Fragmented Welfare States: Federal Institutions

and the Development of Social Policy

PAUL PIERSON*

Despite political scientists’ growing appreciation of the ways in which

institutions influence political processes, the “new institutionalism” has so
far had a limited impact on the comparative study of welfare state develop-
ment. This article discusses some broad issues concerning institutions and
public policy by exploring the implications of one set of institutions -those
associated with federalism -for the politics of social policy. Federal insti-
tutions encourage three distinctive dynamics: they influence the policy
preferences, strategies, and influence of social actors; they create important
new institutional actors (the constituent units of the federation); and they
generate predictable policymaking dilemmas associated with shared decision-
making. Comparisons between social policy development in Canada and the
United States are used to demonstrate that while federalism clearly matters,
how it matters will depend on the characteristics of a particular federal
system and the ways in which federal institutions interact with other
important variables.

Social scientists now stress that institutions matter in political life. The
political institutions of different countries vary along crucial dimensions,
such as the rules of electoral competition, the relationship between legis-
lature and the executive, the role of the courts, and the place of subna-
tional governments in politics. Political institutions determine the ”rules
of the game” for political struggles, shaping group identities and their
coalitional choices, facilitating some political strategies while impeding
others, and altering the relative bargaining power of different groups.
Institutions also affect the capacities of states - their administrative and
financial resources for fashioning policy interventions (Evans, Reusche-
meyer and Skocpol 1985; March and Olsen 1989; North 1990; Shepsle
1989).
These ”new institutionalist” arguments have been slow to take hold in
the study of comparative social policy development. Until recently, efforts
to account for the wide variations in patterns of social policy intervention
among advanced industrial democracies have stressed the role of eco-
nomic interests and the balance of class forces. ”Power resource” theorists
argued that the strength of working class organizations (in both the
economic and political arenas) is the crucial variable (Korpi 1989; &ping-
* Harvard University
( h m m n c e : An InkrnafiOnal b u m a l of policy and Administration. Val. 8, No. 4, October 1995
(PP. 449-478). @ 1995 Blackwell Publishers, 238 Main Street, Cambridge, 02142, USA,
and 108 Cowley Road, Oxford, 0x4, IJF, UK. ISSN 0952-1895
450 PAUL PIERSON

Andersen 1990). These analyses (along with other studies emphasizing

political culture or a general “logic of industrialism”) have traditionally
ignored political institutions. In part, this is a consequence of case selec-
tion. The prototypical contrasting countries in studies of welfare state
development were often Sweden and Britain, where the centralization of
political authority made institutional design seem unimportant.
Nonetheless, institutionalist arguments about social policy develop-
ment are now beginning to catch on. A number of analysts have argued
that state structures help to explain aspects of welfare state development
that a focus on economic interests cannot. In a series of studies on the
issue of American exceptionalism, these scholars have stressed the role of
institutions in generating peculiarities of policy timing and design (Weir,
Orloff and Skocpoll988; Skocpol1992). Comparative work remains rela-
tively rare, although both qualitative and quantitative studies have re-
cently provided additional support for institutional arguments (Immergut
1992; Huber, Ragin and Stephens 1993).
This article echoes this recent emphasis on the role of institutional
factors in the development of welfare states. Instead of studying a variety
of institutions within a single national setting (the United States), it
examines a particular type of institutional arrangement - federalism -
in a range of settings.* Comparative work on federalism is rare - and
comparative research on the consequences of federalism for social policy
is non-existent. Yet seven of the 23 OECD countries have federal systems:
Austria, Australia, Belgium (since 1993), Canada, Germany, Switzerland,
and the United States. Others, such as Spain, have quasi-federal features
that may make the issues explored here relevant. Finally (if controver-
sially), it is increasingly common to regard the European Union as an
emerging ”quasi-federal” system (Sbragia 1993).
Given such a significant set of political rules - dividing political
authority among different tiers of government and introducing new po-
litical actors (the constituent units) organized along territorial lines -
institutional analysis suggests the plausibility of important political con-
sequences. Indeed, I will argue that the institutional rules of federal
systems have major implications for social policymaking. This point has
been made in studies of individual welfare states.’ Considering a number
of countries allows one to document that the influence of federalism is
not simply an isolated occurrence, and to identlfy the most important
types of institutional effects. Part I of this article takes on these tasks,
drawing on the experiences of a number of federal polities to indicate the
significant consequences of institutional structures. I emphasize three
broad categories of institutional effects: (1) changes in the policy prefer-
ences, strategies, and influence of social actors; (2) the emergence of
significant new political actors - the constituent units of the federation;
and (3) a set of predictable dilemmas connected to the sharing of policy-
making authority among multiple jurisdictions.
Part 11turns to the issue of variation among federal systems. One must
 FRAGMENTED WELFARE STATES 451

be very cautious in presenting general arguments about the consequences

of federalism for social policy. There is substantial variation among fed-
eral systems in crucial features of institutional design. Furthermore, there
is good reason to believe that the institutions of federalism interact with
other characteristics of national polities (e.g. the significance and territo-
rial distribution of minority groups). To highlight these points, I contrast
a number of aspects of social policy development in Canada and the
United States. Federalism has played a critical role in both systems, but
the interplay of quite different federal institutions with other distinctive
features of the two polities has frequently led to divergent political out-
comes.
This article thus goes beyond the simple (if important) claim that
federal institutions matter for social policy outcomes. By examining vari-
ation among federalist countries, a comparative approach makes it pos-
sible to develop more nuanced propositions about the consequences of
institutional arrangements and the interplay between institutions and
other variables. Outcomes that single-country studies might ascribe to
federalism per se can be seen to depend on the interaction of a particular
kind of federalism with other political variables. This finding also high-
lights the limitations of using broad quantitative studies to investigate
institutional effects. Because institutional variables often operate in con-
junction with other aspects of national systems, their impact may be
obscured in the quantitative studies of OECD nations that are common
in this field. In short, federalism matters a great deal for the development
of social policy, but how it matters depends on the specific kind of feder-
alism and how federal institutions are embedded in a particular political
context.

THE MAKING OF SOCIAL POLICY IN FEDERAL SYSTEMS

For policymakers, federal systems superimpose the question of “who
should do it?” over the traditional question of “what is to be done?” There
are good reasons to think that where policy designs and systems of
decision-making are multi-tiered, institutional fragmentation will assume
considerable importance in the development of welfare states. This sec-
tion considers some broad implications of this institutional arrangement
for the dynamics of social policy
In federal systems, authorities at the central level coexist with authori-
ties in the territorially-distinct ”constituent units” of the federation. Be-
cause government officials at both levels are part of the same system yet
partly autonomous, their social policy initiatives are highly interdepend-
ent but often only modestly coordinated. They may compete with each
other, pursue independent projects that work at crosspurposes, or coop-
erate to achieve ends that they could not obtain alone. Their interdepend-
ence may allow them to draw on each other for ideas and aid, or entangle
them in institutional and policy structures of Byzantine complexity and
452 PAUL PERSON

rigidity. Equally important, the existence of multiple jurisdictions is likely

to have considerable implications for social actors, for whom a more
complex and fragmented institutional environment creates a quite distinc-
tive setting for strategic action. Here I wish to consider three broad sets
of implications: the modified circumstances of societal interests, the
prominent role of constituent units as autonomous policy-makers and
political actors, and the increasing prevalence of dilemmas associated
with shared decision-making.

