The Shaky Case for State Bailouts 

Governments should prepare for emergencies by cutting spending during flush times.


In Washington, D.C., it is common to hear that anyone who opposes the federal rescue of states experiencing budget issues due to COVID-19 must be out of his or her mind. Newspapers are running story after story about how, in the absence of such bailouts, state and local legislators are forced to slash funding for services. But if you decide to shed tears for these poor states and cities, 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 tells us: "Alaska chopped resources for public broadcasting. New York City gutted a nascent composting program that could have kept tons of food waste out of landfills….In Maryland, the Baltimore Symphony Orchestra will lose a $1.6 million state subsidy."

These examples not only are not dire; they represent activities that the government has no business wasting taxpayer money on. Orchestras, for instance, overwhelmingly benefit the rich. If affluent Americans want to enjoy the pleasure of live classical music, they should pay for it themselves, fully and honestly.

In addition to the funds they receive from the federal government during regular times (up to 30 percent of states' budgets), state and local governments have already received huge sums of money from Uncle Sam during this recession. Under measures such as the Coronavirus Aid, Relief, and Economic Security (CARES) Act, they've hauled in $280 billion for various pandemic-related expenses and another $150 billion for more flexible "needs." The Federal Reserve also set up a $500 billion program to facilitate short-term borrowing by state and local governments.

Washington is nonetheless being urged to fork over more cash because revenue streams for state and local governments have dried up. There is no doubt that tax revenue has taken a hit during this recession; most everyone's revenue has. But as the Cato Institute's Chris Edwards noted in a September blog post, conflating state and local government tax revenue paints a misleading picture of the situation.

"While state income and sales tax revenues have dipped, local governments raise 72 percent of their tax dollars from property taxes, which are rising," Edwards writes. "Property tax revenues were up one percent in the second quarter of 2020 from the first quarter….Local tax revenues nationwide may not fall at all, as they did not fall in the last recession."

Moreover, most analysts vastly overestimate the size of budget gaps faced by the states. Based on the Congressional Budget Office's federal revenue projections for 2020, Edwards estimates a "a modest $70 billion reduction from calendar 2019 state tax revenues of $1.09 trillion."

Even if they can't get more cash, state and local officials say, their fiscal predicament could be improved if the already-distributed federal funds were not earmarked for COVID-19 expenses. To make their case, they cite an August report from the Treasury Department's Office of Inspector General (OIG) that shows some states have spent virtually none of the federal money they received. The Times reports that New York state "has been sent about $2.9 billion that it can't put toward other uses." As of June 30, the OIG report says, New York state had spent just 53 percent of its federal bailout funds.

The argument for federal funding flexibility doesn't hold water. It's one thing for state and local governments to ask the federal government for help covering unforeseen expenditures related to the pandemic. But they should not demand that federal taxpayers pay for other state and local expenditures, especially when these governments have failed to plan appropriately for revenue shortfalls that arise in emergencies.

Governments should prepare for emergencies by cutting spending during flush times. If their rainy day funds prove to be inadequate, state and local governments should seek the needed additional funds from their own residents. If those residents truly support the spending, they should be willing to pay for it themselves.

That spending includes the lavish pensions paid to state employees. Why should I, as a resident of Virginia, pay for public employees' retirements in badly managed states such as Kentucky? As the Times explains, Kentucky has one of the most poorly funded public-sector pension systems in the country, and now it is further delaying its payments into the system. Meanwhile, "some, like California and New Jersey, had recently committed to raising their contributions to cover past underpayments—but now can't afford to do so."

Supporters of federal bailouts say we should demand that states reform their pension systems after we help them. They draw an analogy to an overweight patient who shows up at the emergency room after suffering a heart attack: Doctors will treat him first and lecture him second.

Unlike doctors, who are ethically obliged to help even patients who cause their own medical distress, the federal government is not obligated to help irresponsible states in financial distress. Places like New York state or Illinois need to be bailed out during every emergency, and then they inevitably fail to address the issue during good times. Instead of pruning their budgets, they hike spending between recessions.

The shaky case for bailouts depends in part on the idea, as the Times put it, that "state spending reductions could prolong the downturn by shaking the confidence of residents, whose day-to-day lives depend heavily on state and local services." But this claim springs from fiscal myopia. Someone, somewhere, someday must pay off all the debt that the federal government accumulates in order to postpone short-term pain for states.

In a recent paper published by the Mercatus Center, my colleague Jack Salmon and I reviewed all the published research since the last recession that looked at the impact of public debt accumulation. An overwhelming majority of these academic studies find that debt slows economic growth, only adding to the costs that will be paid by future generations. Putting aside concerns about the future, a large majority of the studies that Salmon and I summarized in a different literature review found that one dollar of government spending during the last recession returned much less than a dollar in growth, even under the best circumstances.

