Archive for the ‘Federalism’ Category

The burden of government spending is already excessive. But the numbers will get worse with the passage of time if policy is left on autopilot.

The main culprits are the so-called mandatory programs. Entitlements such as Social Security, Medicare, Food Stamps, and Obamacare that automatically dispense money to various constituencies are consuming an ever-larger chunk of the economy’s output.

And if you want to be even more specific, the fastest-growing entitlement program is Medicaid, which was originally supposed to be a very small program to subsidize health care for poor people but has now metastasized into a budget-gobbling fiscal disaster. Arguably, it’s the entitlement program most in need of reform.

So how big is the problem? Enormous if you look at the numbers from the National Association of State Budget Officers.

States increased their spending in fiscal year 2015 by the biggest margin in more than 20 years, but most of the increase was thanks to huge leaps in Medicaid spending under the first full year of the Affordable Care Act (ACA). Spending increased last fiscal year, which ended on June 30 for most states, by 7.8 percent, according to new estimates from the National Association of State Budget Officers (NASBO). It’s the biggest boost since 1992 and was thanks to a 15.1 percent increase in Medicaid spending, much of that paid for via federal Medicaid funds. Illinois, Michigan, Kentucky, Nevada and Oregon saw more than 30 percent increases in federal funding because they expanded Medicaid under the ACA. But 2015 was also a year where states were putting up more of their own money again.

Here’s the chart showing which outlay categories grew the fastest.

The article points out that spending is outpacing revenue.

On average, state revenues aren’t keeping pace with spending; NASBO estimates General Fund revenues will increase by just 3.8 percent.

Though the real problem is that spending is expanding faster than the private sector, which is the opposite of what is called for by my Golden Rule.

One of the reasons Medicaid grows so fast is that the program is split between Washington and the states, which both picking up a share of the cost. This may sound reasonable, but it creates a very perverse incentive structure since politicians at both levels can vote to expand the spending burden while only having to provide part of the cost.

The National Center for Policy Analysis explains how this system produces bad decisions.

Medicaid has a horrible financing mechanism: Federal transfers to states are not based on the number of poor people, or any other reasonable calculation. Instead, they depend on the amount of its own taxpayers’ money a state spends. Traditionally, when California spent $1 on Medi-Cal, the federal government kicked in $1. …So, state politicians hike taxes and spending on their own citizens in order to get as much funding as possible from people in other states (via the feds). Hospitals and Medicaid MCOs maximize this by agreeing to a state tax on themselves, which the state uses to ratchet up the federal funding. After multiplication, the money goes right back to these providers. …Stopping this wild spending growth requires fundamental reform to Medicaid’s financing. Congressional Republicans have proposed “block grants,” whereby states would get federal Medicaid transfers based on their population of poor residents, not how much they gouge out of their own people.

But unless that kind of reform happens, the program will continue to grow and become an ever-larger fiscal burden.

Heritage Action has more details on the perverse incentives of the current system.

…the federal government promises to reimburse states for a majority of their Medicaid spending, most of which involves reimbursements to health care providers. Therefore, states collude with health care providers in the following manner: they tell providers that they will tax them (so-called “provider taxes”), bringing in more revenue to the state. The state then promises to filter that money back to those same providers in the form of higher Medicaid reimbursements. States then bill the federal government for this added cost. Because the federal government provides more than 50% of total Medicaid funding, both state governments and Medicaid providers are made better off by the arrangement, while the federal government is stuck footing a larger bill it had no part in creating.

Though I partially disagree with the assertion that the feds are blameless. After all, it was politicians in Washington who created this wretched system, including the reimbursement rules that states manipulate.

This info-graphic illustrates how the “provider fee” scam operates.

The net result of all this is a nightmare for federal taxpayers, but states also are losing out when you consider the long-run consequences. And that’s even true with the Medicaid expansions contained in Obamacare, which supposedly were going to be financed almost entirely by Uncle Sam. The Wall Street Journal reports.

…the Affordable Care Act was designed to essentially bribe states to expand their Medicaid programs: The feds offered to pay 100% of additional costs through 2016, dropping to 90% by 2020. This “free money” prompted 30 states and the District of Columbia to take the deal. Democratic activists have joined with state hospital lobbies to pressure lawmakers in the remaining 20 state capitals to follow.

But free money can be very expensive.

