Feb

Obama: More Bailouts for Bankrupt States

Question: If you are the overspending father of a family of 5, and your rich uncle keeps paying your bloated credit cards bills, will you ever tighten your belt? Will your habits ever change? Will you ever decide that you can live without a new pair of hi-def speakers?

Now let’s depersonalize the situation: You are a governor with constituents, minority (in the strict sense of the word) interest groups, lobbyists, and legislators knocking down your door. Each group is dependent in one way or another on your state’s funds; for subsidies (business), for living expenses (pensioners, sick and elderly), re-election (state legislators). For the past decade you and your predecessor have approved one huge budget increase after the next, able to borrow on the cheap thanks to historically low interest rates and fat tax revenues. In doing so, you’ve run up quite tab.

But in the last few years, since the Great Recession took firm hold, although interest rates have remained at historic lows thanks to the Federal Reserve, your tax base has eroded, your state is facing 12% unemployment, and unemployment insurance outlays have tripled. Still in place are the subsidies and so-called social welfare programs, which cost a bundle. But the day of financial reckoning inches nearer with each new spending bill, and chatter among the financial classes points toward substantially higher interest rates sooner rather than later.

Unlike your fat cat uncle, whose own 401K is vulnerable with the rest of the market, our Federal government has essentially no firm limit to its spending. It’s true limit is how much power it can project in world affairs. Until high ranking officials see diminishing returns on their oversees… err, let’s call them “investments,” debt will not be their focus. If debt becomes problematic in the meantime, the Federal Reserve, ever eager to fire up the printing press, can monetize it. Thus, direct financial connection to the Federal government coupled with an accommodating President and Congress who never say “No” results in governors only delaying the inevitable.

Fox News reports:

Rising unemployment has placed such a burden on states that 30 of them owe the federal government $42 billion in money borrowed to meet their unemployment insurance obligations. Three states already have had to raise taxes to begin paying back the money they owe. More than 20 other states likely would have to raise taxes to cover their unemployment insurance debts. Under federal law, such tax increases are automatic once the money owed reaches a certain level.

Under the proposal, the administration would impose a moratorium in 2011 and 2012 on state tax increases and on state interest payments on the debt.

This move only perpetuates the charade that you can enact wide ranging government programs without increasing taxes. As attractive as this sounds to a voter, it’s a cruel deception. The debt piles up at the national level, where it has recently broached $14 trillion. The matter really cuts to the heart of the argument for limited government, in which tax dollars are used in defined ways that are relatively fixed in constitutions.

Your uncle has cut you off. You still owe huge sums of money. There are two modes of action which will enable your to more effectively service your debt – reduce current consumption (i.e. send less money away) or get a raise (i.e take more money in).

Any government has parallel choices, with one caveat. Like you, it can cut spending. This is straight forward. But in terms of getting a raise, it has two methods: either it can raise taxes, or it can expand its tax base by “growing” the economy.* If it raises taxes, it runs the risk of chasing business away. Why not set up headquarters in Singapore, or Europe, or China? There are many attractive options, and as margins migrate to more accommodating countries, so does business.

States can increase taxes in an attempt to give themselves a raise and close budget gaps, like Illinois recently did - by 66% for some – but they run the risk of chasing away residents, or having those residents move their money into (mainly non-productive) tax shelters, such as municipal bonds and real estate.

The best way to reduce budget deficits, like the best way to lose weight, is to consume less. For states, this means slashing budgets. 30 states will learn that lesson. But this new talk from our Federal government assures it will be learned later rather than sooner.

*”Growing the economy” and any metaphor which conflates providing a stable political environment in which business can flourish and assigning to government the role of business proprietor is tragically misleading. Business is not a function of government but the private sector. Governments, to the extent that they encourage business at all, provide safety, a strong legal code which respects private concerns, and oversee the orderly transition of one government to the next while keeping taxes low. Regulations, price controls, subsidies, special incentives, and redistribution overwhelmingly tend only to stunt business growth and discourage personal initiative.

This post and the contents thereof are the views of only the author identified immediately above and do not necessarily represent the views of the New York Young Republican Club, Inc. (the "NYYRC"), its officers or its members. The NYYRC expressly disclaims responsibility for the contents thereof and by its charter documents may not, and does not, endorse any candidate for any office, except in a general election.