"Please Eliminate Three."
James Surowieki has stumbled upon the secret flaw in our nation’s fiscal structure:
But here are fifty culprits you might not have thought of: the states. Federalism, often described as one of the great strengths of the American system, has become a serious impediment to reversing the downturn.
He complains that states are lousy at coordinated action, like building national railroads and the magical “smart grid” that will solve our energy problems, and that the “disproportionate” influence of rural constituents on state governments will divert resources from productive urban centers, but here’s his curious insight:
[Fiscal stimulus is] built on the idea that during serious economic downturns the government can use spending increases and tax cuts to counteract the effects of consumers who are cutting back on spending and businesses that are cutting back on investment. So fiscal policy at the national level is countercyclical: as the economy shrinks, government expands. At the state level, though, the opposite is happening. Nearly every state government is required to balance its budget. When times are bad, jobs vanish, sales plummet, investment declines, and tax revenues fall precipitously—in New York, for instance, state revenues in April and May were down thirty-six per cent from a year earlier. So states have to raise taxes or cut spending, or both, and that’s precisely what they’re doing: states from New Jersey to Oregon have raised taxes in the past year, while significant budget cuts have become routine and are likely to get only deeper in the year ahead. The states’ fiscal policy, then, is procyclical: it’s amplifying the effects of the downturn, instead of mitigating them. Even as the federal government is pouring money into the economy, state governments are effectively taking it out. It’s a push-me, pull-you approach to fighting the recession.
The states, according to Surowieki, are working against federal stimulus by raising taxes and spending less, a combination that he refers to as “taking money out” of the economy. As if this is by choice, he complains that they’re “doing precisely the wrong thing.”
I’m no financial columnist, but when I last checked, states were still constrained not only by their various commitments to balanced budgets, but by things like Baa1 bond ratings. Then there’s the trifling detail that to keep the lights on and repay their bonds, state governments need real money. California, for instance, can’t pull the red lever labeled “Quantitative Easing” and start cutting payroll checks. So I’m not sure how Surowieki wants the states to help with fiscal stimulus, other than by ceasing to exist, admittedly an increasingly popular solution in certain quarters.
UPDATE: Over at Free Exchange, the point is made that being tied to the fiscal mast is California’s political choice, and the decision to run balanced budgets is what keeps those bond ratings low and prevents big deficits in lean times:
California had a gross state product in 2008 of nearly $2 trillion—larger than Russia, Spain, Brazil, or Canada. All of those countries carry significant public debt; Canada has debt equal to about 60% of GDP, for instance. If California could borrow, it could borrow.
This is true, and it’s fun to imagine the macroeconomics of a counterfactual California with both fiscal and monetary autonomy.
“Then there’s the trifling detail that to keep the lights on and repay their bonds, state governments need real money.”
Which is the exact reason why the balanced budget constraints exist in the first place. One could argue that the Feds should act the same way, but they have Helicopter Ben on patrol!
— Matt C · Aug 12, 08:30 PM · #
The federal government could just give money to the states. They’ve been doing that (via the stimulus bill) now that the Democrats are in power again, but they could give more. Or, some things that receive funding at the state level could be funded more at the federal level, especially things (like Medicaid) with costs that are pro-cyclical. States could also set aside “rainy day funds” during boom times so they have a cushion for the downturns; instead they tend to ratchet spending up and taxes down, which is popular at the time but leaves them with a budget that plummets into the red as soon as the economy turns bad.
— Brad · Aug 13, 01:09 AM · #
You could do something like have a federal trust fund for the states that kicks in given certain economic conditions. A sort of forced savings account.
— Dero · Aug 13, 03:47 AM · #
Let me add to that so I can distinguish myself from Brad a bit. It would be more ideal to have something that’s divorced from the political process. Because right now we can give money to the states, but that raises moral hazard issues. We don’t want states to think the national government will bail them out of any situation. There should be something that kicks in independent of state or federal legislative action.
— Dero · Aug 13, 03:52 AM · #
Giving money to the states is pretty much the same as eliminating the states as states and turning them into administrative districts of the federal govt. Not that this hasn’t happened to a great degree already. As in the case of GM, power is transferred to the ones providing the money.
We need real states more than ever — to protect us from things like “coordinated action”.
— The Reticulator · Aug 13, 04:45 AM · #
“Giving money to the states is pretty much the same as eliminating the states as states and turning them into administrative districts of the federal govt.”
