« BACK  |  PRINT

RS

FRONT PAGE CONTRIBUTOR

Robbing Peter To Pay Peter

Bailing Ourselves Out

So Charlie Rangel and other New York Democrats want a federal bailout for state and local governments:

“Our hope is that the leadership of both parties will be able to confer and come back after the election, and see what we can do to provide assistance to our local and state governments, as we have been able to do for our banking and finance industry,” Rep. Rangel said at the outset of a committee hearing Wednesday on stimulus discussions.State governors and local officials testifying at the hearing put forward to lawmakers a wish list worth tens of billions to help shore up their finances. Their argument: we didn’t create the financial mess, and we need Washington’s help to get out of it.”The failure of our federal regulatory system has caused too many innocent bystanders to suffer,” said New York Gov. David Paterson at the hearing. “Just like the financial services industry, we need a partner in the federal government in order to help stave off an impending calamity and stabilize our fiscal condition.”New York faces a $47 billion budget shortfall over the next four years, and it is far from alone as states face unprecedented expenditures even as the economic recession shrinks their revenues.

This is nonsensical.I was a grudging supporter of the Paulson Plan (a/k/a the “Wall Street bailout”) on the theory that it was absolutely necessary at the time as a policy matter to restore confidence and liquidity in the financial markets, which have ripple effects for pretty much the entire rest of the world economy. One of the main policy arguments in favor of the Paulson Plan was that it was relatively minimalist and not really going to be a long-term money-loser for the government. One of the sounder political arguments against the plan was that casting it as a “bailout” of the unpopular financial industry would lead to a long procession of pretty much everybody else coming to Washington to ask to be bailed out of whatever was ailing them, at large expense and without any analogous hope that the taxpayers would get their money back. This has come to pass quickly, and the Rangel proposal is its reductio ad absurdum. Consider:

Q: Why Does New York State Need A Bailout?

A: Because it can’t pay its bills.

Q: If New York Does Not Cut Spending or Get A Bailout, How Will It Pay Its Bills?

A: Raise state/local taxes on New York taxpayers.

Q: So, Who Will Pay New York’s Bills If There Is A Bailout?

A: Federal taxpayers.

Q: Aren’t Those The Same People?

A: Basically, yes. If states and cities aren’t bailed out in equal proportion to the tax money they send Washington, then it’s not precisely the same, it’s a “spread the wealth” transfer. So it’s possible that New York will get to soak the taxpayers of some other state, especially with Rangel chairing the committee; then again, the high cost of living in NY means that the state’s taxpayers generally pay a high per-capita share of federal taxes and will pay a much larger share if Obama gets in and passes his tax plan. But in the aggregate, the burdens of state and local taxpayers are being relieved by … those same taxpayers’ federal tax dollars.

Q: What Is The Purpose Of This Shell Game?

To diffuse responsibility. If Gov. Paterson or Mayor Bloomberg raises taxes or cuts spending, they take the blame. But if the same dollars get laundered through the colossal federal budget, it’s easier for the impact to get lost. The purpose is thus to ensure that taxpayers do not directly see where the money is coming from, and get to imagine that somebody else is paying it.

Of course, they could consider cutting spending. Presumably Gov. Paterson is asking for help because he has wholly eliminated non-essential spending from the New York State Government, right?

Obviously the other way to do this is, have the federal government use borrowed money, since the feds can borrow at a lower rate and with fewer state-law restrictions on borrowing. But the accountability point stands. Politicians should not spend money they can’t afford to raise from their own constituents.

Get Alerts