Consider the experience of the states that did expand Medicaid. “At least 14 states have seen new enrollments exceed their original projections, causing at least seven to increase their cost estimates for 2017,” the Associated Press reported in July. The AP says that California expected 800,000 new enrollees after the state’s 2013 Medicaid expansion, but wound up with 2.3 million. Enrollment outstripped estimates in New Mexico by 44%, Oregon by 73%, and Washington state by more than 100%. This has blown holes in state budgets. Illinois once projected that its Medicaid expansion would cost the state $573 million for 2017 through 2020. Yet 200,000 more people have enrolled than were expected, and the state has increased its estimated cost for covering each. The new price tag? About $2 billion… Enrollment overruns in Kentucky forced officials to more than double the anticipated cost of the state’s Medicaid expansion for 2017, the AP reports, to $74 million from $33 million. That figure could rise to $363 million a year by 2021. In Rhode Island, where one-quarter of the state’s population is now on Medicaid, the program consumes roughly 30% of all state spending, the Providence Journal reports. To plug this growing hole, Rhode Island has levied a 3.5% tax on insurance policies sold through the state’s ObamaCare exchange.

Interestingly, Obamacare is causing pro-big government states to dig even deeper fiscal holes.

The National Center for Policy Analysis has some remarkable data on this development.

States that expanded Medicaid tend to have per capita state spending that’s about 17 percent higher than non-expansion states. …In 2004, expansion states had median per capita tax collections (both state and local) of 19 percent more than non-expansion states. By 2012, this gap had widened with expansion states collecting 28 percent more taxes per capita than non-expansion states. Moreover, since 2008 expansion states have moved to increase taxes, while non-expansion states have reduced taxes slightly.

Unsurprisingly, the states that are making government bigger are experiencing slower growth.

In 2001 expansion states had real median income that was nearly 13 percent higher than non-expansion states. However, by 2013 this gap had narrowed to just over 9 percent. Expansion states have historically had slightly lower poverty rates, but the difference was only 1 percentage point by 2012 (12.9 percent vs. 13.9 percent). Non-expansion states, although slightly poorer, have lower unemployment than expansion states (6.7 percent versus 7.2 percent).

By the way, the decision by some states to reject Medicaid expansion is a huge – and underappreciated – victory over Obamacare.

Another point worth mentioning is that the program isn’t even a good deal for the poor according to Scott Atlas at the Hoover Institution. Here’s some of what he wrote for the Wall Street Journal.

Americans should be more worried than ever about Medicaid… The cost of the $500 billion program is expected to rise to $890 billion by 2024… Yet more spending doesn’t necessarily mean better care for beneficiaries… The expansion of Medicaid is one of the most misguided parts of ObamaCare… Some 55% of doctors in major metropolitan areas refuse to take new Medicaid patients… Medicaid enrollees who manage to see a doctor typically experience outcomes worse than those under private insurance. That means more in-hospital deaths, more complications from surgery, worse posttreatment survival rates, and longer hospital stays than similar patients with private insurance. A randomized study by the Oregon Health Study Group showed that having Medicaid did not significantly improve patients’ physical health compared with those without insurance.

The proverbial icing on this foul-tasting cake is the way the program enables staggering amounts of fraud and theft.

I’ve written about this before (including how foreigners are bilking the system). But here are some fresh details from the Wall Street Journal.

…one of our favorite political euphemisms is “improper payments.” That’s how Washington airbrushes away the taxpayer money that flows each year to someone who is not eligible, or to the right beneficiary in the wrong amount, or that disappears to fraud or federal accounting ineptitude. Now thanks to ObamaCare, improper payments are soaring. Last week the Health and Human Services Department published an “alert” warning that the improper payment rate for Medicaid in 2016 will likely hit 11.5%. That’s nearly double the 5.8% rate as recently as 2013… The 11.5% for 2016 is likely an underestimate given that HHS’s goal last year was 6.7% and instead scored 9.8%, which amounts to $29.1 billion. The dollar amount of improper payments in Medicaid was bound to rise because ObamaCare vastly opened eligibility. In 2015 enrollment climbed by 13.8% and one of five Americans are now covered by the program. …In recent audits of Medicaid in Arizona, Florida, Michigan and New Jersey, the GAO uncovered 50 dead people who recouped at least $9.6 million in benefits after they died; 47 providers who registered foreign addresses as their location of service in places such as Saudi Arabia; and $448 million bestowed on 199,000 beneficiaries with fake Social Security numbers—12,500 of which had never been issued by the Social Security Administration.

But as bad as all this sounds, it can get worse.

If HHS tries hard enough, maybe the department can match the failure rate for school lunches (15.7%) or the Earned Income Tax Credit (23.8%).

And Kevin Williamson of National Review adds some acidic observations.

