I will never forget the day I decided to start earning my own money. I was 12, and I asked my mother for my allowance. She promised to give it to me on one condition: that I would run down to the convenience store and buy her a newspaper.
The store was only two blocks away, so normally I would not mind. But this was January, in a town about as far north as Fairbanks, with ten feet of snow and -42F outside.
I still don’t know if that was my mom’s subtle way of teaching me the virtue of financial independence, but it worked. Basically, she showed me how vulnerable you are to factors beyond your control if you do not pay your own way through life.
What I learned that day was not exactly earth-shattering. All kids who think they deserve more candy, a better cell phone and tickets to the next Fallout Boy concert sooner or later learn the same lesson. But what is almost earth-shattering is the immunity that our politicians seem to have to this basic lesson of life.
Take our state legislators, for example. I do not mean to be negative about them in general; on the contrary, over years I have met many fine lawmakers from almost every state in the union. The vast majority of them are hard workers, dedicated to genuinely improving the lives of their constituents.
Nevertheless, despite their often stellar understanding of complex policy issues, the one point that eludes most of them is the one that my mother taught me on that cold January morning a long time ago.
The allowance that our states are getting comes not from mom, but from Uncle Sam. Also known as Federal Aid to States, this program paid out $541 billion in 2014 to hundreds of programs in all 50 states. The money goes to Medicaid, SCHIP, K-12 education, transportation, food stamps, housing subsidies, all the way down to the Special Milk Program (which means that I pay federal taxes, which the IRS sends to the Department of Agriculture which sends it back to the state which pays it out to the school district which sends the money to the school where my daughter goes to the cafeteria and has a glass of milk).
Federal Aid to States is a big piece of the pie. In 24 states the federal funds represent 30 percent or more of total state spending. In four states the federal money is more than 40 cents of every dollar the state doles out.
In no other state is the dependency on federal funds higher than in Arizona.
According to the National Association of State Budget Officers (NASBO) State Expenditure Report, in 2014 the Grand Canyon State received 43.5 percent of all its revenue from the federal government. Mississippi is a close second (43.3 percent) with Tennessee third (40.9) and Michigan fourth (40.1).
For Fiscal Year 2014 Arizona received $12.8 billion, up from $12bn a year earlier. Almost half of the federal funds, $6.2bn, go to Medicaid. SCHIP is another big-ticket item, as is K-12 education and transportation.
Federal Aid to States may seem like a genuinely good idea: state legislators can “do more” than they would be able to if they relied on just the money they get from in-state taxpayers. But there are two big problems with Uncle Sam’s money.
The first is the one-size-fits-all idea behind the federal sponsorship of programs like Medicaid. States are very different – how many similarities are there really between Alaska and Florida? – and their residents often want to prioritize differently. While Medicaid is flexible to some degree, its fundamental structure limits the ability of states to adapt it to the preferences and needs of their residents.
Medicaid is just one example. The federally sponsored – and well-intended – school lunch program is probably the best teacher to our children why it is so important to localize control over our children’s education.
The second problem is the promise that the state government makes when it spends federal funds on a program. By providing health care to poor and needy families through Medicaid (or, in Arizona’s case, the AHCCCS program) the legislators in Phoenix convince families to put their future health needs in the hands of government.
If the enrollees can get the health care they need, when they need it, then that is fine. But what happens the day when the federal government runs into acute fiscal trouble?
That day is not as far off as many people think – or hope. For reasons that I have explained on my blog America’s Fiscal Future we are 12-18 months away from a new recession. With relatively weak GDP growth, persistent budget deficits and a new global economic downturn in the making, this new recession would quickly bring about trillion-dollar budget deficits again.
This time, global financial investors will be paying close attention to how the federal government manages its finances. The credit downgrades that the federal government suffered during the Great Recession are still in place; it will take only a small annual increase in federal borrowing to cause new downgrades.
Once the downgrades begin, our interest rates are going to rise, and rise rapidly. This further tightens macroeconomic activity and reduces tax revenue, federal as well as state.
On top of shrinking tax revenue, Arizona’s state finances will suffer more than in any other state when Congress is forced (by declining credit and rising interest rates) to make panic-driven spending cuts. First up on the chopping block will be – yes – Federal Aid to States. And there will not be a single thing the elected officials in Phoenix can do about that.
Unless, of course, they get themselves involved in how Congress runs its finances. How can they do that? By passing a balanced-budget amendment that gives states a say in the federal government’s budget process.
Either that, or raise taxes on Arizona’s taxpayers by $12.8 billion. Whichever the fine men and women in the state legislature prefer…
Sven Larson, Ph.D., is an economist and Member of the Council of Scholars of Compact for America. He is the author of Industrial Poverty (Gower Publishing) about the debt crisis in Europe. Find his daily blog articles at America’s Fiscal Future