There are two contrasting theories of federalism. The first, functional theory identifies distinctive areas of competence for each level of government. It predicts that each level will expand in its arena of competence but will remain limited or will diminish in its less competent arena. The second, legislative theory, says that the modern federal system is shaped by the political needs of legislators responsible for its design. Legislator at all levels of government will seek to distribute governmental benefits for which they can claim credit and, if all possible, will shift governmental burdens to other levels of the federal system.
Functional theory identifies the two main economic purposes of domestic government as developmental and redistributive. Developmental programs provide the physical and social infrastructure necessary to facilitate a country’s economic growth. Redistributive programs reallocate societal resources from the “haves” to the “have-nots”. They transfer economic resources from those who have gained the most from economic development to those who have gained the least.
For federal governments to function effectively, the division of responsibilities among levels of government must respect the comparative advantages of each level of government. The national government should assume the primary responsibility for redistribution, while state and local governments assume primary responsibility for development.
Local governments are best equipped to design and administer developmental programs because their decisions are disciplined by market forces as well as by political pressures. Although some developmental tasks must be undertaken by higher levels of government, the national government, on the whole, is the least efficient provider of development policies. Unlike local and state governments, it operates under few markets like constraints.
The national government, however, is the most competent agent of redistribution. Local government are unable to redistribute wealth effectively because labor and capital are mobile in an economically and political integrated nations-state. The national government has the greatest capacity to engage in redistributive programs, because it can prevent the in-migration of labor from foreign countries and can impose some constraints on capital flow
Legislative theory thinks that the political incentives that shape the decisions of policymakers induce them to make the wrong choices. The theory bears the legislative label because it assumes that policies are shaped by political needs of those who write the country’s law. It also gives a less important policy role for presidents than functional theory. It assumes that, in general, the preferences of presidents (and governors) have much less effect on domestic policy than do preferences of the members of congress (and state legislatures).
Legislative theory assumes that elected representatives’ primary goal is their own reelection. In pursuit of that goal, representatives seek to secure benefits for and screen costs from their constituencies. Legislative theory further assumes that constituents easily recognize spatially concentrated costs and benefits, but that spatially dispersed costs and benefits are less perceptible. Legislators therefore support projects that have geographically concentrated benefit but diffuse costs, and they oppose policies that have diffuse benefits but spatially concentrated costs.
Legislators’ opinions about redistribution are according to legislative theory, strongly influenced by constituency pressures. Legislator who represents a low-income, needy population or a liberal constituency is likely to favor the expansion of redistributive programs. Those who represent middle-income constituents less likely to need government aid are more likely to resist redistribution. Political support for redistribution is expected to be greater in cities and states with higher poverty rates.