Worse, systematically bailing out state and local governments creates a serious moral hazard, reducing decision makers' incentives to plan better for the next downturn. So next time you hear a sad story about states and cities that have to cut composting programs, cheer up. The lesson will serve them well.

NEXT: Brickbat: Open Up Your Engines, Let 'Em Roar

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  2. I really hope the Republicans don’t give in on this one, even if the reckless states seem to include some red ones like Kentucky. Forget about the January elections; Georgia isn’t asking to be bailed out.

    Any additional bailouts should be modest, go directly to individual workers or households, maybe some businesses, and that’s it. No more money to governments. Anything other than that should get a firm “No” from the GOP. If it doesn’t, then I hope they get punished in January.

  3. Under no circumstance should a Team R Senate allow a blue state bailout. That idea needs to go to McConnell’s legislative graveyard.

    GA is a critically important election, for many reasons.

    1. Agreed. But if bailouts are going to happen, the R senate had better attach some serious strings, on both the spending and taxing side.

      I do think that they’ll eventually be bailed out, and I don’t want the Dems calling all the shots on that.

      1. The hard and fast answer to state bailouts must emphatically be: NO

      2. Just like how the Graham Ruddman Act cut spending forever?

        Any constraints will be ignored.

    2. If they allow it it would set a terrible precedent that states don’t need to be responsible. Agree, this can not happen.

  4. “These examples not only are not dire; they represent activities that the government has no business wasting taxpayer money on. Orchestras, for instance, overwhelmingly benefit the rich. If affluent Americans want to enjoy the pleasure of live classical music, they should pay for it themselves, fully and honestly.”

    Subsidiarity. If the citizens of a town or state decide to fund an orchestra or school or library, they are certainly in their rights to do so.

    “Orchestras overwhelmingly benefit the rich”? What a silly, irritating statement.

    The central government is the creature of the states. The only income it has it gets from the citizens of the states. Sometimes, when a fiscally responsible state hits hard times, it has to cut back on luxeries like fancy civilian-killing drones and White House Christmas trees and Virginia senators. Maybe that’s what Kentucky should do: stop federal income taxes at the border and use it to feed their starving citizens.

    1. ““Orchestras overwhelmingly benefit the rich”? What a silly, irritating statement.”

      The truth of this is not determined by your emotional reaction.

      1. Where have you been? We are decades into the era where “truth” is entirely based on emotion. Why do you think our esteemed elite institutes of higher learning teach grievance studies?

        1. Just because the “reality based community” and the trumpistas deny reality, does not mean I have to.

          I am a libertarian, I don’t care what the “top men” think.

      2. I stopped going because it was difficult to get a ticket with all the poor buying them.

        1. *My* problem is finding a place to park, what with all the musicians’ Rolls and Ferraris. And those darned ushers and ticket sellers, making their chauffeurs stay with their Bentleys!

          The opera is worse! Chorus and stagehands with their personal helicopters…

          Art is a good in itself. It is essential to being human. It is universal. Art is empathy. Without it, we’d all be Trump.

    2. Giving $1.6 million to the orchestra might be a debatable expenditure in lean times, but it’s insignificant next to the tens of millions handed to profitable sports franchises every time they bellyache that their current stadium or arena doesn’t have enough luxury suites that they can lease out to rich fans? Often this is financed via extra taxes on food and lodging that are paid largely by people of much more modest means than the team owners and players. Talk about welfare for the wealthy.

      1. My experience is that a large number of the boxes are rented to corporations to use for the marketing teams to court clients. Same function that hookers and blow served in the 80s.

    3. Federal student loan guarantees and student loan debt forgiveness overwhelmingly benefits the rich too, but the Dems love that.

  5. But blue states need to protect politicians and union pensions otherwise how do they get elected or enjoy retirement.

    This is typical of the left don’t do any heavy lifting just let someone else pay for it. It is why blue states are less charitable than red states,

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  7. Even Keynes said stimulus spending should be temporary, timely, and targeted. Too bad for us that statists forget all three in their rush to expand State power.

    1. Keynes gives governments the blank check for when times are bad.
      Krugman warns them not to cut back on the spigot when times are good.

  8. States with shaky budget situations should consider the disastrous impact of lockdowns, which are not supported by the WHO and haven’t been shown to reduce the spread of the virus. But they do cause a massive fiscal drain in the form of lost government revenue and personal hardship, pushing millions of people into the ranks of those needing financial assistance. Public health regulations do not have to entail shutting the economy down, and the idea that they do has been a disaster for public health (by creating backlash), the economy, and civil liberties.

    1. Anyone still supporting lockdowns is either evil or stupid.

      1. Or both

      2. People who support lockdowns have something else in common, as well: They have a job or other source of income that continues during a lockdown.