The problem is not that the federal government issues grants to the states. The problem is that these grants have stated purposes and conditions attached which distort the expressed preferences of states and localities as collectivities. A straightforward subsidy to each state, county, and municipal government distributed by a formula taking into account population and per capita income and carrying NO conditions would serve to allow poor areas to provide public services in quantity and quality close to national means without abnormal levels of taxation and diminish political pressure to socialize the provision of certain services by transferring responsibility to higher levels of government. We could also provide for an additional increment to this subsidy to particular governments in times of severe recession, transfer the provision of ‘automatic stabilizers’ (e.g. unemployment compensation) to the federal government, and set up by interstate compacts elected regional authorities to handle a selection of issues that might benefit from the co-ordinated policy of several states. There are ways around these problems which do not involve augmentation of the central government.
— Art Deco · Aug 13, 12:54 PM · #
The US government has bond ratings too, and far better ones than the individual states do. For example, Moody’s and Fitch (the two companies mentioned in the California bond rating piece) both rate US Treasury Bonds as AAA, their highest rating. Just sayin’
With that sayin’ said, hell yeah to getting rid of states. The problem with having a federal system with states is that there’s freaking 50 of them; obviously they’re going to be treated as nothing more than administrative districts by the federal government. Instead, since we’ve ideologically sorted ourselves into 5 or so regions (Northeast, South, North Midwest, Southwest and West Coast by my count*) any way, we should just make it official and set up a EU-style confederation between those regions.
* In this plan, of course, Hawaii becomes part of the West Coast and Alaska becomes part of Russia. See ya Palin; don’t forget to write.
— Bo · Aug 13, 06:45 PM · #
“obviously they’re going to be treated as nothing more than administrative districts by the federal government.”
Obviously to whom, and why?
I would point out that New Zealand is an affluent country (though one with a per capita income considerably lower than the United States) and (if I am not mistaken) produces the full portfolio of public services and subventions that people expect from modern government. It is a member of no supranational body like the European Union and is fairly isolated out there in the Antipodes. It has a population of just north of four million and its principal metropolis has in it 1.3 million people, a bit smaller than greater Kansas City. About three quarters of the population of the United States live in states which meet these two demographic criteria. I think there is considerable margin for devolution in this country.
— Art Deco · Aug 14, 12:15 AM · #
There is no such thing as a subsidy with no strings attached. It cannot be done and has not ever been done in the course of recorded human history. This is true whether it’s the government paying for auto subsidies, health care, or state revenue sharing.
— The Reticulator · Aug 14, 12:42 PM · #
What funded and unfunded mandates must my mother fulfill when she receives her Social Security check?
— Art Deco · Aug 14, 01:23 PM · #
That’s the same Moody’s that gave the go ahead to invest in sub-prime mortgage backed securities. Just sayin..,
— jd · Aug 14, 10:49 PM · #
Art Deco: What funded and unfunded mandates must my mother fulfill when she receives her Social Security check?
I suppose that’s about as close to a good counter-example as you can get. Some subsidies are prone to more corrupt controls and meddling than others, and this one is a little better than others. Some points:
The left likes to maintain the fiction that SS isn’t a subsidy — it’s an insurance program. But it takes the money and invests (aka spends) it on politicians you might not approve of. You have no choice. I suppose you could call that a string that’s attached. Peter Ferrera’s book on the subject (which I found by googling for “social security strings attached”) certainly does.
It does use the payouts to maintain a certain degree of social control. It keeps oldsters out of the labor force by making the money conditional on their working only limited hours.
Before any election you’ll have people writing letters to the editor: “Vote for Congressman Stringy. He helped grandma get her Social Security.” Any time you have to call up your Congressman to get your entitlement, there are implied strings attached. Not many people are going to call up their Congressrep and say, “Hello, I need help from Congressman Stringy. The SSA won’t give grandma her Social Security. My name is Agnes Agitator. The Congressman may remember me. I’m the person who writes weekly letters to the editor accusing him of corruption and fraud.”
Then, after you get Congressman Stringy’s assistance, if you REALLY want to see some excitement, have Grandma speak out in public advocating the privatization of Social Security. It’ll be like the townhallers who denounce Medicare recipients for advocating that the government has no business getting involved in health care. These people expect Social Security and Medicare to buy your political views, and they get very angry if you don’t stay bought.
— The Reticulator · Aug 15, 12:40 PM · #
Re the update: I think Free Exchange is kind of missing the point. First, bonds are debt, and California has quite a few of those outstanding, and second, since state debt and federal debt are owed by the same people, it’s not quite as simple as California -> Canada. If California had 60% of GDP in debt, Californians would have more like 120% of GDP worth of public debt. With the added caveat that anyone could escape half that debt just by moving to a different state. Not exactly a recipe for a good credit rating.
