. Part of me hopes that Trump will keep his tariffs in place until the costs are broadly apparent to all, so that a modern consciousness of why this approach doesn’t work can take effect for the next few decades.

10) President Trump’s claims about the benefits of tariffs seem based on demonstrably false beliefs. For example, he seems to believe that trade imbalances are the result of tariffs, that the existence of trade balances proves that other nations are imposing unfair trade imbalances, and that reciprocal unfairness by the United States will eliminate trade imbalances. He seems to believe import tariffs won’t affect prices to US consumers. He seems to believe that although manufacturing jobs are declining all over the world, including in China, tariffs will make manufacturing jobs resurgent in the United States. None of this is plausible. Trump also seems to that that the US economy will be stronger with more limited connections to global trade. But I am unaware of any real-world examples of countries that made themselves rich by withdrawing from the world economy.

A new OECD report on “The Ocean Economy to 2050” begins its “Executive Summary” in this way:

The ocean covers 71% of Earth’s surface, comprises 90% of the biosphere, provides food security for over three billion people, enables the transportation of over 80% of global goods, and hosts sea cables carrying 98% of international Internet traffic. … If considered a country, the ocean economy would be the world’s fifth-largest economy in 2019.  From 1995 to 2020, it contributed 3% to 4% of global gross value added (GVA) and employed up to 133 million full-time equivalents (FTEs). The global ocean economy doubled in real terms in 25 years from USD 1.3 trillion of GVA in 1995 to USD 2.6 trillion in 2020, growing at an annual average rate of 2.8%.

Unsurprisingly, the growth in the ocean economy has mainly been in east Asia in the last 25 years or so, and is related to the rapid growth of China’s economy during that time. I was struck by this breakdown of the ocean-related economy by industry:

The report goes into some depth in analyzing various factors that will affect the future course of the ocean economy: population, environmental, legal, energy demand, technological, and others. It’s striking to me that the top industry on the list is marine and coastal tourism.As I read through the report, one key tradeoff for the ocean economy will be over environmental protections. Future success for some of these industries–tourism, fishing–depend heavily on environmental protections, while others like offshore oil/gas or overfishing pose enviromental dangers.

But more broadly, it feels to me as if thinking of the ocean as an economy can conceal as much as it reveals. For example, the economic function of ports and ship-building is different from the issues raised by freedom of the seas for shipping and by national defense. The importance of undersea data connections and ocean shipping in the global economy is connected to the gains they bring to users–not just the amount that is paid to the providers.