State Independence No More

If you ask an economist “what time is it?” his answer will be “It depends”. If you ask a lawyer the same question, he will start his charge-you-big-bucks meter and give you a 40 minute review of case law.

I often find myself in arguments with lawyers, not because we disagree; in fact I have a great deal of respect for lawyers who fight the good freedom fight. I have a good friend who has done an enormous amount of work fighting for the integrity of our First Amendment. But when it comes to concepts like liberty, the legal and economic definitions and analytical pathways tend to differ quite a bit.

One of the subtopics of the conversation on liberty is the constitutional independence of our states. A lawyer will, and rightly so, tell us how states remain independent jurisdictions, with their own legislatures, their own executive and judicial branches, their own right to tax and spend (or – pray for it – choose not to) and at least in theory even have the right to secede from the union of they so desire.

They are correct, of course, but there is a difference between liberty in the legal sense and how it can actually be used. If someone impedes on someone else’s liberty, the lawyer will sue and – if elected – legislate to secure that person’s liberty, and that’s fine. The problem becomes particularly prevalent when we delve into the economy. You can be free to start a business, but when government is the dominant provider of the service you want to provide, chances are you will be squashed like a bug under the competition from someone who has both legal, regulatory and taxation powers in his back pocket.

Individual entrepreneurs are not the only ones who can have their economic freedom taken away from them. Our states, actually, are in a comparable situation. In fact, state independence is increasingly being hollowed out, and it doesn’t even take formal constitutional fights to make that happen. All it takes is to get states hooked on federal money.

About 31 percent of the money states spend comes from Congress. The share varies: according to the National Association of State Budget Officers, in 2018 four states got more than 40 percent of their total revenue from the federal government. A total of 21 states depended on Uncle Sam for more than a third of their funds.

This dependency makes it hard for states to effectively exercise their constitutional independence. The most conspicuous example is Medicaid, where the federal government, on average, pays 61 percent of the bill. The share exceeds 70 percent in 14 states, with New Mexico being damn close to 80 percent.. Only four states get less than half their Medicaid funding from Congress.

With Medicaid being a budget buster in almost every state, and with its costs running out of control faster than a politician can kiss babies to get re-elected, it is valid to ask if states really have any sort of fiscal freedom left. What decisions can they make about Medicaid, and about their budgets in general, without first asking the federal government for approval?

Of course, from a strict legal viewpoint the states don’t have to take federal funds. They can say no and bail out of any program that they are responsible for and for which they get federal funding. In practice, though, that is not exactly easy to do as we will see in coming articles. There is, namely, a lot to be said about federal funds and state independence. To get started, let us do a quick rundown of the programs that the federal government sponsors, in “voluntary” agreements with the states.

Unsurprisingly, the spending area called Health Care is the largest one. Of the $721 billion that Congress sent to the states in 2019, 61.3 percent or $442.3 billion went to health care. Almost all of that, $409.4 billion, was for Medicaid; the CHIP program – Medicaid for Kids – gobbled up $17.7 billion.

Income security is a distant second spending area. A conglomerate of programs added up to $112.6 billion (15.6 percent of total), with three sub-headlines being responsible for almost all of it:

  1. Agricultural income security, i.e., Child nutrition programs, Food stamps and WIC (Supplemental feeding program for Women, Infants and Children) added up to $36.9 billion;
  2. Human services was a slightly bigger item, ringing in close to $40.2 billion. This one consists primarily of Temporary Assistance for Needy Families, or the traditional “welfare” program, to which Congress allocated $15.5 billion.
  3. Housing programs ran away with almost $32.4 billion, with “tenant-based rental assistance” being the biggest item at $22.2 billion.

It is worth noting that we have a new and rapidly growing program under “human services”, namely federally sponsored child care. Called a “block grant” (they never really are block grants when you examine them in detail), it was allotted $3.9 billion in 2019. This item is slated to grow in the future, with $24.4 billion being projected for 2020. That will probably be leaps and bounds higher when the dust settles on all the stimulus appropriations, but even regardless of where Congress happens to be in this crazy year, the long-term trend among both Republicans and Democrats is toward an even greater involvement of federal tax money (or monetized deficits) in the care of our kids and grandkids.*

The third major item on the federal-aid-to-states list is Transportation. Most of the $65.6 billion goes to highways ($45.2 billion) with $13.1 billion being wasted on urban mass-transit programs. A total of $3.8 billion is spent on airports, with $1.9 billion thrown after passenger trains. An item to keep an eye on is “national infrastructure investments” which received $351 million in 2019; why this one is separate from the already existing programs is a question for another day.

Next we come to “education, training, employment and social services”, which is $63.1 billion large assortment of spending:

  • Education gets $42.7 billion to split between “the disadvantaged”, whatever that means ($16.2 billion), special education ($13bn) and rehabilitation services ($3.1bn);
  • Children and family services get $11.2 billion; and
  • Labor training and employment services make do with a bit less than $2.7 billion.

Among the smaller but not insignificant programs are the ones clustered under “Community development”. The Department of Homeland Security sends almost $9 billion to the states for FEMA and disaster relief programs. These are understandable expenses (in view of what else our government wastes our money on), although such funding should of course be part of an insurance plan, not some dole-it-out regular appropriations scheme. Nevertheless, it makes a lot more sense to provide relief from natural disasters than to spend $5.3 billion on “housing and urban development”. Most of this money goes to the “community development fund”, which is basically another way to conceal traditional welfare-state spending for the purposes of economic redistribution.

One of the fiscally small but politically and philosophically significant programs under this headline is the $522 million being spent on “rural water and waste disposal”. It is something that all you property-rights and environmental regulations buffs out there could certainly sink your teeth into. I don’t have the time, but this sounds like a worthy project for someone with good knowledge of land management issues.

The remaining spending categories under federal-to-state funds each represent less than one percent of the $721 billion: Natural Resources; Justice; General Government; Commerce; Veterans Benefits; Agriculture: and Energy.

Again, we should keep in mind that these are programs run by the states under a joint-venture financing deal with the federal government. As I pointed out already in 2008 in my Heritage Foundation report on federal funds to states, these programs

make it difficult for voters to hold the President, Senators, Representatives, state legisla­tors, and governors accountable. If New York spends more on Medicaid, is that because New York voters demanded that their state government expand Medic­aid or because the voters gave the federal government a mandate to expand the program nationwide? If New York voters want to restrain state spending, should they turn to Albany or Washington? Blurred responsibilities between states and the federal government also make it easier for lawmak­ers to sneak government-growing bills in under the voters’ radar.

The only thing that has changed in the past 12 years is that the sewage water of welfare-state spending that was ankle-deep back then, we are now waist deep in. A full 88 cents of every federal-aid dollar that goes to the states are designated for the purposes of economic redistribution. Therefore, to get a full idea of just how big our welfare state is, we have to:

  1. Estimate federal-only spending on economic redistribution,
  2. Identify the $633+ billion dollars in welfare-state funds from Uncle Sam to the states, and
  3. Calculate how much the states spend in matching funds to continue to get that federal money package.

Do it. You will be shocked.

Actually, you don’t have to. We are going to look at it here at The Liberty Bullhorn. Stay tuned. And don’t forget to click the “follow” button to get all the updates right away. Thank you.

*) I predicted this in my book from 2010: Remaking America: Welcome to the Dark Side of the Welfare State. Just sayin’.

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