Should Government Bail Out Government?

Despite the unanimous rejection of the so-called “stimulus” bill by House Republicans last week, many Republican governors (as well as Democrats) are lobbying for the overall passage of it. What’s the reason for this? The stimulus package sends about $150 billion to the states to compensate for current budget shortfalls. This raises a surprisingly fundamental question: Should federal tax dollars – or borrowed/printed money – be used to bail out state governments that can’t control their budgets?

In essence, should the government bail out the government? It sounds like an obscure riddle, doesn’t it? Fortunately, it is not.

The inefficiency of one institution should not be the basis for soliciting help from another equally inefficient institution. This is exactly what we are seeing from our deteriorating state governments. But just how bad is the fiscal incompetence?

The average annual revenues (receipts) to our federal government between 2003 and 2007 were approximately $2.16 trillion. However, the federal government spent an average of over $2.46 trillion dollars each year. That’s about 20% of our average annual gross domestic product over the same period. During those five years, the government averaged an annual deficit of $300 billion.* Many of the state governments have exhibited an equally unsatisfactory performance and are now asking for more money – from all United States citizens, not just those who live in their state – to reimburse them for an absence of fiscal responsibility.

So, should our inept federal government take money out of the pockets of every American and give that money to the inept governments of the individual states? And if they do, could we reasonably expect that these actions will “stimulate” the economy? Since most of that money is actually being printed, not confiscated or borrowed, we should worry that a state bailout will unnecessarily contribute to severe inflation, further dragging down our economy – all for the inevitability that the state governments will effectively waste their federal hand-outs as they do with their annual state revenues.

Those arguing for the state bailout claim that if the federal government does not provide the 150 billion dollars to the states, then the state governments will have to raise taxes in order to offset their budgets. But this argument simply defies logic – and economics.

We know that raising taxes in a slumping economy makes it worse. Raising taxes during a sharp recession for the purpose of increasing government revenues is just plain stupid. Any governor or state congress that advocates such a plan ought to be roundly criticized and thrown out of office as quickly as possible. These politicians are precisely the reason why the governments they operate are failing in the first place. They have no economic sense and they should not be drafting fiscal policy.

The governors that make such wild claims are actually conceding some very important facts about economics in general. First, they acknowledge that raising taxes is neither preferable nor is it conducive to economic growth. As a corollary to this admission, they recognize that low tax rates are in fact essential for economic growth. Why they can’t figure this out on their own and lower their tax rates at the state level is quite confusing and frustrating to witness. It’s almost as perplexing to watch these governments pile up extraordinary debt and not recognize the correlation to it and their failing institutions and economies.

Cutting taxes will help stimulate a faltering economy. This fact has been proven repeatedly throughout our contemporary history. We don’t need historical analysis from centuries past or fantastical economic theories that are bandied about in Ivy League universities to show us that. But tax cuts will not solve all of our problems. A large portion of this current dilemma we face is a result of overwhelming public and private debt. Debt spending will only hurt the economy in our current situation.

Acquiring additional national debt in order to give states more money to spend, instead of forcing them to cut wasteful spending on their own and alleviate the pressures on their economies from their fiscal irresponsibility, will only push us further down a path we don’t want to be on.

So, to solve the conundrum: No – the federal government should not bail out any other government. It is neither a constitutional obligation nor is it appropriate to use federal dollars for state needs. The purpose of the stimulus is to give the economy a quick boost in order to prevent a deeper recession or depression. Giving billions of dollars to poorly managed state governments will certainly not contribute to an economic turnaround, and thus, we should not allow it to happen.

If the states want to solve their budget crises, they need to do so within their state legislatures and with the consent and the taxes of their own citizens. Our federal government has enough of its own problems to solve.