Two ways to solve our fiscal blues boldly

Are blue states being raided by red?

President Eisenhower famously said, “If you can’t solve a problem, enlarge it.” Let’s try that approach with the current unsolvable problem, the debt crisis.

As it is, the country and the media are locked into a sports metaphor, where what matters is who loses and who gains, who saves face, who prances in the end zone. What if we thought not in terms of the tennis match and more in terms of reform, of lasting good for the country?  Enlarge the problem, in short.

The first way to do this is to push the problem down to the next level, the states, letting them decide whether they want high or low or medium levels of services the federal government cannot afford.

This idea goes back, in modern times, to Sen. Patrick Moynihan, that invaluable intellectual gadfly and U.S. Senator from New York. Like a lot of liberals today, Moynihan got to thinking about how much his state paid in federal taxes, compared to how much it got back in services and federal dollars. It turns out that blue states like Washington and New York subsidize red states, a lot.

That holds true today, and it will only get worse if tax rates go up to help solve the deficit. The Tax Foundation has done a calculation of what would happen if all the Bush tax cuts were to expire on New Year’s Eve, and found that eight of the top 10 states paying the most would be solid Obama-voting states. Maryland tops the list, with an average household sending $7,194 to the feds, getting back much less than that in services.

Moynihan didn’t just lament this situation, but he proposed a solution, once called "the new federalism." Pare the national government’s functions back to things such as national defense that it could do better than the states, cut federal taxes significantly, and leave that money back in the states for them to decide on tax and service levels.  “It is time to trade,” Moynihan suggested in 1998. “Less activism in Washington in return for more revenue at home, for whatever active measures recommend themselves to the state or municipality in question.” This argument is laid out in a recent article by Steven Malanga of the conservative Manhattan Institute, suggesting its strong appeal across the aisle.

Republicans get to slice federal programs and intrusion and beat the drum for states’ rights. Democrats get to tailor programs in liberal states and stop building highways in South Dakota with funds from California.  A similar argument was made by the wag who said the problem with high-speed rail, given the way you get enough votes in Congress, “is that the first line would be built from Omaha to Pierre.”

This same line of argument could be applied at the state level, as Rep. Ross Hunter and others have done. Rep. Reuven Carlyle recently published a map indicating how a handful of rich counties subsidize the bulk of recipient counties. Blue Seattle subsidizes the rest of the state, and relying on state-level programs often means that if you want to widen I-405 you probably have to build a super highway from Dayton to Cheney. Devolving the funding to a more local level, with tax authority, would save money, avoid gridlock in the legislature, and let those counties that believe in government-lite enjoy the experience of having to tax themselves fully for what they want.

Don’t like that solution? I’ve got a second one, equally dramatic. This involves giving more money to the poor, shaving off all the money that, in the name of the poor, is going to the middle class.

The critical study along these lines is a paper, “Restoring a true safety net,” by two George Mason University researchers, David J. Armor and Sonia Sousa.  They argue that the dramatic increase in entitlement programs such as food stamps, Medicaid, and welfare is largely due to spreading these benefits well into the middle class. Some of this was due to stimulus spending under Obama, but the pattern goes back into the George W. Bush administration, before “exploding” in 2008-10.

 This suggests an obvious reform, which would be both humane, giving more money to the truly needy, and produce annual savings on the order of $160-260 billion a year.

Several factors have produced this “benefit creep.” Politicians like to spread funds around, especially to the sainted "middle class," and the recession casts such political favors in the light of stimulating consumption and the economy. Congress typically allows states and federal agencies wide latitude in determining eligibility thresholds. States like Washington, in flush times, take advantage of this, only to find it impossible to roll them back.  And it’s easier to reward the middle class under the cloak of stamping out poverty.

Here are some figures from the Armor/Sousa study. Food stamps enrollment has risen from 20 million in the early 1980s to 40 million today, with about 48 percent of the benefits going to non-poor households. Washington is one of 12 states that allows food stamp benefits up to 200 percent of the poverty line.

Medicaid is the big item in poverty programs, amounting to nearly half of anti-poverty expenditures.  Eligibility standards have risen steadily to where now “we estimate the federal cost for non-disabled persons [receiving Medicaid] who are below the poverty line to be $27.8 billion, while the federal cost for non-disabled persons who are above the poverty line is substantially higher: $40.3 billion.”

A similar story is found looking at welfare payments, now called Temporary Assistance for Needy Families (TANF) after the Clinton welfare reforms.  The analysis finds that more than 40 percent of TANF beneficiaries have incomes above 200 percent of the official poverty line.  The largest distortions of payments to the non-poor are in the Earned Income Tax Credit program, where 62 percent of beneficiaries are above the poverty line. The one area where money truly is targeted to the poor is housing assistance, where the poor get $10.4 billion of the $14.8 billion spent annually.

Obviously these are rough numbers, though they are huge, in the $2 trillion range over the usual 10-year period that deficit reduction figures use. The federal poverty line may be too low. Currently it's $11,702 for a single person under 65, and $22,811 for a family of four that includes two children. In high-cost states, this is absurdly low. Programs aimed at the disabled probably should not be cut at all. There would be a way to phase in such redefinitions of eligibility, starting with new applicants and phasing changes for current recipients over five years.  Drawing a firm line at 130 percent of the poverty line would net $1.68 trillion over 10 years, “without stoking class warfare or picking winners and losers among recipients of federal resources,” the authors suggest.

All this suggests that it is not just the rich or the corporate lobbyists who are gaming the American system. Low-tax states are feeding off the liberal states they deplore, and the lower middle class is siphoning off about half the money that is supposedly targeted for the truly poor. The public misses all this amid the sports metaphors and the simple, broad-brush contrasts of rich versus poor. 

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