Two years after the Republican congressional victory marked by the Contract with America, Steven Gold examines the effects of New Federalism and what he calls the devolution revolution on local and state governments. Gold points out that devolution is not an amorphous concept, but is varied in both content and application.

Three main components of the devolution program are stated:

1. Aid reduction to state governments

Federal aid represents between a quarter and a third of state government resources. As most states have structural deficits in future payments, there is the possibility of a looming fiscal crisis. Several factors could ameliorate the crisis, including gradual phasing of federal aid reduction, economic growth (and tax receipts) from a balanced budget, and the possibility of smaller cuts over time.

2. Shift from matching to non-matching grants

This policy shifts the burden of federal programs such as welfare programs and Medicaid onto state governments. The shift means that there would be less federal aid to offset the contraction of state revenues in the event of a recession; hence, the state budget would be severely stressed in a recession.

3. Enhanced flexibility for state governments

The efficiency gains from allowing state governments greater autonomy would not necessarily be offset by the negative effects on the budget. These efficiency gains rely on the ability and creativity of the individual state governments, and it is likely that these governments will exploit their newfound freedom through fiscal manipulation rather than increasing efficiency.

The second part of the article describes five trends in state policy that necessitate further research. These five areas are:

1. Structural balance of state budgets
2. Discretionary tax changes
3. Determinants of state spending
4. Interactions between state and local governments
5. Effects of federal aid

Finally, the devolution program involves powerful structural changes that require further research. He worries that squeezing the system from the top will result in instabilities elsewhere. Unless there is less structural rigidity, and increased research, the devolution program is unlikely to reach its full potential.