Thursday, June 16, 2011

Leave it to the States?

Mitt Romney had an interesting moment in this week’s debate. When asked about the role of the federal government he said that the government should ask itself what it must do, and then leave the rest to the states, or even better the private sector. Such a policy would improve the debt outlook for the United States.

Or would it? The federal government would benefit as it spent less money on priorities like healthcare, education etc. It would have to borrow less money. But the burden of debt would simply be shifted to the states. This is something the states can scarcely afford at this juncture. For example, the states have more than $1 trillion in pension and healthcare liabilities. And that’s just the beginning. California’s debt may be 37% of the economy. In order to save money, Hawaii instituted a four day school week last year. Asking states to carry an even greater burden would cause some to default.

Moreover, having states with such high debt loads is arguably worse than the federal government having one. The states do not have the same borrowing capacity as the federal government, and do not have the same respectability with foreign creditors who are doing a lot of the lending to America. This means the states can borrow a lower amount before they risk default, and that they may not be able to command as favorable an interest rate, thereby increasing their burden of debt. Since the United States consists of both states and the federal government, what happens in the state matters a great deal. So the country’s overall debt picture will likely not improve simply by telling the states to pay for more programs.

The way that shifting functions to the states would help the overall debt situation is if voters choose not to fund certain things at the state level. But remember that the biggest drivers of the federal debts are entitlements. As it happens, programs such as Medicare and Social Security are the most popular. Even if conservatives managed to outsource these to the states (unlikely), voters would probably choose to continue these benefits at the state level. On the margins, certain states might not fund certain environmental programs or discretionary programs, but again, those aren’t what is bankrupting us.

There may well be good reasons to leave more to the states. Saving money isn’t one of them.

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