…the criminal — and I do not use the word figuratively — administration of Medicaid by the Obama administration. …improper payments under Medicaid have become so common that they will account this year for almost 12 percent of total Medicaid spending — just shy of $140 billion. …That rate has doubled in only a few years…12 percent in improper payments isn’t an error rate — it’s a malfeasance rate. …If improper and illegal federal payments were an economy of their own, that economy would be bigger than Hungary’s… The Obama administration is not lifting a pinky to do anything about this, even though analysts such as John Hood have — for years — been arguing that it is necessary and possible to reform this mess. As the Wall Street Journal has reported, we don’t even verify that doctors billing Medicaid for services rendered are actually doctors. In many cases, we do not do much to verify that their patients actually, you know, exist. We’ve paid untold billions of dollars to “clinics” that turn out to be little more — or nothing more — than post-office boxes and prepaid cell phones. And as bad as that 12 percent rate is, some policy scholars believe that it is in fact probably worse.

Kevin observes that this system is good for the Poverty Pimps.

…the real problem with the welfare state is not the poor people receiving checks — it’s everybody in the middle, the vast array of government employees, their union allies, contractors, and third parties who earn six-, seven-, eight-, or nine-figure paydays taking their cuts of money we think we’re spending on the poor. This is an enormous criminal conspiracy against the American people and the public fisc.

You might think that fixing this fraud would be an area for bipartisan cooperation.

But the sad reality is that fraud is a feature, not a bug. Politicians like the fact that scam artists in their states and district are stealing healthcare money from taxpayers. After all, recipients of the loot can be registered voters and campaign contributors.

So what’s the best way of fixing this mess?

Will big tax hikes solve the problems? If the problem is that America isn’t enough like France, then the answer is yes.

But if the problem is that government already is too much of a burden and that it would be a good idea to at least slow down the rate at which America becomes France, then the answer is genuine entitlement reform.

And this video shows how the Medicaid program should be “block-granted” (just as welfare was reformed in the 1990s).

P.S. For all intents and purposes, block granting Medicaid is a partial repeal of Obamacare. Just in case you wanted an additional reason to support reform.

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Programs about the improbable success of Chile and Estonia already have aired on nationwide TV, and those were joined last weekend by a show about the “sensible nation” of Switzerland.

Here’s the 28-minute program.

When I first watched the program, I was slightly irked that there was very little discussion of the role of fiscal policy and the importance of spending restraint and competitive tax rates.

Moreover, there was no direct mention of Switzerland’s very successful spending cap, even though the “debt brake” has generated superb results.

Indeed, Switzerland is the only nation from Europe or North America that gets high scores from Economic Freedom of the World for both fiscal policy and rule of law (a notable achievement since Wagner’s Law tells us that it is very difficult to stop government from expanding once the private sector generates a lot of wealth that can be redistributed).

But I confess I’m biased about the importance of tax and spending issues.

And as I thought about what I had seen, I realized that the program’s focus on federalism and decentralization made sense.

Yes, Switzerland has a modest-sized government. And, yes, the debt brake has been a huge success. But those good outcomes are in part the result of a system where most government still takes place at the local (commune) or state (canton) level.

In other words, Switzerland generally still has the type of system America’s Founding Fathers envisioned, with a small central government.

I’ve already pointed out that the level of redistribution in Switzerland is relatively low because of its decentralized model.

But there’s another feature of federalism that’s worth celebrating. As Nassim Nicholas Taleb (of “Black Swan” fame) has pointed out, decentralized systems are much more stable and successful since there’s far less risk of a mistaken policy being imposed on a one-size-fits-all basis.

And countless scholars, including many Nobel Prize recipients, have explained that small, competing nations were a key reason why Europe became a rich continent in the first place.

Sadly, most Europeans have forgotten this lesson and have created the EU superstate in Brussels (which helps to explain why I’m delighted that the United Kingdom voted to escape that sinking ship).

So the moral of the story, from both the video about Switzerland and from all the other evidence in the world, is that federalism is good policy.

Let’s close with an interesting example of Swiss federalism in action. The canton of Zug is known for being a low-tax haven in a country famous for having a reasonable tax regime. Well, the town of Zug is on the cutting edge of digital money.

…the town council has hopes Zug’s trend as a financial tech hub continues  — having embraced the new identity with this legislative move. …As the pilot program is first implemented it will initially allow payments up to 200 Francs, and possibly introducing the ability to pay larger amounts later in the future. …analysis will ultimately determine whether or not the town council will continue allowing Bitcoin payments for municipal services. …Bitcoiners will be taking notice of this small town, and it already has the added benefit of being located in Switzerland  —  which is known for its business friendly environment and relatively small regulatory burden. …In fact, Switzerland’s business environment and relatively free-market economy even helped to convince the Bitcoin wallet and exchange, Xapo, to relocate to Switzerland last year. …the town of Zug itself also provides its citizens with a relatively hands-off approach to the local economy. The Swiss town of  Zug showcases one of the lowest tax rates in the world. This combination of a hands-off approach by the government and large tax benefits has made the small town into a successful economic hub where global trade flourishes.

