Coyote Blog

Congress just passed a new $26 billion payoff to state governments, easing the pressure on states to institute some sort of fiscal responsibility.  The follows on the heals of last year's tens of billions of dollars in direct aid to state budgets in the original stimulus bill.

Taking the pressure off states for real fiscal reform is bad enough, but this is worse:

Maintaining the salaries and generous benefit plans for members of teachers unions is indeed a top Democratic priority. That's why $10 billion of the bill's funding is allocated to education, and the money comes with strings that will multiply the benefits for this core Obama constituency.Specifically, the bill stipulates that federal funds must supplement, not replace, state spending on education. Also, in each state, next year's spending on elementary and secondary education as a percentage of total state revenues must be equal to or greater than the previous year's level.

This is roughly equivalent to the government telling mortgage holders that took on too much debt that the government will bail them out, a clear moral hazard.  But then it goes further to force the mortgage-holder to promise to take on a bigger mortgage next year.  Unbelievable.

In a move right out of Atlas Shrugged, Texas is singled out for special penalties in the law because, well, it seems to be doing better than all the other states economically and is one of the few that seem comitted to fiscal responsibility

For Texas, and only Texas, this funding rule will be in place through 2013 [rather than 2011]. This is a form of punishment because the Beltway crowd believes the Lone Star State didn't spend enough of its 2009 stimulus money.

So much for equal protection.  This Congress sure has set an incredible record for itself in choosing to reward and punish individual states (remember Nebraska and Louisiana) in its legislation.

The WSJ thinks perhaps a different kind of multiplier, other than the Keynesian one, is behind this legislation.

Keep in mind that this teacher bailout also amounts to a huge contribution by Democrats to their own election campaigns. The National Right to Work Committee estimates that two of every three teachers belong to unions. The average union dues payment varies, but a reasonable estimate is that between 1% and 1.5% of teacher salaries goes to dues. The National Education Association and other unions will thus get as much as $100 million in additional dues from this bill, much of which will flow immediately to endangered Democratic candidates in competitive House and Senate races this year.

Many states managed to grow state spending in the last decade far faster than inflation and population growth, soaking up every new dime in bubble-generated tax revenue they could.   It may seem like states were forced to make a lot of hard decisions last year, but in fact they were sheltered from really dealing with the full measure of their own fiscal problems by large influxes of Federal "stimulus" money.  As I demonstrated way back in January of 2009, most of the stimulus was actually ear-marked not for the mythical shovel read project, but for "stabilization" of state and federal budgets.  This is a couple of months old, but still applies:

A historic nosedive in state tax collections extended into the third quarter of the year, and only an infusion of federal economic stimulus money has averted widespread program cuts and worker layoffs.
Tax collections from July through September dropped an average of 8.3% from a year earlier in the eight states that release up-to-date monthly tax figures, a USA TODAY survey found. New York's tax collections fell 8.9%, despite an income tax hike earlier this year. States reporting partial third-quarter results showed a similar downward spiral in tax collections, including 13.2% drop in Arizona.

Federal stimulus money has protected states from making big cuts in the number of government workers, in aid to schools or in spending on Medicaid, the health care program for the poor. But most federal stimulus money ends in December 2010.

This is not a new trend, from Tad DeHaven of Cato:

According to the Goldwater Institute, over a third of the AZ state budget is federal money.

How can there possibly be any accountability for how this is spent, though it actually is larger than the amount raised by state taxes?  If we want the government to buy us goodies in this state, we should at least pay for them ourselves and not take money from others.  By the way, every time I raise this argument, someone says "well our state pays more federal taxes than it gets back."  First, every state says this so it can't possibly be true in every case.  Second, it's a terrible practice from the standpoint of accountability.

Related, via Matt Welch:

The biggest single national political donor in the country during the 2007-08 election cycle, according to OpenSecrets.org, was the overwhelmingly Democrat-supporting teachers union the National Education Association. What category of worker was the biggest single beneficiary of stimulus spending? Public school teachers. Who, according to Vice President Joe Biden, accounted for 325,000 of the first 640,000 jobs "created or saved." While it's true that teachers are Americans (even my brother), in the vast majority of these cases, the jobs in question weren't "created," just maintained, since it is nearly impossible to fire public school teachers.