Societal Interests, Fragmented Institutions, and the Politics

of Social Policy
Multi-tiered systems of governance necessarily link the questions of what
to regulate and at what level to regulate. Because the answer to the latter
question has implications for the former, societal actors with an interest
in social policy are unlikely to remain aloof from the issue of who will
have authority As E.E. Schattschneider long ago observed, social actors
will be eager to shift political decision-making to the arena most likely to
favor their interests (Schattschneider 1960).
For economic actors, then, preferences for integration or decentraliza-
tion are tightly linked to their attitudes towards free markets. Of course,
the extent to which particular groups will desire and be able to impose a
preference for a decentralized, partially deregulated solution is an empiri-
cal question. Yet the functioning of federal systems clearly has implica-
tions for the political power of economic groups, their choices of coalition
partners, and their attitudes towards policy activity by each tier of gov-
ernment. Systems that combine economic integration with territorially-
dispersed authority over social policy create opportunities for competitive
deregulation. The term refers to the prospect that firms operating where
government regulations are limited may be able to undercut the prices of
competitors, forcing higher cost firms to either relocate, pressure local
officials to reduce regulatory burdens, or go out of business. The same
dynamic may apply to the ”social wages” associated with the welfare
state. In extreme scenarios, competitive deregulation in a decentralized
system could fuel a downward spiral in social provision, eventually
producing very rudimentary “lowest common denominator” social poli-
cies.
This prospect arises in decentralized federal systems because the spatial
lines of political jurisdictions and integrated markets do not coincide.
Local social policies are situated within a larger environment marked by
the mobility of labor and, especially, capital. Indeed, a principal reason
for emphasizing the territorial aspect of federal systems is that many of
the most interesting consequences of such an institutional arrangement
have a prominent spatial component. The jurisdictions comprising the
system must deal with the movements of various ”factors” across their
physical borders. The free movement of both workers and investment
 FRAGMENTED WELFARE STATES 453

constrains redistributive policies, which threaten to produce an exodus of

businesses and the affluent, undermining public finances and the local
economy. Generous policies might also attract potential program bene-
ficiaries (”welfare magnet” effects), generating prohibitive costs.
The presence of multiple, potentially competing jurisdictions creates
new strategic opportunities for those opposed to extensive, redistributive
social policies. Business, in particular, is likely to have increased options
in a fragmented institutional environment. If a business is unsatisfied
with government policy in one jurisdiction, it can threaten to move to
another. This is likely to promote competition among constituent units,
as they maneuver to provide the most attractive climate for mobile capi-
tal. There is evidence that business interests have sometimes used the
strategic advantages offered in-federal systems to push policymaking in
a less interventionist direction. In the United States, where social policy
initiatives were overwhelmingly state and local matters until the arrival
of the New Deal, fear of capital mobility acted as an extremely effective
brake on social policy (Robertson 1989). In the European Union (EU),
most business interests have strongly and effectively resisted centralized
social policies. Businesses have favored the expansion of the EUs policy
competence on economic matters only so long as it fosters a deregulatory
agenda that limits member state intrusions in the market without substi-
tuting powerful new central controls (Streeck and Schmitter 1991).Thus,
the prospect of interjurisdictionalcompetition not only changes the strate-
gies available to social actors; the availability of new strategies also alters
their relative power. The strengthening of the exit option for business
enhances its ability to exercise voice (Hirschman 1970).
If federal systems create mobility options that increase the strategic
options and power of business, they also increase the prospects for the
realignment of social coalitions. In general, institutional fragmentation
promotes interest group fragmentation. As William Chandler and Her-
man Bakvis note, ”. . . dispersion of powers induces groups to develop
fragmented, decentralized organizations in order to gain access at multi-
ple decision points” (Chandler and Bakvis 1989, 73; Coleman 1987). Be-
yond this general fragmentation, however, federal institutions may
encourage the development of a distinctive cross-class cleavage among
economic groups.
Recent comparative research in political economy has drawn increasing
attention to alliances that cut across cla~ses.~ Federal institutions encour-
age a specific type of cross-class alliance. If there is a geographical division
between areas of high wages and low wages, the interests of producers
(both employers and workers) in high social wage areas are likely to
diverge from those in low social wage areas. Often, the former will be
interested in establishing a Tloor” under competition, while the latter will
be eager to exploit a potential competitive advantage. This cleavage was
pronounced in Australia during the period before World War 11, where
the major business associations were sharply divided over the desirability
454 PAUL PERSON

of public policies that would create a ”national” labor market.4 The

divisions fell largely on territorial lines. Firms where wages were higher
and state governments more active sought a ”level playing field.” Firms
elsewhere resisted natiohal standards. The disagreements were serious
enough to lead the two largest of the six state associations in the Central
Council of Employers of Australia to resign in 1935 (Matthews 1990;
Plowman 1989). As discussed in Part I1 of this article, there is ample
evidence that federalism encouraged a sharp cleavage over social policy
between high-wage (northern) firms and low-wage (southern) firms in
the United States (Gordon 1994). The efforts of southern economic inter-
ests to block or weaken policy initiatives (including supportive social
policies) that would create a national labor market have been an enduring
part of the American political landscape.
While I argue later that federal institutions are not a sufficient condition
for territorially-based cross-class alliances to emerge, they encourage such
a coalitional structure in two ways. First, by offering institutional channels
for territorial representation, federalism facilitates the translation of re-
gional interests into the political process. Second, by providing a set of
policy alternatives (centralizationvs. decentralization of social policy) on
which low-wage and high-wage regions are likely to be most polarized,
federalism makes this particular interest cleavage potentially salient. By
contrast, where the policy option of decentralization is institutionally
precluded, economic actors have far less incentive to organize along
territorial lines.
While in many countries the impact of federalism on the interests and
influence of business and labor is particularly important, federal struc-
tures may also alter the position of other social actors. Where distinctive
ethnic and racial groups are politically significant, struggles for increased
political and economic power are likely to become intertwined with
questions of jurisdictional control over social policy. Just as the locus of
policy control is relevant to the political strength of economic groups, it
is likely to affect the position of other social actors. Different ethnic groups
will attempt to shift policymaking towards whatever arena seems most
favorable to their interests. This has had a significant impact on recent
social policy debates in Belgium, for example. Moves away from a unitary
system towards a federal one have been fueled in part by the fact that
Belgian ethnic groups are largely located in distinct territories. The push
for federalism has been accompanied by calls from wealthier Dutch-
speaking Flanders to decentralize social policy and end the transfers to
the poorer French-speaking areas of Wallonia (Hill 1993).
Institutional settings clearly affect the political positions of social actors.
The main consequences discussed here are summarized in Table I. The
resources, coalitional choices, and policy preferences of social actors are
not simply “givens.” They depend in part on institutional contexts, which
influence the options available to social actors. By changing the range of
available strategies, the ”rules of the game” also affect the power that
 FRAGMENTED WELFARE STATES 455

TABLE 1
Federalism and the Political Position of Social Groups

Group Impact of Federalism

Business Firms possibility of decentralized federalism increases policy

options
decentralized federalism enhances power (”exit” threat)
Business & Labor possibility of territorially-based policies encourages
”cross-class” coalitions
Minorities alternative sites of authority encourage strategic focus
on most favorable arena

groups are able to exert in competition with other actors. In both these
respects, the role of groups in social policy development seems likely to
differ considerably in federal and unitary systems.

