The shaky case for state bailouts
IN WASHINGTON, D.C., it’s common to hear that anyone who opposes the federal rescue of states experiencing budget issues due to COVID-19 has to be out of her or his mind. But if you choose to shed tears for these poor cities and states, let them be crocodile tears–as those are all this tale of woe deserves.
Consider a recent New York Times article,”With Washington Deadlocked on Aid, States Face Dire Fiscal Crisis.” The report informs us”Alaska chopped tools for public broadcasting. New York City gutted a nascent composting program which could have kept plenty of food waste out of land?lls….In Maryland, the Baltimore Symphony Orchestra will lose a $1.6 million state subsidy.”
These illustrations not only aren’t dire;they represent actions that the government has no business wasting taxpayer money on. Orchestras, for instance, overwhelmingly bene?t the wealthy. If a?uent Americans wish to enjoy the joy of live classical music, they should cover it themselves, fully and frankly.
In addition to the funds they receive from the federal government during routine times (around 30 percent of states’ budgets), local and state governments have already received enormous sums of money from Uncle Sam during this downturn. Under measures such as the Coronavirus Aid, Relief, and Economic Security (CARES) Act, they have hauled in $280 billion for assorted pandemicrelated expenses and another $150 billion to more ?exible”needs.” The Federal Reserve also established a $500 billion program to facilitate short-term borrowing from state and local governments.
Washington is nonetheless being urged to fork over more money because earnings streams for local and state governments have dried up. There is not any doubt that taxation revenue has taken a hit in this recession; most everyone’s revenue has. However, since the Cato Institute’s Chris Edwards noted in a September blog post, con?ating state and local government tax revenue paints a misleading picture of the situation.
“While state income and sales tax revenues have dipped, local authorities raise 72 percent of the tax dollars from property taxes, which can be climbing,” Edwards writes. “Property tax revenues were up one percent in the second quarter of 2020 in the ?rst quarter….Local tax earnings nationwide may not drop at all, because they didn’t fall in the last downturn.”
Furthermore, most analysts significantly overestimate the size of funding gaps faced by these states. According to the Congressional Budget O?ce’s federal earnings projections for 2020, Edwards estimates a”a modest $70 billion reduction from calendar 2019 country tax revenues of $1.09 trillion”
Even though they can not get more money, state and local o?cials say, their ?scal predicament could be enhanced when the already-distributed federal funds weren’t earmarked for COVID-19 expenses. To make their case, they cite an August report by the Treasury Department’s O?ce of Inspector General (OIG) that shows some nations have spent virtually none of the federal money they obtained. The Times reports that New York state”was sent about $2.9 billion that it can not place toward other uses.”
The argument for national funding ?exibility doesn’t hold water. It’s one thing for local and state authorities to ask the federal government for aid covering unforeseen expenses about the pandemic. But they shouldn’t need that national taxpayers pay for other state and local expenses, particularly when these governments have failed to plan appropriately for revenue shortfalls that come up in emergencies.
Governments should prepare for crises by cutting during ?ush times. If their rainy day funds end up being insufficient, state and local governments should seek the needed additional funds from their own residents. If those citizens really support the spending, they need to be inclined to cover it themselves.
That spending comprises the lavish pensions paid to state employees. Why should I, as a resident of Virginia, cover public employees’ retirements in poorly managed states such as Kentucky? Since the Times explains, Kentucky has among the most poorly funded public-sector retirement programs in the nation, and now it’s further diluting its obligations to the system. Meanwhile,”some, such as California and New Jersey, had lately committed to raising their contributions to cover beyond underpayments–but can’t a?ord to accomplish that.”
Supporters of federal bailouts state we should demand that countries reform their pension systems once we help them.
Unlike doctors, who are ethically obliged to help even patients that cause their own medical distress, the national government isn’t obligated to assist irresponsible countries in ?nancial distress.
Places such as New York state or Illinois have to be bailed out during each crisis, and then they inevitably don’t address the issue during good times. Rather than pruning their budgets, they increase spending between recessions.
The shaky case for bailouts is based on part on the thought, as the Times put it, that”state spending reductions could prolong the recession by vibration the con?dence of residents, whose day-to-day lives depend heavily on state and local services.” However, this claim springs from ?scal myopia. Someone, somewhere, someday should pay o? each of the debt the national government accumulates to be able to postpone short-term pain for most states.
At a recent paper released by the Mercatus Center, my colleague Jack Salmon and that I reviewed all of the published research since the last recession that looked at the effects of public debt accumulation. An overwhelming majority of these academic studies ?nd that debt slows economic development, only adding to the costs that will be paid by future generations. Putting aside concerns regarding the future, a sizable majority of the research that Salmon and that I summarized in a di?erent literature review discovered that one dollar of government spending during the past recession returned less than a buck in growth, even under the best circumstances.
Worse, systematically bailing out state and local governments produces a serious moral hazard, decreasing decision makers’ incentives to plan better for another recession. So the next time you hear a sad story about cities and states which must decrease composting programs, cheer up. The lesson will serve them well.