Suppose Uncle Sam came to you with a smile on his face and a big lump of cash in his hand. Suppose he promised you: “Son, I know you are getting by on three grand a month. I know you’d like that bigger house down the road, and how about trading in that old Geo Metro for new Dodge? I’ll give you two grand a month.”
Suddenly, you are living a five-grand-a-month lifestyle on a $3,000 salary. Uncle Sam pays for 40 percent of your living expenses.
Sounds like a good deal, right? But Uncle Sam does not give you the money to do what you want with. There are strings attached: you have to buy that house down the street, not move across town to get closer to work. And you have to buy a Dodge; if you say you want a Nissan then Uncle Sam will cut off the cash flow.
Still, even with the strings attached, your new and improved lifestyle is worth it.
Then one day when Uncle Sam stops by to drop off that monthly check, he puts his hand on your shoulder, looks you in the eyes and says: “Son, I’m sorry, but I think I may have over-promised a little bit. See, I’ve been borrowing most of the money I give to you, and now my creditors want their money back. Starting next month, you’re on your own.”
What now?
As private citizens we can probably cope with it. We downsize our living, downsize our car, eat more cheaply, cancel internet (no, wait – if you do that your kids will run away…).
Things get a lot more complicated when we make the same kind of deal as politicians. As I mentioned a couple of weeks ago, more than four dimes of every dollar the state of Arizona spends comes from the federal government. This means, bluntly, that the lawmakers in Phoenix are providing services for the residents of the Grand Canyon State that they really cannot afford.
More than 1.2 million people in Arizona are enrolled in Medicaid (AHCCCS), half of them children. By taking federal funds in large amounts, the state of Arizona has made a promise to all these people that their health insurance coverage will always be there. They can, simply, plan their lives around being on Medicaid.
But what happens the day when the federal government reaches the end of its credit line; when there is no more raising the debt ceiling without consequences? What happens when Congress has to start making budget cuts?
How many of the 1.2 million Medicaid enrollees in Arizona will be kicked out of the program? How many health care procedures and treatment methods will they be denied?
These questions are not isolated to Medicaid. With $1 billion going into Arizona schools the federal government now pays for almost one fifth of the state’s education budget.
Nor are these questions isolated to Arizona. It is increasingly common that states cover as much as 40 percent of their total outlays with federal funds. Some examples:
-Louisiana spends just over $25 billion per year, of which $10 billion is federal funds;
-Tennessee takes almost $13 billion per year from the federal government, equal to 38 percent of total state spending;
-South Carolina get $8 billion, 40 cents of every dollar the state spends, from the federal government;
-Missouri has drastically increased its federal dependency, taking 46 percent more federal funds in 2015 than they did in 2013.
In many cases half of the federal dollars go toward Medicaid, but public education is rapidly on the rise as the next big item to critically depend on federal funds.
It is a safe bet to say that no state lawmakers, and no governors, in these states have even considered the possibility that Congress might tighten the cash flow. Yet that will happen, and probably sooner than any elected officials realize.
As things are today, a sudden, drastic cut in federal funds will be like a punch in the belly of states like Arizona. But there are steps the state can take to shield themselves from the unpleasant surprises of federal fiscal mood swings. In the coming weeks I will outline in more detail what those steps can look like; as a little appetizer, here are some of the reform models Arizona could put to work:
Real block grants of federal funds;
Free-market reforms of Medicaid;
Charity compacts for welfare programs.
Curious? I hope so. Stay tuned.
—
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.