To help alleviate pending state budget crises, forget about bailouts. Instead, lets remove federal "strings" that prevent states from making prudent spending cuts as they see fit.
A Wall Street Journal opinion piece from 2 January 2010 highlighted a glaring discrepancy between the purported intent of last year's stimulus funding to the states and it real results. In The States and the Stimulus, (available on line for a limited time without subscription) the Journal points out that much of that stimulus "help" came with strings attached. The states had to put up matching funds (money that was hard to come by in an already tight budget), or agree as a condition of accepting funds not to cut a broad array of programs from future state budgets. In some cases, they had to agree to federal Davis-Bacon rules mandating more expensive union wages on projects partly subsidized with federal "free" money. The article goes on to cite many more examples and is well worth reading, if it is still available when you read this.
The point is, many states now find themselves in an even worse fiscal bind than when this stimulus "gift" was bestowed upon them early last year. Any prudent manager would reduce expenditures in the face of a widening budget shortfall, but the feds have essentially tied the hands of the state governments with all the strings attached to the previous funding. The states have little choice but to raise taxes, or come begging to Washington for another handout. As the article stated, it's not bad enough that the federal government is spending itself into oblivion, but they are determined to force the states into the same profligate ways. The rules of the game prohibit the states from making prudent spending cuts where necessary. It's as if the Democrat Congress had it in mind to intentionally beggar the individual states by binding them to larger and larger entitlement spending. Could that be possible? See Cloward Piven Strategy in the previous blogpost.
This recent article from the San Francisco Chronicle highlights some of the problems that California, in particular, is facing with an impending budget crisis. California might be the first and the biggest meltdown on the horizon, but it won't be the last. Lots of states face similar problems. Do not be surprised if California becomes the next emergency bailout candidate. You thought we were done with bailouts after TARP, AIG, Fannie, and Freddie, and the auto companies. It was awful, but at least it's over, you thought. YOU WERE WRONG. Read the Chronicle article, and you'll see the arguments that will soon be made on California's behalf in the next few months. California's economy is larger than many G-20 countries. If that's not systemically critical and too big to fail, then what is? They will not cut spending. Instead, they will beg for free money from the feds. It will be dressed up as adjusting Medicaid reimbursement rates or more infrastructure funding, or payments in support of federal unfunded mandates, but it's basically begging for federal dollars to solve California's problems. Problems of their own making. The worst back door trick they will likely employ will be seeking federal guarantees of their debt. This will essentially let them borrow their way out of their current crisis, and leave us, the American taxpayer on the hook to cover their debts when they default. You may not realize this, but that's what has been going on with the bank bailouts. The nominal $700 Billion figure for TARP is deceptive. That's just the cash injections made available to banks. TARP is what the magician shows you with the right hand, while the left hand is working the deception. In this case, the deception is the banks raising money cheaply by issuing bonds with US government guarantees. If they default, we're on the hook for that. Federal loan guarantees are a cheap fix if the issuer remains solvent. If not, our costs could be astronomical. It's like co-signing a loan for your deadbeat brother-in-law. No problem if he repays the loan. Big problem if he doesn't.
When the crisis comes, we'll be told we have to put up the money or the results will be catastrophic. California will become a wasteland, we'll be told, and the ripple effects will take us all down. If we don't act, this will trigger the next great depression. When California and the enabling Democratic administration come pleading for a rescue, we should politely listen to their pleas, nod our heads in sympathy, and we should calmly just say no. There's a less costly way to solve California's problems. We simply eliminate the federal strings attached to previous funding. We untie their hands. California will now be free to cut its budget where it needs to. Any pain involved with that will be California's to bear. California will have to suffer for her own poor choices, the American taxpayer will be spared the burdens of the hard working ant rescuing the imprudent grasshopper, and the principle of moral hazard will be preserved for the first time in years.
Oh, while we're at it, this amnesty offered to California should be offered to all the states. That's only fair. Plenty of them could use the help, and the principle of states exercising their own discretion in budget matters independent of the federal government is a valuable goal in its own right. With one policy initiative, we can help solve a financial crisis, strike a blow for states rights, and stick a finger in the eye of the Cloward Piven crowd on the left. Not a bad days work.