House Republicans should create ‘New Federalism’ budget

Rep. Marjorie Taylor Greene (R-Ga.) has suggested a “national divorce,” a breaking up of federal spending and distribution by state, so that red and blue states each could go their own way. I’m actually stunned to say these words, but she may be on the right track … sort of. Her branding — the name — is awful and inaccurate. Her segmentation — that various states are doomed to be permanently red or blue — is also inaccurate and short-sighted. And, most importantly, she misses the bigger picture.

The brewing battle over the budget, inflation, taxes and the debt ceiling creates the perfect conditions for renewing one of the epic struggles of the last half of the 20th century: the debate between those driving for a much more powerful, central, federal government, controlling the entire economy and the behavior of all Americans, pitted against those “federalists” who believe that Americans make the best  decisions for themselves, and collectively for the country, on the local and individual levels. Masters of the Universe versus the People.

The debate reached its high point during the Ford administration, when the Office of Management and Budget (OMB), led by then-Deputy Director Paul O’Neill, launched a colossal effort to defeat raging inflation, a stagnant economy, and central government overreach (this may sound familiar) by consolidating the vast array of fragmented federal categorical programs — which, taken together, had created an overwhelming force for government growth — and consolidating them into a few integrated “buckets” with a clear public purpose, i.e., national defense; homeland security and law enforcement; transportation and infrastructure; national research; health; public welfare and social safety net; domestic and international commerce; Treasury; Agriculture; Environmental Protection; and public lands management; etc. Of course, the trust fund-based, entitlement programs of Social Security and Medicare were left separate and protected.

This plan was called New Federalism, a phrase coined by President Richard Nixon.

O’Neill then targeted a no-growth overall federal budget in real dollars, with no new taxes. He worked with President Gerald Ford to veto all new bills from Congress that would expand the budget, seeing the spending as destructive to the economy and the quality of life and freedom for all Americans. 

OMB then allocated the available budget to each of the broad governmental areas, rather than to the narrow programs. Some broad national responsibilities such as national defense, civil rights, federal Justice, interstate highways, etc. were kept at the federal level. The remaining funds were then distributed to the states as “block grants,” so that citizens and their local representatives had the power and latitude to determine the best approaches to solve local problems. The final part of the budget strategy was to downsize federal agencies, since their roles and responsibilities were being transferred to the states. This is exactly what America’s Founders had in mind when they determined that federal powers would be only those granted by the states.

This great experiment unfortunately came to an abrupt end with the election of President Jimmy Carter, who returned to a progressive agenda, destroyed the economy, created record-level inflation and interest rates, wrecked the energy sector, and launched a “national malaise.”

Now is the time to re-examine and re-ignite this movement. To begin with, America cannot afford to raise the debt ceiling. America’s debt-to-GDP ratio stands today at around 129 percent, the highest in history. The previous high was 113 percent at the end of World War II, when America was exhausted, and it nearly led to massive civil upheaval in the early 1950s. Many will worry that not raising the debt ceiling will lead to America’s default on sovereign obligations. News flash: Over the past two years, massive inflation has given our international lenders a 10 percent haircut in our promised returns to them. If we keep this up, the dollar may cease to be the world’s reserve currency, and other countries then may cease to buy T-bills and provide other support to prop up the American economy — which in turn allows us to run huge deficits. In short, we may be on the verge of the house of cards collapsing. Everyone knows this and is happy to play a high-stakes game of political chicken.

The Democrats, cynically, are licking their chops, hoping the Republicans resist raising the debt ceiling so that the Democrats can say the federal government cannot function, Social Security and Medicare payments cannot go out, national security is imperiled, and we have defaulted on sovereign obligations — all of which is untrue, but highly effective politics.

House Republicans need a plan. A possible strategy would be to create an entirely new federal budget — the Biden budget appears to be dead on arrival, in any case — and frame it around (New, New) Federalism (I know, the name needs work), following the O’Neill approach. In late 1975, I watched O’Neill restructure the entire budget over a 60-day period, so it certainly can be done with some political will.

The politics of this are interesting. Special interest groups, congressional committees and federal agencies will scream. But, when states and cities run the numbers, they may come to a much different conclusion — they may welcome the shift to local control. It also may dilute the central radicalization of politics that moderate political leaders on all sides are starting to decry.

America is approaching desperate times on many fronts: the economy, national security, political civility. It’s time for radical change. (New, New) Federalism, may be a step in that direction.

Grady Means is a writer (GradyMeans.com) and former corporate strategy consultant. He served in the White House as a policy assistant to Vice President Nelson Rockefeller. Follow him on Twitter @gradymeans1.