Constituent Units as Autonomous Actors in Federal Systems

In federal systems, the interests and activities of the constituent units
themselves become of central importance. These constituent units are
autonomous sites of political authority, with the capacity to pursue (at
least some) policy options of their own and to influence the possibilities
for the pursuit of social policies at the center. The second part of this
article considers how the specific design of a federal system may affect
the extent to which this is the case. For now I wish to highlight the most
prominent ways in which the introduction of constituent unit activity
may influence social policy development.
Because of the strong links between public social provision and political
legitimacy, federal systems have been prone to a dynamic which Keith
Banting has aptly termed competitive state-building (1995). Social policy, he
notes, is not only an object of struggle and compromise among economic
groups, but an ”instrument of statecraft.” Welfare states expanded in all
the industrial democracies in part because politicians saw social programs
as valuable sources of mass legitimacy (Flora 1986; Flora and Heiden-
heimer 1981). The building of direct links with the electorate, through
which government authorities could claim credit for assuring a certain
degree of economic security, has had broad political appeal.
In a federal system, the popularity of social provision becomes a source
of potential conflict among competing centers of political authority. Social
policy debates in federal systems are frequently as much or more about
the locus of policy control as about policy content. As noted above, the
two matters are not easy to separate; societal interests care about the site
of policy control precisely because it influences policy content. Govern-
ment authorities, on the other hand, care about policy control independent
of policy content. They want the political benefits obtainable through
456 PAUL PIERSON

claiming credit for social provision. A classic example of such competitive

state-building efforts is the struggle between the Canadian province of
Quebec and the federal government in Ottawa. Each authority has iden-
tified social policy as a critical instrument for constructing political legiti-
macy and has fought tenaciously over jurisdictional boundaries.
Closely linked to the idea of "competitive state-building" is the concept
of pre-empted policy space. In a federal system, the early enactment of
policies at a decentralized level may constrain the options available to
authorities in the central tier. Once adopted, policies go through a gradual
process of institutionalization. Established programs generate sunk costs
and networks of political interests that are likely to diminish the prospects
for radical reform (Pierson 1993). For example, Skocpol and Ikenberry
have argued that the federal government in the United States has had
more freedom to shape interventions where state authorities had not
already occupied a particular policy space. State-level policy entrepre-
neurs from Wisconsin were central in shaping plans for a national Unem-
ployment Insurance system during the New Deal, and they acted to
protect the structure of Wisconsin's existing program, rather than promote
more national uniformity (Skocpol and Ikenberry 1983).
Multiplying the number of jurisdictions with authority over social
policy may also open up avenues of policy innovation and emulation. State
governments, as Louis Brandeis argued in New State Ice Co. v. Liebman,
are the "laboratories" of democracy: "a single courageous state may . . .
try novel social and economic experiments without risk to the rest of the
country" (Brandeis 1932, 311; Walker 1969; Osborne 1988). Individual
jurisdictions where political, social, or economic conditions are most fa-
vorable may implement reforms. Successful innovation can facilitate a
process of diffusion throughout the system, or provide a rationale for
central authorities to universalize the policy change.
The prospect of policy variation and experimentation is often viewed
as a major advantage of federal systems. A number of scholars of feder-
alism have argued that the interplay among competing jurisdictions is a
powerful contributor to effective governance. Theorists of Competitive fed-
eralism argue that multiplying jurisdictions create a public sector analogy
to market competition in the private sector. The ability of voters (and
firms) to move between jurisdictions allows them to pick the jurisdiction
that best meets their tastes, and the "exit" option gives governments a
powerful incentive to provide value for money in public services (Tiebout
1956; Breton 1987; Kenyon and Kincaid 1991).
Much of the power of this argument for the innovative capacity of
federalism depends, however, on the capacity and willingness of constitu-
ent units to act autonomously (Weaver 1994). As Feigenbaum, Samuels
and Weaver have recently argued, the type of issue involved is likely to
have sigruficant effects on the prospects for innovation:

Whether federalism inhibits or promotes policy innovation depends on the

distribution of costs and benefits of innovation as well as on the nature of
 FRAGMENTED WELFARE STATES 457
relations between national and subnational governments. Federalism is most
likely to stimulate innovation when subnational units can act autonomously
and there are economic or political benefits that can be captured by acting early
. . . But if innovation involves imposing losses (for example, imposing higher
energy consumption taxes), there are strong incentives to be laggards, espe-
cially if those suffering losses can vote with their wheels (for example, by
buying gasoline in another state or moving a business out of state) (Feigen-
baum, Samuels, and Weaver 1993, 103-4).
The question is: which features are typical of social policy? Where there
are significant externalities, with the costs and benefits of policies spilling
across jurisdictional boundaries, the argument for competitive federal-
ism’s efficiency breaks down. This may well be the case for social policies
that are intended to increase ”human capital.” Local jurisdictions in an
integrated economy may be constrained in their ability to fashion for-
ward-looking, preventive social measures. Because of the mobility of
citizens across local borders, investment in human capital represents a
kind of public good, with the jurisdiction making the investment often
unable to capture a commensurate ”return.”
The ability of businesses and individuals to vote with their feet be-
comes even more problematic for policy areas that would generate sig-
nificant redistribution - that is to say, for most of social policy. Under
these circumstances, competitive federalism is likely to mean competitive
deregulation, and constituent units will tend to ”innovate” only in the
direction of diminished e f f ~ r t Policymakers
.~ enacting generous social
policies must fear not only that doing so will encourage the exit of the
affluent, but that it will discourage exit among the poor. These kinds of
pressures have indeed restricted social expenditures in the United States,
where labor (and capital) mobility is quite high (Robertson 1989; Peterson
and Rom 1990).6As Rose-Ackerman concludes,

No reform of local government political processes can overcome a fundamental

weakness of a decentralized political system: A multiple government system is
simply not well suited to carrying out distributive goals. It permits wealthy
people to cluster together and avoid paying taxes that provide benefits to
low-income people (Rose-Ackerman 1983,37).

Thus, in most areas of social policy, inter-jurisdictional competition may

produce not innovation, rational sorting, and self-discipline,but a collec-
tive action problem for constituent units, fueling a “race to the bottom”
in social provision.
The possible negative effects of horizontal competition bring the verti-
cal interaction between constituent units and the national government
back into the picture. Because constituent units may also seek central
intervention in response to collective action problems, the relations be-
tween different tiers of government are not exclusively ones of competi-
tion and preemption. Under such circumstances, constituent units may
play a sigruficant role as petitioners for policy as~istance.~ Facing the
prospect of competitive deregulation, territorial sub-units may turn to
458 PAUL PERSON

central authorities to create a more ”level playing field,” keeping these

pressures from getting out of hand.
In many federal systems, inability to raise local taxes has generated
fiscal pressures which have encouraged constituent units to seek an ex-
panded national role in social policy. In Canada, financial concerns led
provinces to agree (unanimously) to constitutional amendments in 1940,
1951, and 1964 that gave federal authorities full responsibility for Unem-
ployment Insurance and a considerably expanded role in pensions
(Banting 1987).8In the United States, fiscal stress has often led to state
appeals for federal help, and has been one of the major causes of a gradual
if still partial nationalization of control over income transfers (Piven and
Cloward 1971; Gordon 1991; Pierson 1995). In Germany, the fiscally-
strapped Liinder played a major political role in the recent enactment of a
national system of long-term care insurance (Alber 1994; Gotting, Haug
and Hinrichs 1994). The structure of Germany’s federal system - with
the Liinder themselves represented in the Bundesrat - assured that their
interests would receive careful consideration.
This is a crucial point. The interaction of governmental tiers involves
more than “zero-sum” conflict. Federal systems can also generate “posi-
tive-sum” efforts to sort out responsibilities across tiers in a way that best
meets the needs of many parties. Rather than being seen as a simple
tug-of-war over control of popular programs, the interplay between na-
tional and constituent unit officials entails a much more complex mixture
of competition, cooperation, and acc~mmodation.~
One final feature of the interplay between constituent units and central
governments requires mention. While “competitive state-building” has
traditionally meant competition for the credit associated with providing
social programs, the contemporary environment of austerity makes fed-
eralism an important feature in the on-going politics of blame avoidance
(Weaver 1986; Pierson 1994). The major policy question is no longer the
pace or design of policy expansion but the extent of cutbacks in social
provision. Because retrenchment is generally unpopular, governments at
both levels will try hard to ”pass the b u c k to other tiers in the system.
Instances where national governments have attempted to manage auster-
ity by shifting responsibilities to (ill-equipped) constituent units have
been prominent in a number of federal systems, including Canada and
Germany. In the United States, devolution of social policy is the central
strategy in the current Republican assault on the welfare state. Such a
reorientation of policy both opens the door to a decentralized “race to the
bottom” and may shift the blame for cutbacks from federal officials to
state and local ones.
All of these examples illustrate a basic point. A distinctive feature of
federal systems is the presence of a set of powerful institutional actors -
the constituent units - which may enact their own policies and influence
the character of central authority actions. The consequences of this aspect
of federalism are summarized in Table 2. The preferences and influence
 FRAGMENTED WELFARE STATES 459

