Creative Federalism; L.E. Read

Creative federalism is one of the newer masterpieces of label ing. Creative conjures up man's highest aspiration; federalism, in the American tradition, calls to mind the separation of powers, the checks and balances against unlimited political authority, al ways with a view toward maximizing the freedom of choice of the creative individual.! Taken to gether, the two words constitute a semantic tour de force. Each word, however, has been lifted from its traditional setting and made to adorn a concept of opposite content. Yet, a certain rationalization supports the use of both creative and federalism in the current context. To see the substance beyond the label, we must examine the rationalizations. Federalism here, of course, denies the historical concept. In stead of the Federal establishment having only those powers specifi cally ceded by the people and the the states - really their agency and nothing more - the new feder alism aims at the states having such powers and monies as are 1 See Gottfried Dietze's The Federal ist: A Classic on Federalism and Free Government (Baltimore: Johns Hopkins Press, 1960) ,especially pp. 255-285.

9 10 THE FREEMAN July ceded by the central government, a reversal of roles, with citizens as mere wards of the government. This proposed new relation be tween national and local govern ments still may be deemed a type of federalism, but lost entirely is the original emphasis on the dig nity of the individual. But just how can the word cre ative be rationalized in this new strengthening of the government al monopoly at the national level? The Erosion of Capital The states and municipalities, as well as the Federal government, have the power to impose direct tax levies. But political expediency limits the percentage of the peo ple's wealth that can be obtained in this manner. Beyond a certain point - usually when the total take exceeds the 20-25 per cent level the voters revolt; they'll have no more of it. Thus this method serves to put a crimp in spending and to keep governments within bounds, more or less.

But the Federal government alone among the more than two hundred thousand units of gov ernment in the U.S.A.- has a way of creating funds beyond what can be collected by direct tax levies, out of thin air, seemingly! Not only is it now creating all of the funds it wants for ever-expanding ",Federal activities, but it urges the use of these Federally created funds upon the lesser govern ments. Indeed, foreign govern ments are urged to feed at its cornucopia. Because the desires of governI;nents are insatiable, the program is not difficult to sell. More than anything else, this "creativity" accounts for the shift in political sovereignty from the states to the central govern ment. When we observe a magician at his trade, we ask, "Where, really, does that rabbit come from?" And, in this case, we are warranted in wondering from where these count less billions come. We know, in our saner moments, that real wealth can no more be created from, thin air than from direct tax levies.

These "created" monies come from an indirect tax on savers and lenders, in short, a confisca tion of capital. The effect, unlike a local tax or a bill from the IRS, is not immediate but, instead, is indirect and delayed or, as the Spanish put it, manana. The meth od takes advantage of, and at the same time fosters, the prevalent urge to spend and live it up today with no concern for the morrow. Too technical for a brief ex planation, the Federal "creativity" is achieved, in a word, by the monetization of debt; that is, the Federal government's IOU's are turned into money. The more the 1966 "CREATIVE FEDERALISM" 11 government spends, the more it goes in debt; the greater the debt, the more IOU's; the more IOU's, the more money. But not at all technical is a demonstration of how this manana byplay works in large-scale prac tice: Only 26 years ago, two Ar gentine pesos were exchangeable for a 1940 American dollar. That dollar, in the meantime, has de clined 60 per cent in purchasing power. Related to the 1940 dollar, it is now worth 40 cents. Today, 240 pesos-not two-are exchange able for our cheapened dollar.

The Power to Create Money Now observe how this type of "creativity" taxes capital: In 1940, let us say ,you stashed 240 pesos under the mattress. What in 1966 remains to you in terms of 1940 purchasing value? Exactly 40 cen tavos! In brief, the Argentine pol icy of diluting the medium of ex change (inflation) as a means of financing governmental activities -precisely what we are doing, al though on a lesser scale, as yet has taxed away 239.60 of your 240 pesos! Unlike a direct tax levy which garnishees your income and /or capital right now, this "creativ ity" takes the form of slow cap ital erosion. For the most part, [ erosion goes unnoticed: one rarely feels older today than yesterday; one senses no less capital today than the day before, particularly if one has more dollars; yet ero sion, though rarely perceived, leads to the point where finally nothing remains to erode. 2 To conclude our look beyond the label and at the substance, social ism is the state ownership and control of the means of production (the planned economy) and/or the state ownership and control of the results of production (the welfare state). The new federalism quali fies as socialism pure and simple.

Socialism - all of it - is founded on coercion. Were coercion absent, then it would not be socialism. Thus, if creative and·federalisrn were to be defined in their tradi tional sense, creative federalism is the same contradiction in terms as creative socialism or creative coercion. The label can only be come popular among those who do not know or care what the sub stance is. ~ 2 A government resorts to inflation because the process garners billions in revenue with very little protest from the owner sources. The reason for the lack of protest is an unnoticed erosion of the medium of exchange. For instance, the dollar that has lost 60 per cent of its purchasing value in the past 26 years has eroded at the rate of 1/158th of a cent per day. Who can notice that? Re~rints .available, 2 cents each.