Wow, this says a lot about the quality of governance in Switzerland that a nation that doesn’t need Bitcoin (unlike, say, Greece or Argentina) nonetheless welcomes it as a competing currency.

Yet another reason why Switzerland is one of the world’s best nations.

P.S. Today’s column is about Switzerland, but I can’t resist pointing out that Hong Kong and Singapore both score highly for rule of law and small government. And Chile deserves honorable mention as well. For what it’s worth, the Princess of the Levant’s home country of Lebanon apparently has the world’s small fiscal burden, but the low score for rule of law suggests that the real story is that the government is simply too incompetent to collect and redistribute money.

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Australia is one of my favorite nations, and not just because the people are friendly.

It has a modest-sized government, at least compared to other developed nations (see table 25 of this OECD data), and it has a very attractive private Social Security system that puts Australia in relatively good shape when looking at the long-run fiscal health of countries.

Indeed, this is one of the reasons why I picked Australia when asked which nation to choose if (when?) America suffers a Greek-style fiscal and economic collapse.

But this surely doesn’t mean that Australia has ideal public policy. It ranks #11 for economic freedom, which is better than America, but the Aussies trail first-place Hong Kong by more than one full point in the 1-10 scoring system.

That being said, Australia will probably move in the right direction if Prime Minister Malcolm Turnbull succeeds in his plan to implement real federalism by shrinking the central government and returning tax and spending authority to the states.

Here’s how an Australian media report characterized the issue.

Returning income taxing power to the states would have resulted in a fierce interstate economic battle that would see Australians vote with their feet and move their lives across borders to get a better deal, economists warn.

The reporter obviously is talking to left-wing economists. If she talked to sensible economists, the above sentence would end with “hope” rather than “warn.”

Here are some of the specific details.

The Prime Minister met with state premiers and territory chief ministers yesterday to discuss his plan to lower the federal government’s income tax and have the states make up the rest by collecting their own tax, to do with which whatever they please. If his bold scheme had gone ahead, they would eventually have been able to set their own tax rates as well.

Unfortunately, state-level politicians apparently are not happy with the notion of having real responsibility.

…premiers and chief ministers weren’t keen and the idea is now off the table, for now, after Malcolm Turnbull conceded there was “nothing like a consensus”.

Actually, there was a consensus of the state politicians. If you’ll allow me to provide a negative interpretation, they want the empty-suit job of taking money from the nation’s central government and then playing Santa Claus by distributing that money to various interest groups.

But I hope Turnbull isn’t giving up because of resistance by these hacks.

Here are some more excerpts that help to explain why he has a very good idea.

What he had been attempting to do with the tax shift was to force more responsibility onto state governments, and encourage greater accountability to its voters. It’s a new way of funding school and hospitals and is also designed to encourage competition between the states and force them to operate more efficiently. It’s a model called competitive federalism, which allows states to battle it out over a range of issues to compete to provide their citizens with the best value goods and services at the best cost.

And the reporter did talk to at least one good economist, my buddy Sinclair Davidson.

RMIT economist Professor Sinclair Davidson explains…“At the moment, because the federal government has so much power over the revenue that goes into health and education, for example, there’s not much difference between the states…But once that changes, for people whose state’s bundles of goods and services don’t suit their needs, they can start looking around.” With a mobile population threatening to abandon its state government, effectively stripping it of a major revenue supply, the voting public would have a lot more control over state governments, Prof Davidson says. …With state governments made more eager to please, it sounds like this new tax plan would be a win for voters, if those downward pressures on tax rates the system’s meant to encourage do come off.

Here’s a different prespective.

Curtin University Associate Professor Helen Hodgson argues state tax competition could lead to a race to the bottom. “The biggest challenge that would emerge is if states chose to exercise the right to increase or decrease their income tax rates,” she writes… Prof Hodgson says boosting migration between the states would put pressure on state governments to reduce their own rates as they compete to retain their populations, while “a general lowering of tax rates would defeat the stated intention of allowing states to raise additional funding for health and education.”

Methinks Professor Hodgson’s “stated intention” is not the same as Prime Minister Turnbull’s “stated intention.”