TABLE 2
Constituent Units and the Formation of Social Policy

Policy Dynamic Example

Competitive Conflicts between Quebec and Ottawa in Canada
State-building Conflicts between member states and
Community officials in the European Union
Policy Preemption Unemployment Insurance in the United States
Policy Innovation Saskatchewan and health care reform in Canada
Petitioner to National German Lunder over long-term care insurance
Government US states during Great Depression
Blame Avoidance Proposals for devolution of policy authority in
Canada

of these actors have received very little examination in the study of

welfare states, but the need to incorporate these actors into the analysis
of social policy-making in federal settings is evident.

The Dilemmas of Shared Social Policymaking

The expansion of policymaking circles to include multiple political
authorities with distinctive interests and capacities is bound to create
complications for the formulation, implementation, and modification of
social policies. To note that shared responsibility will create problems is
simply to recognize, as Sbragia puts it, that ”any variant of federalism is
likely to be more concerned with balancing claims of representation than
with issues of efficiency and rationality in policymaking. Managing di-
versity typically requires ’side payments’ in order to reach consensus, and
such payments run counter to the rational allocation of resources”
(Sbragia 1992, 289n). For political scientists, the point is less to identify
inefficiencies than simply to recognize the contribution of these charac-
teristic tendencies to the likely dynamics of policy evolution. Federal
systems that develop shared responsibility for individual social policies
are likely to generate complex policy designs to incorporate the needs and
interests of each tier, and complex decision-rules for policy reform to
insure that these needs and interests continue to be addressed. As Fritz
Scharpf has argued, shared policymaking is prone to ”joint-decision
traps” in which efficiency and flexibility are subordinated to political
accommodation and procedural guarantees (Scharpf 1988).
Three results of institutional arrangements that rely on joint-decision-
making (where national and constituent unit representatives each possess
a veto or at least a substantial capacity for obstruction) seem likely: (1)a
tendency towards lowest-common denominator policies; (2) the incorpo-
ration into policies of institutional protections that generate inefficiencies
and substantial policy rigidities; and (3) expanded efforts to find escape
460 PAUL PERSON

routes - alternative policy options or institutional reforms that mitigate

the need for joint-decision-making, even if these alternatives have various
substantive limitations.

Proclivities towards Lowest Common Denominator Policies

Where institutional actors are heavily dependent on each other for policy
development, pressures to achieve mutually acceptable compromises will
intenslfy. The stronger the veto power, the greater such pressure becomes.
Under these circumstances, policymakers tend to pursue lowest common
denominator policies, reflecting the views of the least ambitious partici-
pants in a minimum winning coalition. Of course, minimum winning
coalitions must be assembled in all political systems. However, while
minimum winning coalitions in unitary states may often be simple ma-
jorities, multi-tiered systems that create institutional protections for con-
stituent units generally require a broader coalition base." Protection for
constituent units may be de facto rather than de jure. For example, depend-
ence of central authorities on constituent units for implementation may
give the latter considerable power over proposed reforms.
This dynamic has been evident in Germany, where the strong position
of the Liinder is assured both by their control over policy implementation
and by the prominent role of the Bundesrat (Katzenstein 1987). The ten-
dency towards lowest common denominator policymaking has been even
more pronounced in the European Union. The very strong position of
member states in central decision-making places a fundamental constraint
on policy development. Many social policy decisions require a unanimous
vote of member states, and even the newer, more flexible rules available
for some issues require a "qualified majority that allows a relatively
small bloc of states to stall reform. Along with the strengthened position
of business already discussed, these features of shared decision-making
help to account for the relative weakness of EU social policy initiatives to
date. While Britain has been most open in expressing a willingness to veto
more ambitious efforts, British intransigence is not the only barrier to
policymaking. The structure of institutions makes it very difficult to move
beyond the policy preferences of the least eager constituent units (Lange
1992; Lange 1993).

Incorporation of Institutional Protections.

I have argued that social policy development in federal systems always
involves a two-dimensional debate, in which discussions of what is to be
done overlap with discussions of who should be given responsibility. The
various institutional actors involved in joint policymaking will seek to
protect not only their substantive policy goals but also their institutional
positions. Constituent units may wish to consider how policy reforms will
affect the choices available to them down the road. Even if they believe
that a reform favors them now, they may fear the future consequences if,
 FRAGMENTED WELFARE STATES 461

for instance, the current national government is replaced by a government

of another party (Moe 1990).
The result will usually be policy designs that are sensitive to the
institutional concerns of constituent units. The point is not that such an
emphasis is good or bad, but simply that it influences the politics of social
policy and has consequences for how policies are designed and actually
operate. A policy that seeks to achieve two goals (substantive outcomes
and protection of a variety of institutional interests) is likely to be less
effective in achieving each than a policy that is directed toward only one
goal.
The desire to insure that institutional interests are protected will often
foster development of rigid policy designs. The evolution of Canada’s
contributory pension system offers a particularly dramatic example. The
need to guarantee provincial interests led to the adoption of decision-
rules that almost prohibit significant policy reform. As Banting has noted,
under the terms of the intergovernmental compromise that established
the Canada Pension Plan:
Change requires the agreement of the federal government and at least seven
provinces representing two-thirds of the population, making [it] . . . more
difficult to amend than most sections of the constitution of the country. The
federal government has a veto over changes to the Canada Pension Plan;
Ontario also has a veto by virtue of its share of the Canadian population; and
several combinations of other provinces can block change. In addition, because
Quebec decided to operate its own pension plan, the Canada and Quebec plans
need to be coordinated, giving Quebec additional weight in the process. Here
is a joint decision process of withering complexity (Banting 1995).
Thus, institutional protections dictated by the nature of Canadian feder-
alism have fundamentally altered the politics surrounding a major social
program. Locked-in by the decision rules governing reform, Canadian
officials - provincial and national alike - have virtually no ability to
adapt the Canada Pension Plan to new circumstances.

