Right-wing advocates of limited government often argue that locating political power in state governments is preferable to locating it in the federal government. The reasoning they give for why this is the case is a bit complicated. On its face, it seems like it is irrelevant where government power is located. After all, a state government can be just as involved in regulation and social programs as the federal government is. Advocates of this view do not deny that, but they typically claim that locating power in state governments will force states to compete with one another which will lead them to reduce regulations and taxes in order to attract businesses.
That is, they believe that the natural conclusion of inter-government competition for capital investment is a race to the bottom which will force governments to increasingly dismantle labor laws, environmental laws, taxes, and other regulations. When the federal government sets nationwide standards, owners of capital have no way to escape them except of course to move out of the country, something they increasingly do. However, if a state sets a particular standard, owners of capital can just shift that capital to another state and easily avoid it. Thus, this strategy of relocating power in the states will usher in the kind of limited government those on the right-wing would like to see.
That is the theory at least. In reality, the mechanism used to force the creation of limited state governments — the profit-motivated decisions of investors — will actually create large state governments that provide generous handouts to attract businesses. Advocates of this strategy typically think of it in terms of the pairwise comparisons of investors. An investor choosing between two states would choose the one that had less environmental regulations, assuming everything else about the states was identical. Along the same lines, an investor deciding between two states would pick the state that had lower taxes, no workplace safety rules, and no unions. The state that was imposing these profit-reducing measures would then be starved of capital investment, and would thus be forced to dismantle them to stay competitive.
This analysis of what would happen makes good sense, but it does not go far enough. There is nothing that would constrain states that are competing with one another to only use decreased state intervention to attract investors. In fact, at some point all of the regulations would have to be repealed which would leave the states no choice but to compete in some other way. That other way would of course be through subsidies, corporate welfare, and other sorts of monetary bribes. If an investor is choosing between a state which will cut them a check from the public coffers and one which wont, clearly the state giving them money would be preferred. The same competition effects would kick in, and states would be off to the races to see who could hand out the most money to attract capital.
This kind of corruption of the state by owners of capital is quite natural and pops up in almost any place where a free market is supposed to exist. Noam Chomsky’s talk on this phenomenon which he refers to as the “really existing free market theory” is illuminating:
And the principle of really existing free market theory is: free markets are fine for you, but not for me. That’s, again, near a universal. So you — whoever you may be — you have to learn responsibility, and be subjected to market discipline, it’s good for your character, it’s tough love, and so on, and so forth. But me, I need the nanny State, to protect me from market discipline, so that I’ll be able to rant and rave about the marvels of the free market, while I’m getting properly subsidized and defended by everyone else, through the nanny State.
The brute fact of the matter is that a capitalist who has to choose between a perfectly laissez-faire state and a corporate welfare state will always choose the latter. Forcing states to compete to attract capital will consequently always lead to the construction of corporatist states, not limited-government paradises. To suggest otherwise is to pretend that owners of capital will not invest that capital where it will yield the best return, i.e. that capitalists will not act as capitalists.