The Number of States and the Economics of American Federalism
Steven G. Calabresi
Northwestern University - School of Law
Nicholas K. Terrell
Northwestern University School of Law
June 18, 2009
Northwestern Law & Econ Research Paper No. 09-08
In 1789 it was possible to speak of a federation of distinct States joined together for their mutual advantage, but today it is rather the Nation that is divided into subnational units. What caused this shift in focus from the States to the Federal Government? Surely the transformation from a collection of thirteen historically separate States clustered along the Atlantic seaboard to a group of fifty States largely carved out of Federal territory has played a role. Building on previous analysis of the economics of federalism, this essay considers the dynamic effects of increasing the number of states on the efficient allocation of government authority between the State and Federal Governments. When the number of States is low, the externalities imposed by state level actions are more limited - and so is the scope of Federal power. When the number increases, however, the scope of efficient Federal power expands because the States face collective action problems. In the second part of this essay, these insights from the economics of federalism are applied to the question of the optimal number of states in a federal system. Having too few states will lead to insufficient cohesion at the federal level, risking secession and ensuring weak government. On the other end of the scale, having too many states encourages the centralization of power. While the optimal number of state in a federal system will ultimately depend on geography, legal culture, and technology, the available data suggest that the ten provinces of Canada may be too few but the fifty of the US may well be too many.
Number of Pages in PDF File: 50
Keywords: Economics of Federalism, Number of States, Self-Enforcing Federalism, Federal Power, State Power, Expansion, Size of Nations, Public Choice, Theory
JEL Classification: K19, K30working papers series
Date posted: June 18, 2009
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