The search for escape mechanisms

Joint decision-making can lead to complex and frequently unsatisfying
policy arrangements. The ensuing frustration can be expected to motivate
key actors to seek alternatives in order to avoid such traps. The difficulty
of reforming Canada’s earnings-related pension system, for instance, has
fostered an increased federal reliance on programs that officials in Ottawa
can enact without provincial approval, such as means-tested benefits and
tax subsidies for private pensions. In the United States, the presence of
joint-decision traps encouraged those advocating national social reform
initiatives to shift from legislative to primarily judicial strategies. The use
of these rights-based, court-led initiatives has had a major impact on the
politics of social policy in the US (Edsall and Edsalll991; Weir 1995). The
activist role of the European Court of Justice in social policy seems to
stem in part from a similar desire of European federalists to avoid the
462 PAUL PERSON

daunting problems associated with joint-decision-making through the

European Council (Leibfried and Pierson 1992). The common thread in
all these cases is the channeling of reform efforts in directions less subject
to the blockage and complexity typical of shared decision-making ar-
rangements.
It is not only central authorities who will try to find escape mechanisms
from joint-decision traps. Constituent units may employ various strate-
gies of their own to circumvent arrangements that they find problematic.
Among the major options are: policy preemption (the rapid movement
into a policy area to discourage central or joint policy action), circumven-
tion through failed implementation (calculated efforts to frustrate the
execution of central initiatives), and the pursuit of opt-out clauses (the
suspension of central government rules for a particular subset of constitu-
ent units). A ll of these strategies have been employed in various federal
sei3ings.l’ The use of each option is likely to complicate the development
of social policy. Even where these options are not exercised, explicit or
implicit threats to do so will often give constituent units considerable
leverage over policymakers even when they lack formal authority.
When one considers the likelihood of substantial conflict among insti-
tutional actors over both policy substance and the locus of policy control
the result is a set of predictable dilemmas for policymakers. These dilem-
mas are summarized in Table 3. Again, there are likely to be dynamics to
social policy reform in such an institutional context that major theories of
welfare state development have largely ignored. Federal systems gener-
ally produce far more complex decision-making arrangements than cen-
tralized systems.

Conclusion
The operation of a federal system modifies the policy preferences, po-
tential strategies, and influence of social groups, introduces major new
institutional actors, and creates a number of distinct dilemmas for policy-

TABLE 3
Dilemmas of Shared Policymaking

Policy Dynamic Example

Lowest Common Denominator European Union
Focus on Institutional Protections Canada Pension Plan
Search for Escape Routes Judicialization of social policy in US
British “opt-out” from the EU
Social Protocol
Shift to federally-controlled pension
programs in Canada
 FRAGMENTED WELFARE STATES 463

makers. The process of social policy development in federal systems is

not entirely dissimilar to that of social policy development in more cen-
tralized polities; class-based conflicts over the degree and character of
government intervention, for example, are likely to be evident in each.
Yet federalism both alters the terrain for these traditional conflicts and
introduces entirely new actors and issues. Investigations of the politics of
social policy must be adjusted accordingly.

VARIATION ACROSS CASES: THE DIVERSITY OF FEDERAL SYSTEMS

If the preceding discussion provides a general sense of how federal
institutions introduce new features into the dynamics of social policy
development, one must immediately caution against the urge to present
general causal arguments about federalism’s impact (Leslie 1987). Two
factors justify this reticence. First, much is likely to depend on the specific
characteristics of the federal system in question. Federalism is an ex-
tremely elastic concept which, as Daniel Elazar notes, ”provides many
options for the organization of political authority and power” (Elazar
1987, 11). Second, institutions by themselves cannot determine policy
outcomes. While the ”rules of the game” are of tremendous significance,
so are the identities, interests, and resources of the “players.” Policy
outcomes depend on the interplay of these factors, rather than being
dictated by institutions alone.
This section indicates some of the sources of social policy divergence
among federal systems. I discuss in general terms the consequences of
distinct institutional arrangements, and then contrast aspects of social
policy development in Canada and the United States. Both have federal
systems, but because of differences between the two federalisms and
differences in the broader social and political context, federalism has
contributed to quite different political and policy outcomes in the two
countries.
Three institutional characteristics of federalism are of great relevance
to the development of social policy: the reservation of specific powers to
constituent units; how the interests of various tiers are represented at the
center; and the extent of commitment to fiscal equalization across con-
stituent units. The extent to which each of the policy dynamics discussed
in Section I emerge in a particular polity will depend in part on these
characteristics. It is not just federalism that matters, but the particular type
of federalism.
An important aspect of federal design is the extent to which particular
policy areas - or particular responsibilities within policy processes (eg.
implementation) - are reserved for constituent members rather than
allocated to the center. The literature on federalism is full of culinary
metaphors -marble, layer, and fruit cakes - designed in part to capture
this variety. Such institutional arrangements are bound to have consider-
able implications for the dynamics of policy development.
A framework where particular policy areas are reserved to the constitu-
464 PAUL PERSON

ent members may restrict the potential for central government action.
Such a system encourages policy preemption on the part of constituent units
- program initiatives that cut off, or at least complicate, the pursuit of
initiatives from the center. Because jurisdictional responsibilities are likely
to be contested, such arrangements are also prone to competitive state-
building - struggles between tiers over policy authority.
Canada provides a good example of such a system. The British North
America Act of 1867 allocated exclusive constitutional responsibility for
health care, social services, education, and property and civil rights to the
provinces, insuring that initial policy reforms in these areas would occur
at the provincial level and that prospects for federal intervention would
be circumscribed.'2 "Province-building" has had a major effect on policy
development in an institutional setting which encourages what Martin
Painter calls "aggressive unilateralism:"
The principles underlying the Canadian division of powers are based on
jurisdictional distinctions between various subject matters. The result is a
system of parallel rather than interlocking governments, with each government
asserting the right of unilateral action in its separate jurisdiction. For this reason
alone, one would not expect the conditions of the joint-decision trap to be
replicated in Canadian intergovernmental relations . . . The wide scope for
unilateral action arising from the way powers are divided in the constitution
provides the conditions for the aggressive unilateralism and "thrust and ri-
poste" that characterize much of the recent history of Canadian intergovern-
mental relations. In these conflicts, the rules themselves have been high on the
political agenda. Substantive disputes have quickly escalated into full-blown
constitutional confrontations, and resolving the former in some cases has de-
pended on settling the latter (Painter 1991,274-75).
Unless such a reservation of powers is very firmly institutionalized,
however, the intrusion of central authorities is to be expected. Fritz
Scharpf notes that efforts to "reserve" particular powers to constituent
units in federal systems have often fallen by the wayside as economic
interdependence and policy complexity increased (Scharpf 1994). He
points to the interstate commerce clause in the United States as a good
example of how "fire walls" protecting state authority from national
encroachment are gradually circumvented. Protected areas become so
intertwined with other policy issues that it becomes difficult to block
central government action.
Partly for this reason, policymaking in federal systems is more likely
to be based on shared decision-making. Shared jurisdiction between tiers
in a particular policy domain (marble-cake federalism) is likely to make
systems particularly prone to Scharpf's joint-decision traps. This is, for
example, the pattern in Germany, where the federal government enacts
most major policies and the Liinder usually have almost exclusive respon-
sibility for policy implementation (Scharpf 1988). The United States, too,
has evolved from a system of "dual" (or "layer-cake") federalism with
different tiers responsible for different policy issues, to one where policy
responsibility is shared in many domains. Such systems are less prone to
 FRAGMENTED WELFARE STATES 465

