State Governments? Qui(e)t Your Panhandling

Sun, 16 Nov 2008 13:28:31 +0000

Continuing the series (with a one-letter modification), we have some unabashed appeals from state governments for an infusion of funds from the federal government, as reported in this article in The Washington Post:

"I believe that the crisis that is happening in the states needs to be elevated in the national discussion about restoring our economy," said California state Assembly Speaker Karen Bass (D). "California is the world's sixth-largest economy. And just as we cannot let the auto industry fail, we can't let the state of California fail."


New York Gov. David A. Paterson (D) has urged federal assistance, telling Congress in recent remarks, "We are cutting all we can, and we will cut all that we are able to, but inevitably, the deficit is too voluminous for us to address."


California Gov. Arnold Schwarzenegger (R) also demanded federal action, blaming the subprime mortgage crisis for the economic downturn. "Government is really at fault, and this is why government has to get us out of this mess now and figure out very quickly how to get us out of it," he said. "And I'm talking about Washington."

While the rhetoric is overblown, I do have some sympathy for the states in this case, more so than the financial or automotive sectors.<!--break--> States are limited in the extent to which they can run deficits in hard times. States are also responsible for Medicaid expenditures, which rise in hard times, and education, where cuts today could have long term ramifications for economic well-being.

Still, that doesn't mean that the state governments should be relieved of their obligations. These areas are within their purview, and there is no indication in the article that the states have acknolwedged their role in creating their shortfalls, i.e. not raising local taxes enough in the good times to cover shortfalls in the harder times. The federal government is under no obligation to pretend that these added requests were part of its obligations all along.

As a proposed solution, the federal government could lend, not give, money to the states to help them get through the downturns. Further, the rate of interest on the loans could be at above, not below, market interest rates. The interest rate certainly should not be -100%. The U.S. taxpayer might actually be able to make a buck on the transaction.

As an aside, there are a few quotes in the article in which California and New York governors (or their spokespeople) are suggesting that since these states pay more to Washington than they get back each year, this request really is just to get their money back. I'm curious about this claim. First, how does it deal with public goods like national defense, which is one of the things the federal government has to spend money on and which flow back to no particular state? Second, am I to now understand that these governors of solidly Blue states would like to do away with the progressive income tax and the welfare state to the extent that it redistributes from high-income states to low-income states?