Peterson discusses the roles of local, state and federal government in the provision of two types of public policies, developmental and redistributive. He points to recent history to argue that state and local governments should fund the development necessary to sustain economic growth, but that federal government should provide redistribution necessary to compensate those that do not benefit from the growth.

Developmental policies provide physical or social goods necessary for sustained economic growth (e.g., transportation, education, sanitation, police, and fire, etc.). They are best handled at the state and local level. Localities have incentive to provide more efficient goods and services because of the threat of people voting with their feet, especially locally. State and local government can share ideas and therefore promote a variety of good programs and also avoid bad ones throughout states and the country.

Developmental policies are not appropriate at the national level because they result in pork, not growth. Programs and grants for developmental goods and services often do not help the economy but tend to be irresponsible expenditures by Washington politicians. In the past, this pork was made possible because inflation automatically pushed people into higher income-tax brackets causing tax increases that were disguised and politically feasible. This ended in 1981 with a sharp income tax reduction. Fiscal deficits, anti-tax pressures and senior citizen entitlements combined to push for more state developmental spending.

Redistributive policies transfer funds from those who have gained the most from economic development to those who have gained the least. This includes pensions, welfare, health care, unemployment, etc. Redistributive policies are best implemented at the national level because it is difficult for those who pay to move away. They dont work as well at the state and local level because those governments must be concerned with economic development and will therefore almost always provide less redistribution in exchange for a higher tax base.

A state that provides higher benefits than its neighboring state will see an inflow of applicants. Therefore, states try to match or provide lower benefits than their neighbors, resulting in a race to the bottom. This trend is supported by the very minimal increases in redistributive spending at the state and local levels since 1962, despite the greater awareness of the country to the problems of poverty. The new TANF block grants do not increase funding with an increase in applicants.

In an effort to cut federal spending in 1995, the Republican Congress and Clinton teamed up to give states responsibility for more of both types of spending, developmental and redistributive. Peterson feels comfortable with the shift of developmental policies to the states, but not redistributive policies. State and local governments are becoming increasingly competitive and the tendency for them to provide redistributive services is decreasing.

Peterson predicts that shifts to states and cities will be unworkable and short-lived because they are at odds with the underlying structure of the federal system. He further predicts that if he is wrong, the well-being of those that depend on the programs will be dramatically compromised. Many examples can be seen of states cutting welfare programs when given the flexibility to do so.