competitive state-building pressures. They are, however, more likely to

exhibit some of the other characteristics of shared decision-making, such
as a tendency toward lowest-common-denominator policies and searches
for escape routes.
A second dimension of variation in multi-tiered systems concerns the
nature of constituent member representation at the center. In some cases,
direct representation is extremely limited. In the United States, for exam-
ple, decision-making at the center does have an important territorial
content (House and Senate members are elected from geographical dis-
tricts, and the distribution of votes in the Senate is by territorial unit
rather than population). These representatives, however, are directly ac-
countable to groups of voters rather than to the federation's constituent
territorial units.13 In Germany, by contrast, the Bundesrat provides Liindev
representation in national governance.
Various other federal systems fall somewhere in between. The Cana-
dian federal system has a parliamentary arrangement in which voters
select their national representatives, but many issues are subject to inter-
governmental negotiations where provincial governments represent
themselves. Indeed, it has been suggested that the relative weakness of
territorial representation within the federal government has heightened
the role of intergovernmentalism,as provincial premiers have obtained a
near-monopoly on the political expression of territorial interests. As Watts
puts it, "to the question 'Who is to speak for Canada?' with which Prime
Minister Trudeau was wont to challenge the [provincial] premiers, the
commonly understood answer . . . is 'The eleven heads of government:
the prime minister and the premiers"' (Watts 1987, 784).
The nature of territorial representation is likely to be consequential
where there are clashes between the interests of constituent members and
those of central authorities. The stronger and more direct this repre-
sentation is, the more likely it is that the interests of constituent members
will be respected. In general, one might expect federal officials to be more
responsive to the political interests of constituent units in Germany, for
example, than in the United States. The effective veto power held by a
majority coalition of Liindev in the Bundesrut guarantees constituent units
a strong say in the design of central government policies.
However, the ability of a minority of territorially-based constituent
members to block action is also important. While representation of con-
stituent units is in some respects less secure in the United States than in
other federal systems, aspects of institutional design may enable well-
placed territorial representatives to protect the interests of even a minority
of constituent members. As is discussed in detail below, this was often
the case for the American South. The fragmented, veto-ridden political
system of the United States allowed southern interests to block reforms
that a majority of states probably would have favored. Institutional de-
sign gave southern politicians power quite out of proportion to the
population or economic strength of southern states (Bensel1984).
466 PAUL PERSON

A final difference in the structure of federal systems concerns the degree

of commitment to fiscal equalization across constituent units. Many of the
dynamics.of federalism - tendencies towards competitive deregulation,
restrictions on policy experimentation, the strategies of economic actors
- are influenced by the rules governing the distribution of financial
resources among political jurisdictions. As was stressed in Section I, the
financial resources of constituent units are often a prominent issue in
political struggles over social policy. It is because constituent units rely
on potentially mobile sources of revenue that they are often reluctant to
engage in redistributive social policies or expansive innovations. The
weak fiscal capacities of constituent units may lead them to petition
national authorities for aid, or even prompt requests to nationalize policy
control. On the other hand, it is precisely the weak fiscal capacity of
constituent units that frequently motivates conservatives and business
interests to advocate more decentralized structures of social policy
Whether a particular federal system seeks to bolster the fiscal capacities
of its constituent units is thus crucial, and subject to considerable vari-
ation across countries (Bird 1994).14In most federal systems, a commit-
ment to substantial fiscal equalization is well-institutionalized, either in
constitutional form (e.g. Germany and Canada) or through long-estab-
lished procedures that cannot easily be altered unilaterally (e.g. Australia).
In the German case, for instance, the national government is constitution-
ally mandated to maintain "uniformity of living conditions" throughout
the country. In this respect, the United States is near the other end of the
~pectrum.'~ States receive relatively limited financial assistance from the
national government, and there are only the mildest efforts to address
major disparities in income levels (and hence tax capacity) across the
states (Peterson 1995).Weak efforts at fiscal equalization may make con-
stituent units reluctant to pursue policies that threaten their financial
position. Policy experimentation, particularly on redistributive issues,
becomes less likely; concerns about welfare magnet effects and the exit
options of business and the wealthy are likely to intense.
Thus while federal institutions encourage some broadly similar features
of social policy development, there is also substantial variation within the
universe of federal systems. The extent of reserved powers, the forms in
which constituent units are represented at the center, and the degree of
fiscal equalization are likely to have important consequences. As indi-
cated in Table 4, these institutional features may accentuate or weaken
the tendencies discussed in Section I. In addition, of course, features of
federalism interact with other aspects of national systems to influence
political.outcomes.'6 Both these points can be demonstrated through a
brief comparison of social policy development in the United States and
Canada. Federalism has played a critical role in the development of
welfare states in both countries. Yet because of differences between the
two federalisms and the two polities in which these institutions operate,
the impact of federalism has been quite different. I focus here on three
 FRAGMENTED WELFARE STATES 467

TABLE 4
Features of Federalism and Social Policy Development

Feature Impact on Social Policy Development

Reserved Powers for
Constituent Units
Strong Constituent Unit
Representation in
National Politics
Commitment to Fiscal
Equalization
Encourages "competitive state-building"
Encourages policy preemption
Increases CU influence over policy
Limits Prospects for Competitive Deregulation
Encourages expensive CU policy innovations

points of divergence: struggles over the establishment of a national "social

wage;" the response to demands of minority groups; and the role of
policy innovation among constituent units.

Struggles Over a National "Social Wage"

As noted in Section I, the possibility of competitive deregulation in a
system of decentralized federalism may make proposals to nationalize the
social wage a divisive political issue. It is sometimes argued that constitu-
ent units where low-wage labor is plentiful should be suspicious of
central govenunent social policy activity, and will seek to exploit their
competitive advantage by resisting a "level playing field" (Lange 1993).
Students of American politics, for example, have rarely expressed surprise
at the resistance of poor states to nationalized social policies. When one
shifts to a comparative perspective, however, the empirical evidence is far
from clear-cut (Glatzer and Pierson 1994). Canadians are equally unsur-
prised that it is the poorest constituent units that have pushed the hardest
for national programs. The poor Atlantic provinces have been consistent
and strong advocates of social policy integration, and it is the richer
provinces who increasingly object to the territorial redistribution of social
spending that flows from centralization (Boadway and Flatters 1994).
Thus, if federal systems do seem to highlight the different social policy
interests of rich and poor constituent units, the diverse ways in which
these differences are expressed and resolved across countries raise some
fascinating theoretical questions.
As already noted, the policy preferences of southern politicians have
had fundamental effects on the shape of the American welfare state
(Bensell984;Finegold 1988; Quadagno 1988).National institutional struc-
tures made southern politicians the gatekeepers for social legislation at
critical junctures. During and after the New Deal the South was economi-
cally marginal but politically pivotal. Although the region possessed only
a quarter of the nation's population and little more than a tenth of its
taxable income (Robertson 1989, 2731, these figures fail to capture its
468 PAUL PIERSON

influence. Because of long-standing Democratic dominance in the South

and the congressional rules governing seniority and committee autonomy,
southern Democrats generally chaired the crucial congressional commit-
tees. Southern inteiests thus had a key institutional foothold throughout
the New Deal, and have often held the balance of political power since
then.
The interplay of the South’s distinctive interests and America’s federal
institutions dictated the strategy of southern politicians, encouraging
them to favor policy designs that would turn the dynamics of interstate
competition to their advantage. To be blunt, a programmatic agenda of
nationalized social policies has always been anathema to the southern
wing of the Democratic coalition. The South during the New Deal consti-
tuted a distinctive political economy in the truest sense of the term.
Networks of political and economic domination, backed up by the volatile
element of racial hatred, were tightly linked and mutually reinforcing.
Sorting out the role of race and class in this system is difficult, but both
led southern politicians, who represented the ruling white oligarchy, to
fiercely guard local prerogatives. This was particularly true when it came
to policies governing the labor market. Ruling interests in the South had
a strong desire to avoid any national policies that might weaken black
sharecroppers’ dependence on the labor market (Alston and Ferrie 1985).
Southern politicians also objected to policies that might threaten the
low-wage, non-union environment that made the region attractive to
potentially mobile capital. The opposition of Southern Democrats contin-
ued long after the demise of the share-cropping economy that had moti-
vated southern rejection of aspects of the Social Security Act. This stance
reflected strong resistance to efforts to create integrated labor market and
social policies for the entire United States (Katznelson, Geiger and Kryder
1993; Schulman 1991).
The posture of southern politicians over the past half-century is strik-
ing. Overwhelmingly, southern politicians have opposed - while north-
ern interests have supported - reforms that would have paid dispro-
portionate benefits in the South from taxes raised largely in the rest of the
counq. Proposals for a more national system of welfare, for example,
would have produced considerable net public transfers to the South,
where poverty rates were highest and federal taxes were lowest
(Quadagno 1994,129-31).Yet southern members of Congress tenaciously
and successfully fought these reforms. This seeming paradox provides
clear confirmation of the manner in which multi-tiered institutional set-
tings generate quite distinctive conflicts over social policy provision.
Despite promising a budgetary windfall, these proposals would have
jeopardized the South’s major competitive advantage within the Ameri-
can economy: the availability of a cheap, non-unionized workforce.
While social policies have also generated territorially-grounded
conflicts in Canada, these have taken the polar opposite form. Poor
provinces have favored national programs of welfare and unemployment
 FRAGMENTED WELFARE STATES 469

