Stimulate Federalism Instead
by George Liebmann
Issue 126 - February 18, 2009

Most people support the need for a temporary economic stimulus. The sharp contraction of credit, largely the product of derivative financial products and mortgage and credit card pools whose value is overstated or indeterminable has had immediate impacts on the real economy, with large layoffs, a continuing fall in consumer confidence, and concomitant reductions in corporate profits, corporate investments, American imports, and the long-term willingness of foreigners to invest in the United States and maintain the value of its currency. A purely top-down system of relief based on the propping up of large banks, however, rewards the irresponsible, may not necessarily enhance or maintain consumer demand, introduces economic distortions based on attempts to direct the lending activity of banks, and may produce monetary inflation.

One consequence of layoffs and falls in retail sales are declines in state and local tax revenues. The states lack capacity to print money and are constrained by balanced budget amendments; some of their leaders have joined in premature cries for relief of their condition.

At this point, however, most states are crying before they are really hurt, and are turning to federal assistance as a way to avoid necessary rationalization of their tax systems, employee benefits, and systems for support of both incomes and infrastructure. There are dangers that the relief package will confirm and extend bad habits, while leading to a permanent dependence on Washington and the creation there of a new Versailles, the court of a Sun King.

Most states have seriously bloated public pension and retiree health benefit systems, the dimensions of whose deficits are in the process of being revealed by the adoption of new government accounting standards. A federal bail-out relieves the need for rationalization, and allows the states to continue to be increasingly choked by the demands of their own bureaucracies.

The states continue to rely on the gasoline tax for transportation funding; federal relief relieves any incentive to adopt tolls and congestion and time-of-day pricing. Federal matching funds are relied upon for mass transit improvements, not the land grants and excess condemnation that built the American railroad system. Southern and border states maintain redundant and expensive systems of ‘traditionally black’ state colleges with lamentable academic standards and huge dropout rates. They also maintain numerous and large colleges of education to mis-educate the teaching force, and bloated central offices for education. ‘Distance learning’ is underdeveloped, there being no bureaucracy to politically sustain it. Massive fringe benefits, rather than the elimination of barriers to entry and the creation of differentiated pay scales are relied upon to attract teachers. School administration, again under federal influence, is ever more massive and centralized

State systems of business taxation are prehistoric, relying on business personal property taxes that only lightly touch service businesses; corporate income taxes, which have the same defect; and sales taxes, in the process of erosion from interstate internet sales. Few states have followed the example of New Hampshire in adopting a broad-based and mild business enterprise tax which recognizes the existence of a service economy.

The states, thanks to the Rockefeller drug laws and a perverse federal drug policy making the criminal law the method of first resort and thereby stifling state experimentation with testing and treatment systems of control, have bloated and expensive prison systems, and underdeveloped probation systems. Their strategies for care of the elderly, also distorted by federal matching funds, involve the massive over-use of Medicaid nursing homes, and the neglect of measures to stimulate accessory housing and home and family care. The emphasis in all things is on large and expanding bureaucracies, to the neglect of the possibilities for co-production and volunteer service associated with local control

A careless bailout will insure that these facts are not faced. The House bill contained three billion dollars for discretionary grants to local law enforcement, giving the national government an influence in local policing it should not have, together with another billion for ‘community policing’, not a magic panacea. Worse still, it contains two massive annual tranches of $39.5 billion each, to supplement current expenses of state governments, subject to the restriction that current state efforts be maintained, the funds to be divided 39% for public safety and 61% for education. This insures the massive expansion of existing, unreformed bureaucracies which will be difficult to trim to reasonable size should federal funds be withdrawn: permanent expansion of the state public sector regardless of need or efficiency. Its bias is betrayed by the next-to-last provision in the bill, one barring the states from using new federal monies for education vouchers.

What should a sensible stimulus bill contain? It should provide temporary appropriations to build new capacities and institutions. Improvement of the national freight and passenger rail network is a sensible object, as is the rationalization of the nation’s power transmission and communication systems. The endowment of new institutions, like Britain’s Open University, to stimulate distance learning is a plausible object, as is the endowment of new public broadcasters with independent boards. So are measures for soil conservation, flood control, and perhaps another look at portions of the Roosevelt administration’s proposals for a Missouri Valley Authority and at proposals for new national parks. The endowment of state science high schools and institutions for intensive language training might be considered. If appropriations are to be useable for current as well as capital state expenditures, these should be focused on science and math education in high schools and related salary and training supplements, one area of clear present under-investment.

Others are more competent than this writer to assess the special provisions for housing, health, energy, and science; many of the provisions of the House bill contain indicia of having been written on K Street and smack of ‘industrial policy’, and one constructed without benefit of neutral expertise. These can easily morph into the sort of ‘crony capitalism’ that has been the curse of Russia and of Mexico. Hayek’s principle of “uniform rules laid down in advance” is a good rule if temporary relief programs are to be reconciled with a system of regulated capitalism.

But decentralized government is an American custom worth preserving and fostering. A sensible stimulus package would aim at doing so, not at nurturing the worst tendencies in American state and municipal government.

The writer is the volunteer executive director of the Calvert Institute for Policy Research in Baltimore.