        I’m glad most people have moved beyond “stay home orders” but there are also many who haven’t. Now it’s often local officials who keep jingling the jail cell keys as a threat when numbers go up. We’re fortunate to live in the US where there’s a lot of pushback to this. In several other countries, people have no right to peacefully assemble. In Germany they get cold water sprayed on them if they step out of line and do protest lockdowns.

  9. “the federal government is not obligated to help irresponsible states in financial distress”

    Ha! The absolute, fundamental essence of the progressive bleeding-heart existence is to claim an obligation for all of us to help the needy, regardless of how irresponsible they might have been.

    1. And not just voluntarily to who we want. They are to take our stuff by force and give it to who they want.

  10. “Governments should prepare for emergencies by cutting spending during flush times.”

    Sure, and meth heads should ease up on using crank when their stash is flush.

    If government didn’t spend all they money it had, and more, what would they DO all day?

  11. If California and NY want to act like FedGov and spend irresponsibly, they should become their own countries and print their own money.

    1. Money is evil!

      People should just take what they want, and go to work because they want to contribute to the greater good.

  12. Not even going to bother reading the article – you’re asking politicians to stop acting like politicians, aren’t you? The state bailouts are happening unless Trump wins his battle on election fraud, and that requires Democrats to stop acting like Democrats and the scammers who set up the scam to renounce their scam. It ain’t even worth thinking about.

  13. Bailouts serve no purpose other than enabling those who make horrible financial decisions. It’s really no different than spotting your drinking buddy $100 every couple of months, except for in the case of the states it’s billions of dollars that are going to be thrown in the furnace.

  14. The real takeaway is that state governors shouldn’t issue overly broad shutdown orders that kill state tax revenues (and small businesses), without making matching cuts in state employee payrolls.

    California saw a 40% drop in tax revenues after the shutdowns (luckily a lot of highly paid people can work from home), but didn’t lay off any state employees and only cut their pay by 10%.

    Why is any of that a problem for citizens of the other 49 states?

  15. And it’s not as if Congress is sitting on a 10 trillion dollar pile of cash for emergencies either. They are 27 trillion in debt, and any bailouts just get added to the taxpayers’ tab.

  16. “residents, whose day-to-day lives depend heavily on state and local services.”” Maybe too many people are just too dang dependent on the State. Cut the cord!

  17. However, Reason’s preferred candidate, Joe Biden, supports state bailouts, and thus Reason does not really have a problem with these bailouts. And in the long run, destroying the independence of states through progressive wealth distribution is worth it because orange man bad.

  18. Inslee is all-in on the bailout, but using our chips to bet.

    We are not happy.

  19. This is sort of like curing an alcoholic by giving him more booze.

    Politicians get elected by giving away stuff not taking it away.

    Or the solution is relatively simple, states declare bankruptcy, turn the pension assets over to the PBGC, and the PBGC reduces benefits to level of the assets just like they do with private copmpanies.

    1. Should be private companies.

  20. Maybe some of the so-called “patriotic millionaires” who think their taxes are too low could take the money they think they should be sending to the government and putting it into a foundation that would fund all manner of causes that the government has no need to be funding, especially some of the more highly politicized spending that’s pretty much only good for energizing “base” voters and allowing various extremist pols to trade in claims that the presence of anyone in any office who their supporters wouldn’t vote for represent some kind of “existential threat” to human civilization writ large.

    1. Part of the problem here is that patriotic rich. These are often people who want to donate something worth to the city and of course have it named for them. While this is good it may also leave the city putting up money. The billionaire want to put up a new beautiful opera house. Catch is the city now has to fund an opera company and upkeep the property. It can do this in good times, but it get harder at times like these. It could layoff the opera company, but then its stuck paying the people unemployment. A better solution would be for the billionaire to build a smaller opera house and finance an endowment to fund operations for 100 years.

      What a city may really need is a billionaire willing to fund three new garbage trucks to replace three failing vehicles. This is harder to find.

  21. Dear Serfs (Citizens) — PLEASE send/allow MORE of your labor earnings to be STOLEN by Government!

    Sell your individual souls to [WE] mob slavery!!! It’s an Emergency!

    Oh, how I miss the USA instead of this USSA-Nazi-Camp we live in today!

  22. I like to point out that the Trump Administration came in during a good economy and with a cooperative Congress and did nothing to cut spending. Yes cut spending when economic times are good, not at times like this.

    1. “did nothing to cut spending” — Oh? What about all those EPA cuts the left was whaling on about? Which was at the top of a full list of cuts.

  23. Of course everyone, including the states, want FREE money. California wound up with more money than they were expecting this year, but of course we still want our Free Money. Republican states want it too! Everyone wants it, and after 4 years of Republicans spending like MoFos, can you blame everyone? 23 trillion! Fiscal responsibility is an adult virtue, and I do not think modern politics is very adult or virtuous. At the current rate, we are insolvent by 2050. Then the real bitching will begin.

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