insurance that provide massive inter-regional transfers. In general,

wealthier provinces have grudgingly acceded to these programs, al-
though recent fiscal pressures on national and provincial governments
have made the transfers more salient and more controversial. The Mul-
roney government's efforts to reform unemployment insurance, for ex-
ample, yielded a sharp division between officials from rich and poor
provinces within the Conservative party. The strong protests of repre-
sentatives from the Atlantic provinces eventually led the government to
modify its proposals (Banting 1995).
While the issue clearly calls for detailed investigation, much of the
difference in outcomes between the two cases appears to stem from the
quite different nature of the political economies of the two countries'
poorest regions (Glatzer and Pierson 1994).Relying heavily on a resource-
based, seasonal economy, the Atlantic provinces were able to utilize na-
tional unemployment benefits to maintain workers during the off-season
without seriously jeopardizing local wage rates. The geographic isolation
of the Atlantic provinces also made a strategy of "competitive deregula-
tion" unrealistic; even very low social wages were unlikely to attract
much industry to the remote and sparsely-populated region. Finally, the
fact that poor Canadians could vote made the Atlantic provinces more
responsive to their immediate economic needs than was the case for
politicians in the pre-Civil Rights South.
In both countries, territorial divisions among economic interests found
organizational and political expression through the institutions of feder-
alism. In both, these conflicts have proven to be highly salient in struggles
over social policy. Yet the institutions of federalism operated in interaction
with other features of the two countries - the economic viability of a
"low-wage'' strategy of economic development, the compatibility of so-
cial benefits with the structure of local labor markets, and the political
strength of the poorest workers in poor regions. Federalism mattered in
both cases, but in quite different ways.

Responses to the Demands of Minority Groups

In Section I it was suggested that it is not only economic groups that are
significantly influenced by the institutions of federalism. Ethnic, linguistic
or racial groups may also find that federal institutions have significant
consequences for their political position. Again, however, federalism op-
erates in conjunction with other factors. How ethnic groups are distrib-
uted across the constituent units of a federal system is likely to be crucial.
This point can be shown by contrasting the position of Canadian and
American minority groups in the politics of social policy.
In the United States, the African-American population has been widely
dispersed. There are large African-American communities in many parts
of the country, but in no state do they constitute a majority of the popu-
lation. Under these circumstances, and given the resistance of many state
470 PAUL PERSON

governments to African-American concerns, the national government be-

came the major target for political mobilization. The politics of social
policy in the United States has long been centrally concerned with race,
and it has often been fought out through struggles over the locus of
political control. Those wishing to strengthen the political rights and
social benefits available to African-Americans sought an expanded na-
tional role, while those opposed took the reverse position (Weir 1995;
Quadagno 1994).
In Canada, federalism again had considerable implications for the or-
ganization and strategy of minorities, but in quite a different manner.
Canada's largest minority has been an advocate of decentrulizufion. The
concentration of French Canadians in a single province has encouraged
an enduring competition over control of social policy between Quebec
and the federal government in Ottawa (Banting 1995; Watts 1987). Both
sides have regarded social policy as an important contributor to mass
legitimacy. Since each has been engaged in "state-building" enterprises,
they have sought to maximize their own authority over policy develop-
ment.
As the efforts to strengthen Quebec institutions gathered speed in the
late 1950s, the welfare state emerged as a major object of contention. Thus
Quebec insisted on instituting its own Quebec Pension Plan alongside the
Canada Pension Plan that operated in other provinces. The province was
able to use the funds generated to direct massive investments towards
economic development within Quebec. Following the struggles between
Quebec and Ottawa over pensions in the 1960s came intense fights over
health care, a guaranteed annual income, and family policy. While sub-
stantive policy issues were sometimes involved, the struggles were less
over what was to be done than over who would do it. Yet because these
issues are almost impossible to separate, the struggles have had a sig-
nificant effect on the shape of the Canadian welfare state.
The contrast between the two cases could not be more striking. In both
instances, federalism created the conditions for two different sites (na-
tional or local) of policy control. In both cases, the issue of which level
should play a dominant role became a central concern in the politics of
social policy, dividing each country's largest minority group from its most
bitter opponents. Yet for obvious reasons, minority groups in the two
countries took opposite positions on the issue of national vs. local control.
Thus federalism clearly mattered, but not in a unidirectional way.

The Prospects for Local Policy Innovation

Does federalism create "laboratories" that accelerate the pace of social
policy innovation? Again, there seem to be sigruficant variations across
cases. The structure of Canadian federalism and the nature of the Cana-
dian party system has enhanced the capacity of provinces to play an
experimental role in important cases. Although the United States often
touts the innovative capacity of its constituent units, features of the
 FRAGMENTED WELFARE STATES 471

political system have generally inhibited the prospects for state-level

social policy experimentation.
The history of Canadian health care policy provides a classic example
of a "laboratory" process in a federal system (Banting 1987; Tuohy 1989;
Weaver 1994). On several occasions - most notably when Saskatchewan
adopted a plan of public insurance for physician services in 1962 -action
at the provincial level demonstrated both the feasibility and political
appeal of universal coverage. Saskatchewan's success led to mounting
pressure on federal authorities to introduce a similar scheme for the
whole of Canada. This example of policy innovation fits well with my
earlier discussion of the conditions that facilitate constituent unit experi-
mentation. There were considerable benefits to early provincial action,
spillover to other jurisdictions was limited, and "exit" was not a problem,
since doctors quickly learned that the new system increased their incomes
by ending their responsibility for uncompensated care.
Particular features of the Canadian system also appear to have been
important. The Canadian structure of fiscal federalism, which has pro-
vided a strong commitment to financial equalization among the prov-
inces, makes provincial experimentation with potentially redistributive
policies less risky. Canada also has long possessed a number of political
parties, and support for those parties varies dramatically among the
provinces. This increases the prospect for provincial experimentation,
since a single province may elect a government with an "outlier" policy
agenda. In the case of health care, an atypical distribution of popular
preferences allowed a reformist NDP government to pursue social demo-
cratic policies in a single constituent unit. Political success led to a broader
diffusion of the experiment (Weaver 1994).
In the United States, by contrast, there are few dramatic instances of
state-level experimentation in social policy. A stable two-party system
diminishes the opportunities for "outlier" state governments. Probably
more important, the heavy reliance on internally-generated finances
makes states more reluctant to engage in experiments that may involve
sigruficant redistribution. As Russell Mathews has noted in comparing
American federalism with Australia's, which has a very strong commit-
ment to fiscal equalization:
. . . fiscal equalization in a federal country is concerned with facilitating diver-
sity as well as promoting equality. Fiscal equalisation on the Australian model
provides a means of reconciling equality and diversity which is not possible in
a unitary country, where there can be equality of service but no diversity, or in
a federal country such as the United States where diversity can be only partial
because there is no equality. Just as freedom to choose between bread and cake
is meaningless to a poor person without the wherewithal1 to buy either, so
diversity is severely constrained in a federation which makes no attempt to
equalise the fiscal capacities of subnational governments (Mathews 1985,21).
This is doubly true when poor states are not just strapped for cash but
concerned that redistributive policies will make the problem worse. Be-
fore the New Deal, when state governments essentially had the social
472 PAUL PERSON

