Modern central banks keep attempting to manipulate prices to a different and “better” outcome than the market would provide, but what does this achieve?
What are states, and what are they good for? Brother Rappaport had a very good law review article some years ago, arguing that for constitutional purposes, the word “state” means something close to “sovereign country.” (Of course, the Constitution explicitly strips the states of some of the traditional attributes of sovereignty, such as the power to wage war.) And the Supreme Court periodically swoons over the “dignity” of quasi-sovereign states. However, these and similar tributes to “Our Federalism” are increasingly at odds with reality. For operational purposes, “states” are best understood as undercapitalized health care and pension funds that write speeding tickets on the side.
Impressive evidence to this effect is contained in the Report of a State Budget Crisis Task Force, headed by Richard Ravitch and Paul Volcker and stacked with additional personae of proven expertise and civic commitment. The Report examines the finances of six major states (New York, New Jersey, Virginia, Texas, California, Illinois). It goes over familiar ground (“States are going bankrupt!”), but it is noteworthy for its thoroughness and hard-nosed realism. Among the highlights:
- Medicaid now covers upwards of 20 percent of the population; a few years out, the number is expected to reach 25 percent. The program gobbles up something like 16 percent of state own-source revenues, and 23 percent of state spending (including federal transfers). Tendency rising: projected annual growth rates range from 6.6 to 8.1 percent, depending on what states do or don’t do in response to the Supreme Court’s “Obamacare” ruling. (I’ll have more on this in a forthcoming post.) This assumes, I suppose, that the providers will get paid. Which they probably won’t: Illinois alone is in arrears to the tune of $1.9 billion. In New Jersey, about half of all doctors no longer see Medicaid patients.
- State and local public pension funds are underfunded by something like $3 trillion. Other post-employment benefits (mostly health care), almost entirely unfunded, clock in at well over $1 trillion. To illustrate the prohibitive cost of averting disaster: if California wanted to put just one of its pension funds (CalSTRs) on a sound actuarial basis, it would have to contribute an additional $10 billion per year. In Illinois, the shortfall works out to $15,800 per resident. The numbers are bound to get worse. Never mind the basket cases: even the GOP showcases (Virginia, New Jersey) have “balanced” their budgets by underfunding their pension systems by hundreds of millions.
- [Lawyer’s note: The Report notes that state and local pension obligations should really count as debt: they’re irrevocable under state law and, moreover, under the Contract Clause of Article I, Section 10. That clause, originally intended to protect private commerce (especially across state lines), has become unenforceable in that context and to that end, see Blaisdell. But it may yet serve as a potent instrument of protecting the political class and its state-employee coterie. The constitutional “translation” would make for a fine law review article if the irony weren’t so obvious.]
- Something’s got to give. One thing that gives is the infrastructure: it’s suffering badly because every nickel is needed for entitlement programs. Not so much, mind you, for current employees: after the end of federal “stimulus” laws, public employment has actually declined. Trouble is, it’s not declining fast enough. New York is spending over $20,000 per K-12 pupil. That figure, too (I predict), will rise. Enrolment will continue to drop. You can’t fire teachers and administrators fast enough to keep pace, and the legacy costs are locked in.
Alas, when it comes to practical recommendation, the analytically forceful and impressive Report resorts—at its best—to woozy good government proposals (honest multi-year budgeting, full disclosure of pension and other obligations, improved cost controls, etc.) Amen. But there’s a reason why state governments don’t have these mechanisms: they would help to inform us of the perilous state of our public affairs. That is the absolute last thing any government would want.
At its worst, the Report recommends better intergovernmental procedures and improved consultation between local, state, and federal decisionmakers. Respectfully: the vertical-horizontal conspiracy we call “federalism” is what got us into this pickle in the first place. Enhance “cooperation” would not reduce the $20,000 cost of public education in New York. Its agenda would be to bring every state up to that level, double it, and make us pay for it. No Child Left Behind Einstein.
The time has come, maybe, for a constitutional thought. “Wretched nurseries of unceasing discord,” Alexander Hamilton memorably called the states. They are distinctly the playpen of “factions,” James Madison argued: that was his principal case for the “extended republic” we call the United States. It hasn’t worked quite the way the Founders expected. Their fear was rebellion. Our fear is, or should be, the states’ central role as the engine of a welfare and entitlement state beyond not only the Founders’ imagination but at a level that would make even Danish Socialists gasp: are you insane?
The reason for the disconnect, it seems to me, has nothing to do with people’s authentic preferences; it is institutional. Dänen lügen nicht: at the end of the day, they have a country to run. The hacks in Springfield and Sacramento don’t: no matter how reckless they are, they can gamble on the power and prestige of the United States.
Quo usque tandem? Not much.