There seems to be no consequence, and indeed a reward, for unsustainable spending growth by states. In effect, sending $150 billion more to states would produce another layer of moral hazard – already laid bare at the corporate, individual and federal levels in recent years. Corporations like CountryWide overleveraged their resources on risky loans as American banks increased their stake in subprime mortgages from only 5 percent in 1994 to roughly 20 percent in 2005. At the individual level, some people bit off more mortgage than they could chew, with Americans’ house price-to-income ratio jumping from 4-to-1 (where it had hovered for 30 years) to 8-to-1 in 2006, and over 40 percent of first-time homebuyers in 2005 not making any down payment at all. Nationally, the federal government stepped in and offered a solution that presented more risks than the problem it addressed: namely, not allowing certain companies, and even certain citizens, to fail. Yet capitalism was and is predicated on this idea of risk, and the chance for success and failure.
Bloomberg News columnist and author of The Forgotten Man Amity Schlaes points out that the taxpayer is the forgotten man in this equation – and you and I and all our constituents are put on the hook for more and more liabilities, many of which will certainly be passed onto our kids and their kids after them. On both a rhetorical and practical level, I’d ask you what happens when the federal government, indeed our nation, needs a bailout? Who bails out those who’ve bailed out everyone else?
Third and finally, I believe there are far better paths, albeit some less traveled by, to take than going and borrowing more money from the Chinese – whom we owe over an estimated $1.3 trillion plus already – to spend even more taxpayer dollars in a desperate attempt to catalyze a souring economy.
First among these preferable paths would be giving states relief from unfunded mandates – which have cost the fifty states $131 billion over the last four years, and my home state specifically around $500 million. These mandates include Real ID with its long-term $10 billion price tag for states, increasing the minimum wage costing states $200 million this year, No Child Left Behind’s $12.3 billion burden this year, regulations related to prescription drug plans that will cost states $95 million in 2010, bio-terrorism upgrades costing $167 million this year, and reductions in Federal Food Stamp funding costing states $200-300 million annually.
Regular readers will recall that Mark Sanford’s fiscal responsibility has worked better for South Carolina than the borrow and spend model of Governor Rendell for Pennsylvania.