Tag: state and local government

Republicans and Local Control

Jennifer Rubin, seeking to dispel “myths about conservatives,” takes on the idea that “the GOP doesn’t believe in community:

President Obama likes to say that Republicans want everyone to be “on his own.” In fact, conservatives, as Romney put it in a speech at Liberty University this year, believe family, communities, churches and other civil institutions are critical building blocks in society. They favor investing authority in the level of government closest to the people (locales and states), which they believe is most responsive and governs best.

That’s a nice theory, and it’s one that keeps many libertarians voting Republican.

But in practice Republicans show less respect for state and local powers than you might think. Republicans, including Mitt Romney and Paul Ryan, supported—and still support—President Bush’s proposals for federal takeovers of education and marriage law. And I’ve never heard them question the Bush administration’s defense and vigorous prosecution of federal marijuana prohibition in the face of state efforts at reform.

Would that we had a Republican party that actually favored “investing authority in the level of government closest to the people.”

The State of State Subsidies

Chris Edwards recently penned a piece that makes the case for cutting federal subsidies to state and local governments. In a related budget bulletin, he shows that there are now over 1,100 federal aid programs for state and local governments.

I’ve produced two charts that illustrate the extraordinary growth in federal subsidies to state and local government using the latest figures in the president’s 2012 budget proposal.

The first chart shows the inflation-adjusted increase in federal subsidies to states and local governments since 1941, separated into “health” and “non-health” categories:

The second chart shows the inflation-adjusted increase in total federal subsidies to state and local governments since 2000:

Like countless other individuals and interest groups, state and local government officials have become addicted to federal taxpayer money. This addiction has encouraged irresponsibility and profligacy at all levels of government. It has also prevented citizens from appreciating the true cost of the services they demand from state and local governments.

In the next couple of months, state and local officials will wail and gnash their teeth over proposals from Washington to cut back on the federal feeding tube. Journalists who are tempted to be overly-sympathetic to state and local officials should look at these charts and ask themselves why these folks never seem to be able to get their fiscal houses in order despite all the “free” money they’re getting from federal taxpayers.

See this Cato essay on the need to revive fiscal federalism.

Unions and State Government Management

State and local governments that have high levels of unionization have a harder time efficiently managing their finances and other aspects of their operations. At least, that’s my argument. The other day, I showed that states with higher levels of debt had higher levels of unionization. The statistical correlation was very strong.

Today, let’s look at the quality of state management, as measured by a major report by the Pew Center on the States. The Pew report gave letter grades to the 50 state governments for management of finances, employees, infrastructure, and information. Pew also provided an overall state score.

I’ve converted the Pew overall state government management scores to numbers from 1 to 10 and plotted them against state unionization rates (“10” is the best management score). The chart below shows that as the share of a state workforce that is unionized grows, the overall quality of state management falls, as measure by the Pew scores. The chart shows the raw data in blue dots and the statistically fitted line in pink. 

The bottom line: public-sector unionization is not a good idea, as it apparently leads to lower-quality government management and to higher debt levels. As such, I’ve argued that collective bargaining in state and local government workforces should be banned.

(Details: R-square at 0.12 indicates that unionization explains only a small share of management quality, but the F statistic at 6.3 and the t-stat on the management variable of -2.5 indicate that the regression is quite strongly statistically significant. Note that the unionization variable is the union share in state and local governments, but the Pew data regards only the states. Thus, I’m assuming that my unionization variable is a reasonable proxy for state-level unionization.  Thanks for data help from Amy Mandler )

Moody’s Caves In to Political Pressure on Municipal Bonds

Moody’s has announced that it will change its methods for rating debt issued by state and local governments.  Politicians have argued that its current ratings ignore the historically low default rate of municipal bonds, resulting in higher interest rates being paid on muni debt, or so argue the politicians.

First this argument ignores that the market determines the cost of borrowing, not the rating.  And while ratings are considered by market participants, one can easily find similarly rated bonds that trade at different yields.

Second, while ratings should give some weight to historical performance, far more weight should be given to expected future performance.  Regardless of how say California-issued debt has performed in the past, does anyone doubt that California, or many other municipalities, are in fiscal straights right now?

Last and not least, politicians have no business telling rating agencies how to handle different types of investments.  We’ve been down this road before with Fannie Mae and Freddie Mac.  During drafting of GSE reform bills in the past, politicians put constant pressure on the rating agencies to maintain Fannie and Freddie’s AAA status.

The gaming over muni ratings illustrates all the more why we need to end the rating agencies govt created monopoly.  As long as govt has imposed a system protecting the rating agencies from market pressures, those agencies will bend to the will of politicians in order to protect that status.  As Fannie and Freddie have demonstrated, it ends up being the taxpayers and the investors who ultimately pay for this political meddling.

Federal Aid to States Is Too Popular

The Economist’s Free Exchange blog asks: “[W]hy isn’t federal aid to states more popular, and popular enough to get through Congress, given that nearly every American lives in one?”

I would ask the blog’s author: How much more popular would he like it to be? As the following charts show, federal aid to state and local governments has catapulted to record levels.

As I’ve discussed elsewhere, Medicaid has been driving the growth in federal subsidies to state and local governments. But other areas, such as education, income security, and transportation, have also seen substantial increases.

Subsidizing state and local government is quite popular with federal, state, and local policymakers and associated special interests. It’s doubtful the average citizen is aware that so much of their state’s spending is derived from their federal tax dollars. However, I suspect that most folks (who aren’t on the take) would frown upon the concept of sending money to Washington only to have politicians send it back to the states via the federal bureaucracy. While there may be popular support for many of the state programs funded with federal dollars, citizens need to understand that federal subsidization of state and local government has fueled unhealthy government growth at all levels.

Wednesday Links

  • Federal judge dismisses charges against Blackwater guards over the killing of 17 in Baghdad. David Isenberg: “The fact that the Blackwater contractors are not getting a trial will only serve to further increase suspicion of and hostility towards security contractors. It is going to be even more difficult for them to gain the trust of local populations or government officials in the countries they work in.”
  • New report shows state and local government workers have higher average compensation levels than private workers.
  • Podcast: “Televising and Subsidizing the Big Game” featuring Neal McCluskey. “Everybody should watch the National College Football Championship because whether you’re interested or not, you are paying for it,” he says.