For some context, Vermont is the only state in the union without a balanced budget requirement, and they have an excellent credit rating (Aa from Moody’s) . Their public debt is currently around $500 million, or ~2-3% of their GDP, which is very close percentagewise to CA’s outstanding bonds. The big difference is that CA has a patchwork of Clean Water Bonds and Stem Cell Bonds and Economic Recovery Bonds and the like, mostly passed by ballot measure, and Vermont just issues Vermont Bonds.
PS Art, I was speaking about the absolute number of states, freaking 50, rather than their individual sizes. I have no doubts that many of the current states would do just fine as independent countries (Texas and Hawaii were before joining the US, IIRC), but making the US into 50 independent countries turns a government into a bickering United Nations. I was just noting that having just 5 or 6 might help it only become a bickering EU or United Kingdom instead.
— Bo · Aug 15, 03:53 PM · #
Reticulator, as far as I can see, your comment is non sequitur. People can have trouble with public bureaucracies like the Social Security Administration for all manner of reasons, for some of which they are culpable. The staff of the Congressman can and does act as ombudsmen for these people. A Congressional aide offered to me a summary of what is usually going on (his examples were drawn from the activities of the Consular Service): 1. the agency in question is following its usual pace and procedural rules of thumb and an acute problem is for these reasons being addressed at such a pace as the problem is being exacerbated; 2. the agency in question is allowing people to bear the full consequences of folly and that for reasons of equity, this just is not right. Yes, this sort of ombudsman’s work gets the member of Congress votes; it is also useful for the common good. It does not dictate to my mother how she spends her check.
We had from 1972 to 1980 a federal program of unrestricted subsidies to state and local governments called ‘General Revenue Sharing’. It was allowed to lapse while ‘grants-in-aid’, ‘categorical grants’, and ‘bloc grants’ up the wazoo were left in place. The U.S. Congress should stick to its last and leave subordinate layers of government to do their work unimpeded; the U.S. Congress does not do this because they just don’t feel like it.
My concern as expressed is that the states are being manipulated and allowing themselves to be manipulated. A way to correct that problem is to remove some of the incentive to socialize public services by providing subsidies to states which are less affluent and to stop manipulating the states and localities by taking the conditions off. That may be, given the sociology and psychology of legislatures, unlikely. It is not a physical or logical impossibility. As long as states and localities are being jerked around by superordinate governments and by judges, accountability for stupid public policies is impossible for even informed voters to assess. The operations of your local public school are a fine example of this. Ditto county welfare departments here in New York.
Bo, Water rights are not much of an issue where I live, and that may explain why I see little evidence of states bickering with each other. What I believe I do see is local politicians evaluating their performance by how much swag they can grab from above, state and federal legislators manipulating local authorities because they do that like other people breathe, professional cadres in local agencies using the pretext of federal funding to implement policies which run against the grain of local vernacular opinion, professional cadres in superordinate agencies in cahoots with these locals, &c. I also see quite a number of states which have inhomogeneous components with one component demographically dominating the others (a problem in Illinois, Maryland, Massachusetts, New Jersey, and New York). I do not think the number of states is all that important, but how the boundaries are drawn.
— Art Deco · Aug 15, 05:42 PM · #
Art, if my post was a non-sequitur, then I hope you will take a large part of the responsibility for the dissequiturization. I said there can be no federal funding without strings attached. You replied with a comment about mandated spending — which while not totally irrelevant to my point about strings — is hardly the only type of control that is attached to subsidies. So I brought the discussion back to the type of strings that are attached to SS, and you accuse me of a non-sequitur. That’s hardly fair, is it?
This is a really, really important issue. It’s important to get it right.
— The Reticulator · Aug 17, 06:43 AM · #
Mr. Deco, you seem to advocate giving extra subsidies to states that are less affluent. You didn’t say people who are less affluent, but states that are less affluent.
If you give the money to a state with no strings attached, they can then give the biggest share of the money to the richest people in that less affluent state, either under the guise of helping the poor or under the guise of helping the rich. It doesn’t matter, because one way or another it’s usually the well-off who end up with the loot, just as with foreign aid.
That will result in a public outcry, in which case it will be necessary to attach strings to the subsidy, as there should be. There will be demands for some sort of accounting, as there should be. In other words, there will be strings attached.
But politicians don’t like to give out money on clear, easily understood terms because it deprives them of all the benefits that derive from ambiguity — when lobbyists have to come, hat in hand, to get the regulations written or interpreted to favor their constituencies. That translates at the very least into favors owed which get paid in the form of campaign dollars. Politicians like that to happen, therefore they prefer subsidies to be complicated rather than simple to administer.
— The Reticulator · Aug 17, 11:35 AM · #
These people expect Social Security and Medicare to buy your political views, and they get very angry if you don’t stay bought.
— jordan 6 rings · Aug 19, 12:33 PM · #