The great state bailout swindle

When it comes to federal spending, it easy to become numb to numbers: $180,000,000,000 to AIG; $150,000,000,000 to Fannie and Freddie; and now $26,100,000,000 to bailout the states (on top of an earlier $53,600,000,000 state education bailout described an “historic,” “temporary” and “one-time appropriation” way back . . . in 2009).  All those zeros start to run together pretty quickly.  And when the federal government is running a year-to-date deficit of $1.2 trillion, isn’t another $26.1 billion practically a rounding error?  Horrifyingly, yes.  But the latest state bailout is a particularly flagitious swindle that deserves your attention.

Fundamentally, the notion of states seeking a handout from the federal government is a constitutional perversion.  We are not dealing here with private corporations or citizens, but sovereign states with the authority to raise revenue (through taxing and borrowing) and the power – nay, duty – to control the way that revenue is spent.  If a state faces a budget shortfall, it is a self-inflicted problem and its government has no right to shake down the citizens of neighboring states to redress its improvidence.

Imagine that your neighbor leased a Ferrari, wore bespoke Milanese suits and used 25 Year Old Macallan as mouthwash.  Then one day, after losing his job, he strolls over to your house and asks you to pay half his credit card bill.  You would be forgiven for shutting the door in his face (frankly, you’d be forgiven much worse).  Now imagine he comes round with the local constabulary and they demand that you pay his tab.

That’s the state bailout if you are a citizen of Montana, North Dakota or one of the other states that bothered to keep clean fiscal house.

Worse, the bailout actually singles out one state for punishment precisely because that state took sensible steps to protect its budget.  In 2009, Texas committed an unpardonable affront to the ghost of Keynes by using its share of the federal education bailout to create a rainy-day fund against future financial crises instead of increasing spending.

In response, Congress has included a provision in the new bailout that requires the governor of Texas to provide “assurance” that Texas will not reduce spending on education in the next three years.  As the education budget is set by the Texas legislature and not the Statehouse, this is a promise the governor is constitutionally prohibited from making.  As a result, Texas may be forced to forgo its $800 million share of the bailout.

Meanwhile, as even the Washington Post has noticed, the bailout provides the rest of the states with additional education funds whether they need it or not.  Maryland, for example, which has no plans to lay off teachers for the coming school year, receives a $179 million windfall to spend on hiring more teachers or raising existing teacher salaries.  In other words, Texas is punished for past prudence, while Maryland is bribed to increase public spending.  Is it any wonder we are in an economic crisis?

On a technical level, the bailout is a budgetary fraud.  Under the terms of PAYGO – the (mostly theoretical) requirement that new federal spending be paid for out of existing funds – Congress was obliged to identify cuts in other federal programs to finance its largesse.  In this case, Congress “paid” for the bill by “rescinding” amounts previously allocated to defense programs and food stamps.