policy field to themselves, the result was not a proliferation of experi-

ments and policy diffusion but almost total abdication. While many states
actively 'explored possibilities for reform, their concerns about capital
mobility placed a strong check on their efforts. Only with the economic
breakdown of the Depression did states begin to act, and even then their
modest efforts were overshadowed by their loud calls for an expanded
federal role (Robertson 1989; Gordon 1994).From 1935 to the early 1980s,
the major developments in social policy (Medicaid and Medicare, Food
Stamps, the EITC) were essentially national initiatives rather than expan-
sions of state-level experiments. Only in the past few years has there been
significant emphasis on state experimentation, and in practice this has
generally meant various policies to curtail benefits for low-income house-
holds.
This example, like the previous two, illustrates my main point. As Kent
Weaver has put it, "the impacts of federalism on governmental activism
are . . . complex and bidirectional rather than simple and unidirectional"
(Weaver 1995, 5). Indeed, the effects are not just bi-directional but multi-
directional. Federalism matters tremendously for the development of
social policy, but in ways that are significantly mediated by other features
of a particular political setting. Thus the impact of federalism can best be
understood by placing national experiences in a comparative context.

CONCLUSION: POLICY DYNAMICS IN FRAGMENTED WELFARE STATES

The research presented here has significant implications for those inter-
ested in welfare states, federalism and the role of institutions in the
making of public policy The evolution of national welfare states in the
advanced industrial democracies has been the subject of extensive and
sophisticated research. Indeed, this is probably the most well-tilled
subfield of comparative public policy. Yet the orientation of much of this
research towards the unitary political structures prevalent in Northern
Europe and Scandinavia has led to an inadequate appreciation of the role
of institutions, including institutions of multi-tiered decision-making, in
the evolution of social policy. A federal structure has quite important
consequences: major changes in the power, preferences, and strategies of
social groups; the emergence of important new institutional actors; and
the development of a variety of new policy dilemmas for those charged
with responsibility for designing social programs. Thinking clearly about
how federal institutions influence the development of social policy can
help us to understand a substantial number of national welfare states, as
well, perhaps, as such emerging "multi-tiered" systems as the European
Union.
The conclusions are also suggestive for scholars of federalism. Identi-
fying considerable cross-national variation suggests the importance of
comparative analysis. Studies of federalism usually focus on one counv.
This may lead them to erroneous generalizations about the consequences
 FRAGMENTED WELFARE STATES 473

of federal institutions. Equally important, studies of single federations

may lead observers to overlook what is most distinctive about a particular
federal system, cutting off potentially fascinating lines of inquiry. To take
just one example, I have emphasized how the weakness of fiscal federal-
ism in the United States has had a major impact on the politics of
American social policy. For students of American politics, however, this
phenomenon generally has a taken-for-granted quality. As an outside
observer has noted,
. . . Australians find it difficult to understand how the United States, alone
among the world‘s major federations, has made no attempt to introduce any
system of fiscal equalisation; or, even more surprisingly, why the absence of
equalisation arrangements among the states has never emerged as an important
political and social issue (Mathews 1985, 15).

Only by situating national experiences in a comparative context is this

taken-for-granted quality likely to be removed from research on public
policy.
Finally, the analysis has implications for the study of institutions in
political life. Throughout the second half of this essay I have emphasized
interaction effects. Federal institutions operate in conjunction with other
important variables: the structure of party systems, the nature of a par-
ticular political economy, the geographical distribution of minority
groups. Indeed, institutions alone - which establish the ”rules” but tell
an observer only a little about the preferences, identities, and resources
of the ”players” - can never fully explain outcomes (Thelen and Steinmo
1992). This is bad news for those seeking a quick road to parsimony, and
for those hoping to get powerful statistical results by slapping a ”feder-
alism” variable into a quantitative study of OECD countries. Yet if inter-
action effects are indeed prominent in the real politics of policy
development, we may have little alternative to the painstaking and de-
tailed investigation of cases needed to study such processes.

Acknowledgment
Financial and administrative support for this research was provided by the
Russell Sage Foundation. Parts of this analysis draw on ideas developed in
collaborative projects with Stephan Leibfried (Pierson and Leibfried 1995) and
Miguel Glatzer (Glatzer and Pierson 1994). I am grateful for the suggestions of
two anonymous reviewers, and for the comments and research assistance of
Miguel Glatzer.

Notes
1. I rely on Riker’s definition of federalism: “a political organization in which
the activities of government are divided between regional governments and
a central government in such a way that each kind of government has some
activities on which it makes final decisions” (Riker 1975, 101).
2. The best discussion of federalism and welfare states is Banting 1987.
474 PAUL PERSON
3. A prominent example is the tendency in small, open economies toward splits
between producers (both owners and workers) in the tradeable goods sector
and producers in the non-tradeable sector who are more sheltered from
international competition (Swenson 1991; Gourevitch 1986).
4. The focus on wage-bargaining reflects in part Australia’s distinctive path of
policy development, where a quite powerful labor movement favored policies
built around wage regulation. National systems of wage regulation came to
substitute for many of the features of traditional social policy found in other
countries (Castles 1988).
5. While it is seldom advertised as a strategy for cutbacks, this is undoubtedly
a major reason why Republicans in the United States have always looked
favorably on proposals to ”return policy control to the states.”
6. As Peterson and Rom note, ”magnet” effects seem less related to the differ-
entially high “entrance” of the poor in generous states than to differentially
low ”exit” rates.
7. Thus where constituent units do act in redistributive arenas, they may be more
likely than they would be in other domains to push for central govemment
efforts to extend these policies to other constituent units. For some evidence
supporting this proposition in the United States (Boeckelman 1992).
8. As discussed below, the need for provincial assent to these amendments
allowed them to insist on important ”institutional protections” with regard
to pensions policy.
9. Conflicting interests among constituent units raise a further complication.
Constituent units often disagree sharply about the desirability of central
intervention. In many cases, constituent units with extensive social protec-
tions will fear competitive deregulation, and therefore favor policy centrali-
zation. Those without such protections will dismiss “competitive deregu-
lation’’ as simply an unpleasant name for ”attracting investment.” This
conflict has been evident in the United States and (less clearly) in the Euro-
pean Union. The issue is considered further in Section 11.
10. For example, Switzerland’s highly detailed constitution means that many
reforms require constitutional amendment. Amendment, in turn, requires a
majority referendum vote in each canton.
11. Recent examples would include the enactment of the ”Social Protocol” in the
European Union, which allowed the British to ”opt-out” from certain social
policy initiatives, and the growing use of “waivers” in the United States to
permit broader state-level experimentation in programs like AFDC and Medi-
caid.
12. Ironically, the framers’ intent was to create a relatively centralized system.
However, ”many responsibilities that seemed relatively insignificant (or
within the purview of private or religious organizations) when they were
assigned to the exclusive jurisdiction of the provinces . . . have, with the
growth of an industrial, urban, and secular society and of more interventionist
governments, become among the most important” (Watts 1987, 774-75).
13. This was not always the case (Riker 1955).
14. An important related issue, well-analysed in the literature on fiscal federalism,
is the extent to which central government grants are conditional or uncondi-
tional.
15. If the EU is considered a federal system, its very limited efforts to equalize
financial resources would put it even further at this end of the continuum.
16. TOavoid further complicating the discussion, I do not explore another impor-
tant variable: the design of social policies themselves. The type of social policy
at issue and the structure of specific programs is likely to have a significant
influence on when and how federalism matters (Esping-Anderson 1990; Pier-
son 1994).
 FRAGMENTED WELFARE STATES 475

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