Are States Really More Efficient Than the Federal Government?

The states just do it better.

That was the argument many Republicans made for the now-defunct Graham-Cassidy legislation, which would have repealed the Affordable Care Act and replaced it with federal grants that could be used as states saw fit. It is an argument they will likely continue making if and when they take another run at health-care legislation, and also as they try to transform other social programs. As Senator Jim Inhofe of Oklahoma put it to the news site Vox, “As a general rule, the states do things better than the federal government does.”

But there is little evidence that the states are more efficient administrators than Washington is, and some evidence that they might be less so. “The basic argument for state efficiency is based more on hopes and prayers than on clear evidence, across the board,” said Don Kettl, a professor of public policy at the University of Maryland. Delegating programs to the states would likely result in greater disparities in what programs offer and slimmer budgets overall, more than any radical improvements in efficiency.

As a general point, Kettl and other political scientists agree, despite its reputation for bureaucracy and incompetence, the federal government runs pretty well, and where it runs poorly it tends to be stifled by outdated rules and regulations. “The underlying argument is that the federal government is unwieldy and inefficient,” said Kettl. “That’s not true.”

Take the Social Security Administration, as slender and effective a bureaucracy as exists on earth. The organization makes monthly payments to 61 million beneficiaries, with a low error rate and overhead well below 1 percent of costs. Similarly, the Internal Revenue Service is a ruthlessly effective tax collector, when compared to those in other high-income countries and to the states. California spends 94 cents on overhead for every $100 of state tax revenue collected, for instance, with Great Britain spending 74 cents. The feds, on the other hand, spend less than 50 cents. Moreover, the federal bureaucracy functions with more oversight—powerful inspectors general, Congressional budget hawks and committee chairs, and the press sniffing around—than statehouses do, helping to reduce graft.

That said, it is not easy to compare the state and federal governments in terms of efficiency. For one, they tend to do different things, with federal dollars primarily spent on Social Security, health-insurance programs, and the military, and state dollars spent on education, health, transportation, prisons, and a variety of other priorities. “There are some types of things that state governments are good at handling, and other things the federal government is good at handling,” said Jason Sorens, the program director of the Political Economy Project at Dartmouth College. “There are some kinds of fiscal relationships between the federal and state governments that are more efficient than others, but that’s not the same thing as saying that states are more efficient than the federal government.”

Making them even harder to compare is the fact that states are often spending federal dollars and complying with federal regulations, blurring the line between state and national initiatives. “The federal government is like a giant ATM,” said Elaine Kamarck, the director of the Center for Effective Public Management at the Brookings Institution. “Scratch any state or local program and you’ll find federal money. This is why everyone’s decided government shutdowns are a real disaster. The two times it happens, everybody realizes it’s not just the national park that closes—it’s Catholic Charities and the drug treatment center down the road.”

Indeed, Medicaid—which Lindsey Graham of South Carolina and Bill Cassidy of Louisiana had hoped to turn into a block grant to the states—is one such federal-state partnership. The states already have latitude in spending federal dollars on the program; for example, Missouri chooses to fund “health homes” and Oregon puts money toward accountable care organizations.“These innovative models demonstrate that current Medicaid rules allow states significant flexibility,” argues Hannah Katch of the Center on Budget and Policy Priorities, a Washington-based think tank. What is more, the system has delivered high-quality care at a relatively low cost, both in administrative terms and in terms of spending per person. “States have actually been quite good at delivering health coverage efficiently through Medicaid,” said Larry Levitt of the Kaiser Family Foundation, a health research group.

Given those dynamics, experts doubted that Graham-Cassidy or other repeal-and-replace efforts pushing responsibility to the states would yield much of an improvement. Rather, the block grants would have led states to ration care and drop participants from the rolls in order to meet federal budget cuts, such as the half a trillion dollars that Graham-Cassidy would have cut over 10 years. “In the health-care world, people have been looking for the magic bullet on efficiency for ages,” said Kamarck of Brookings. “They want computer health records. They want this, that, and the other. We haven’t found the magic bullet to reduce health-care costs. If Medicare and Medicaid and various state health programs have not been able to do so, I don’t think this would either.”

More broadly, turning programs over to the states tends to result in the 50 capitals pursuing varying policy priorities and achieving disparate policy outcomes—not in a sleeker, more efficient government. Look at what happened with welfare, or the Temporary Assistance for Needy Families (TANF) program, which was turned into a fixed block grant to the states during the Clinton administration and has become a Republican exemplar of the efficiency argument ever since. “In 1996, we block-granted money for welfare reform, and it worked like a charm,” Graham said at a news conference this month, making the case for his health-care legislation. “We put governors in charge of the program. We held them accountable.”

But the welfare rolls shrank mostly because states kicked people off of the program, not because the program got more effective and efficient. An initiative that used to cover 68 of every 100 families in poverty now reaches just 23 of every 100 with cash benefits, the Center on Budget and Policy Priorities has found. Plus, given more flexibility and authority, states started using the money for initiatives other than cash benefits for poor mothers, such as early-childhood education and job training. That led to wide state-by-state differences in program outcomes. California covers 65 out of every 100 families in poverty with cash benefits under TANF, for instance, while Louisiana covers just four.

Much might be the same if Congress block-granted Medicaid or food stamps. “If you delegate to the states, the only thing you can be sure of is big disparities,” said Kettl. The efficiency argument, it turns out, is more about political philosophy than policy expediency, more about federalism than management, and more about limiting government spending than making government work.