Fiscal Federalism 13: The Impact of Federal Aid on Oklahoma

Free Money from Uncle Sam and Unintended Consequences in Oklahoma

Continuing on the theme about federal aid to the states, here is my latest article–“‘Free Money’ and Unintended Consequences”–in the Perspective magazine published by the good folks at the Oklahoma Council of Public Affairs.  Here is the money line:

There is no such thing as “free money” from Uncle Sam. Absent the recent run-up in federal grants to Oklahoma—which has spurred higher state spending—Oklahoma nearly would have been able to eliminate its individual income tax.

Fiscal Federalism 12: Federal Aid by Agency

In yesterday’s post on Federal Aid to the States, I asked if anyone knew why states such as New Hampshire and Texas received so much less federal aid, on a per capita basis, than their surrounding neighbors. Table 1 below reveals the answer.

To hunt down the culprit I decided to turn to my favorite two-state comparison–New Hampshire and Maine. One reason why I like to compare the two states, besides the fact they are economically and politically opposites, is that they have nearly identical populations right now. As such, I can show the dollar amounts without having to adjust them into per capita terms since the relative difference won’t change.

So let’s dive into the data. First, notice just how long the list is of federal agencies that dole out aid to the states.  If you are into pork, there is a federal agency out there for you. The obvious question from this list is . . . are there no limits to what the federal government can do?

Despite having identical populations, Maine receives $1.4 billion more from Uncle Sam than New Hampshire–$3.4 billion versus $2 billion, respectively. Where does this “Maine subsidy” come from? The vast majority of the difference is under the Department of Health and Human Services: Centers for Medicare and Medicaid Services to a tune of $1.1 billion.

So Medicaid is the single largest driver of the difference in Federal aid to the states accounting for $256 billion of the total $552 billion doled out. It dishes more aid than the Department of Agriculture ($31 billion), Department of Education ($45 billion), Department of Housing and Urban Development ($47 billion), Department of Labor ($10 billion) and Department of Transportation ($57 billion) COMBINED!

So the key to freeing your state from federal dependency, um, aid, is to control your state’s Medicaid program. Doing so will also reduce the “crowding out” of the private sector by the public sector which I’ve discussed previously– meaning a larger private sector will also result in greater economic prosperity.

Table of Federal Aid to State and Local Governments by Agency for Fiscal Year 2009

Fiscal Federalism 11: Federal Aid to the States

I’ve always found the phrase “Federal Aid to the States” to be rather demeaning to states–does Uncle Sam think the states need aid the same way international aid is given to basket-cases across the globe?  In most cases, this so-called “aid” is more about scoring political points than it is anything else, but I digress.

At any rate, the U.S. Census Bureau produces this series of reports–“Federal Aid to the States”–(pdf) that is a companion piece to the series of reports I’ve been discussing previously known as the “Consolidated Federal Funds Report.”  The FAS delves into more specific detail pertaining to the grants that Uncle Sam sends down to the states.

As part of a study I’m working on for the good folks at the Oklahoma Council of Public Affairs, I’ve been going through these reports.  What I have found will amaze you–or horrify you depending on your ideological persuasion.

The chart below comes from the most recent FAS report and it shows per capita federal grants to state and local governments by state.  The dark green indicates the states with the highest degree of federal aid while the light green indicates the states with the lowest degree of federal aid.

What I found interesting was that there are two low aid states that are stuck in a region of high aid states–New Hampshire in the Northeast and Texas in the south.  We all know that New Hampshire and Texas stand out for their small(er) government policies at the state level, but how does that translate into less federal aid?

Stay tuned for tomorrow’s post as I delve into specific grant programs that will help answer that question–as well as providing its own shocking data.  If you want to venture an guess, please weigh-in in the comment section.

Chart of Federal Aid to State and Local Governments Fiscal Year 2009


Should States Be Allowed to Go Bankrupt?

Freedom Homes, Government Bailout Money
Creative Commons License photo credit: Alex E. Proimos

Veronique de Rugy, of Mercatus, has an article in Reason magazine dismissing the idea that states should be allowed to go bankrupt.  She states:

Bankruptcy may sound like a silver bullet that could solve budget woes, dismantle cronyism, fix pensions, and forestall a federal bailout. But it contains plenty of potentially counterproductive consequences. Restoring the states’ fiscal health requires fundamental changes to the way they do business. Until that happens, their balance sheets will be bleeding red ink, whether they are officially bankrupt or not.

More specifically, her concern is:

In many states, bankruptcy will be an option only if powerful unions and other entrenched interest groups see it as a way to force budget problems onto the state’s bondholders rather than public employees.

The problem I have with her argument is that bondholders would not let them get away with leaving them holding the bag.  Even without new issues of bonds, states are always in a state of roll-overs–issuing new bonds to pay off the old ones.  Any hint of default would send the price of issuing new bonds into the stratosphere.  This would then have an immediate impact on the budget either because the state would have to fund the roll-over out of tax revenue (pay-off the bond) or pay higher interest payments on the new bonds.

As such, bondholders do have an immediate way to punish a state that looks to default on their bonds.  The negative budget impact would likely result in tax increases since nearly every state has a balanced budget requirement.  That, in turn, may stoke voter backlash.  The bondholders can wait until maturity to be made whole . . . politicians don’t have that luxury.

I still can’t help but think that having the bankruptcy law on the table would change incentives in a positive direction by shaking bondholders out of their lethargy.  I agree that it isn’t a silver bullet that will work in all states, but bankruptcy may help save a few of those on the margin.  Those states that may fulfill Veronique’s prophecy may already be too far along to save anyway.


You may have read that New Hampshire has become the target state of the Free State Project.  Here is how they describe themselves:

Are you frustrated at the loss of freedom and responsibility in America, while the growth of government and taxes continues unabated? Do you want to live in strong communities where your rights are respected, and people exercise responsibility for themselves and in their dealings with each other?  If you answered “yes” to those questions, then the Free State Project has a solution for you.

What the Free State Project is… The Free State Project is an effort to recruit 20,000 liberty-loving people to move to New Hampshire. We are looking for neighborly, productive, tolerant folks from all walks of life, of all ages, creeds, and colors who agree to the political philosophy expressed in our Statement of Intent, that government exists at most to protect people’s rights, and should neither provide for people nor punish them for activities that interfere with no one else.

When you sign our Statement of Intent, you signal your commitment to move to the chosen free state, New Hampshire, within five years of obtaining 19,999 other people who commit to move. The more signatures we get, the more secure people can be in their decision to move, because they know that many other people will also be moving— enough to make a real difference! You don’t have to wait until we have 20,000 signatures to move, of course, but that option is there to let you be more secure in your decision.

Here is their fascinating list of 101 reasons to move to New Hampshire.

Now, the Free State Project will be coming to a big screen near you as part of a documentary called Libertopia.  Reason TV recently did this interview with the Libertopia’s filmmaker  Christina Heller.

Whatever your views about the Free State Project, it is still a fascinating example of the Tiebout hypothesis in action–the theory that people will vote with their feet to find the optimal mix of government.

Disclosure: I am not a member of the Free State Project.