NCPA - National Center for Policy Analysis

Jobs Bill Is a Bailout for States

September 26, 2011

The president recently urged Congress to pony up roughly $200 billion in taxpayer money to assist state and local governments in various policy areas, including infrastructure and education.  These vast contributions, though pitched as a jobs bill, are in reality the latest in a series of bailouts for debt-ridden state and local governments, and they are dangerous for several reasons, say Paul E. Peterson, director, and Daniel Nadler, a research fellow, at Harvard's Program on Education Policy and Governance.

First, the factor of partisanship is difficult to ignore when bailing out state governments.

  • It is difficult to ignore that blue states are having the greatest amount of trouble selling bonds in this economic environment.
  • According to a new study, a 20 percentage-point increase in either the Democratic share of the state legislature or in the share of the public workforce that is unionized drives up interest rates by nearly a half a percentage point on a five-year security note.
  • For this reason, many justly fear that a disproportionate share of state bailout funds will find their way to blue states.

Second, while states normally compete for potential investors, skilled workers and entrepreneurial talent through effective governance and good policies, federal bailouts reduce this accountability.

Third, while the federal government may be pretending in this case that state governments are too big to fail, the truth is that bankruptcy of state governments is not a new phenomenon.  

  • As far back as the 1840s when eight states went bankrupt up until the last state bankruptcy in 1930 (Arkansas), the federal government refused to intervene.
  • This precedent of respect for the fiscal sovereignty of states should not be forgotten, especially when it serves as a viable check against an ever-expanding federal government.

For these reasons, it is clear that treating states in the same way that the federal government treated General Motors is susceptible to bias and against the principles of federalism, among other things, say Peterson and Nadler.

Source: Paul E. Peterson and Daniel Nadler, "A Blue-State Bailout in Disguise," Wall Street Journal, September 16, 2011.

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