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The Growing American Welfare State

In my first installment on state spending I reported that during the recession states have grown notably more dependent on the federal government. In 2008, the states got just over 26 percent of all their revenue from federal funds; in 2013 the National Association of State Budget Officers estimates that 31 percent of states’ spending is paid for by the federal government.

There are several problems with this growing dependence.

First and foremost, it blurs legislative responsibilities: if voters are dissatisfied with how a federally sponsored program is run in a state, do they turn to their state lawmakers or to Congress for a fix? As an ostensibly unintended consequence, it becomes easier for both the states and the federal government to habitually increase spending when there are no clear lines of responsibility between the two levels of government.

Secondly, the $500+ billion per year from Uncle Sam to the states creates a strong transmission mechanism for bad fiscal policy. Put bluntly: when Congress reaches the end of its ability to spend on credit, they will start making panic-driven spending cuts along the same lines as we have seen in many European countries over the past few years. Such fiscal panic would inevitably involve drastic reductions to federal aid to states; the more dependent states are on the federal government, the harder they will be hit by panic-driven spending cuts. At that point, it does not matter whether or not a state has taken good care of its own finances. When the fiscal chainsaw hits federal funds, nobody will be spared.

The third problem has the most far-reaching consequences over time. Behind the growing dependency on federal funds there is a trend of increasing entitlement spending. Approximately 80 cents of every dollar in Federal Aid to States pays for some sort of entitlement; of those 80 cents, 56 cents go toward Medicaid and K-12 education.

This means, plain and simple, that when states grow more and more dependent on the federal government, they also accept a steady growth in the American welfare state – with practically no debate at all.

Let us look at these numbers from another angle. From 2008 to 2013,

•    Total state spending, including federal funds, grew by 15.7 percent;
•    Federal funds for K-12 spending increased 20.8 percent;
•    Federal funds for Medicaid spending went up 43 percent.

It is worth noting that during the same time, the state-funded share of K-12 spending increased by only 2.3 percent over the five-year period. These numbers do not take local K-12 spending into account (comparable numbers, published by the Census bureau, are not yet available) but the disparity between growth in federal and state education funds still hint of a trend to be aware of: the nationalization of our children’s education.

Since 2008 the federal share of K-12 funding (again excluding local funds) has increased in 42 states, with the largest increases taking place in North Carolina (79.6 percent increase of federal share), Hawaii (72.9 percent), Illinois (60 percent), Arizona (44.7 percent) and Delaware and Alabama (43.1 percent).

The eight fortunate states with a decreasing federal share are led by North Dakota (down 30.9 percent), Wyoming (down 29.8 percent) and Indiana (down 20.1 percent).

Medicaid exhibits a similar trend of federalization: while federal spending on Medicaid increased by 43 percent from 2008 to 2013, in-state funded Medicaid spending increased by “only” 32.3 percent. A total of 45 states (including Wyoming) get more than half of their Medicaid funds from the federal government, up from 41 in 2008.

Medicaid and K-12 education are representative examples of entitlements that drive welfare-state spending. Both programs provide services to citizens at costs to the individual user that do not reflect the actual cost producing those services. Both programs are redistributive in nature, with high-income citizens paying a larger share than their cost of using the service. This is particularly obvious with Medicaid where high-income citizens are locked out entirely, yet they still pay taxes to fund the program.

The relentless growth of the American welfare state is a worrisome phenomenon. Our welfare state has largely, though not entirely, the same design as the welfare states in heavily troubled European countries. As I explain in my book Industrial Poverty (Gower Applied Research; forthcoming) the crisis that is turning Europe into an economic wasteland could easily strike the United States as well.

So long as we let our welfare state expand – so long as we choose to rely on shaky government programs rather than on ourselves – we are practically asking to join Europe on the downslope into perennial economic stagnation.

Edited by S.W. Gore.

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Thursday, 23 November 2017

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