Here’s some more analysis from a column in The Conversation.

Malcolm Turnbull has called for a dramatic shift in Australia’s model of federalism… Many economists regard this as sensible and much-overdue reform…the argument is for a shift from a federal income tax to a state income tax. In principle, this can be done in a completely revenue-neutral way. …that would, on the whole, benefit Australian taxpayers because a more efficient tax system is a less costly tax system.

But it wouldn’t benefit state politicians in Australia. With the exception of Western Australia’s Colin Barnett, they don’t like accountability and responsibility.

state premiers…hated the idea. It’s important to understand why. This is not because the idea is bad for the citizens of the states, with the premiers being outraged on their behalf. Rather it is because it is bad for the political classes themselves, and the premiers in particular.

Citing the groundbreaking work of economist Charles Tiebout, the article includes a description of why tax competition between sub-national governments is desirable.

The basic idea is that the states compete with each other by offering bundles of public goods at different prices (i.e. taxes). This is the significance of the state-level income tax. Victoria, for example, may offer very high levels of public services, but also at a high price through high state income taxes. NSW may offer more moderate public services, but also much lighter taxes. What happens next is that citizens sort themselves over the states according to their preferences. Those who value high levels of public services move to Victoria, where they pay that marginal valuation in high taxes. Citizens with preferences for lower levels of public services and also taxes move to NSW. This is a market, not a political, model of local public goods. Economists like it because it encourages competition between the states to provide an efficient bundle of public goods and services at a point that voters (as consumers) are willing to pay. This competition tends to produce an efficient outcome.

Here’s the bottom line. The current system creates a perverse incentive for state officials to endlessly whine for more money. Putting state governments in charge creates an appropriate balance of responsibility and accountability.

That is not the situation we have now. Premiers are incentivised to represent their citizens as all wanting the maximum amount of public goods and services, because someone else is paying for them. State income taxes (coupled with reduced federal income taxes) are a way of implementing this mechanism. The main winners from this will be the 7 million or so Australian taxpayers, because it will deliver a much more efficient supply of public goods and services. The main losers will be the state and territory premiers, because they will have to compete in the market for political goods and services.

Heaven forbid, politicians actually having to collect and spend their own money. Especially in a system where taxpayers can look across state borders to see which states are doing a bad job or good job (think Texas vs. California). How cruel that would be! They would be forced…gasp…to compete.

But let’s set aside sarcasm. It’s worth noting that the most decentralized major economy is Switzerland, and that system has worked quite well.

And the United States also compares favorably with other developed nations, even though we’ve allowed Washington to grab powers that more properly belong at the state level (or in the private sector).

Hopefully, Turnbull’s plan in Australia will move forward and create additional evidence that America should return to the more robust federalist system that our Founders envisioned.

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Does Donald Trump have a consistent and coherent set of economic policies?

He sometimes says things indicating that he understands Washington is a cesspool of waste. But on other occasions, he seems to be singing off the same song sheet as Bernie Sanders.

Which is why, when I recently tried to dissect Trumponomics, I admitted to being clueless.

The honest answer is that I don’t know. He has put forth a giant tax cut that is reasonably well designed, so that implies more prosperity, but is he serious about the plan? And does he have a plan for the concomitant spending reforms needed to make his tax proposal viable? He also has lots of protectionist rhetoric, including a proposal for a 45 percent tax on Chinese products, which implies harmful dislocation to the American economy. Is he actually serious about risking a global trade war, or is his saber rattling just a negotiating tool, as some of his defenders claim?

For what it’s worth, I’m getting more skeptical that Trump would try to restrain and limit the federal government if he got elected.

And I have three recent news reports to underscore my concern.

Here’s a very disturbing example. Trump actually criticized Governor Scott Walker of Wisconsin for not raising taxes. Here’s an excerpt from a report in the U.K.-based Guardian.

Donald Trump attacked Wisconsin governor Scott Walker for failing to raise taxes in order to properly fund schools and roads on Tuesday, in a startling new break from rightwing orthodoxy… “There’s a $2.2bn deficit and the schools were going begging and everything was going begging because he didn’t want to raise taxes ’cause he was going to run for president,” said Trump. “So instead of raising taxes, he cut back on schools, he cut back on highways, he cut back on a lot of things.”

To dig deeper into the issue, Governor Walker had just endorsed Ted Cruz, so I can understand why Trump would try to take a few shots at someone who is supporting a rival for the GOP nomination.

But attacking the Wisconsin governor for successfully balancing his state’s budget without a tax hike? Sounds more like something Hillary would say. Maybe it’s time to induct Trump into the Charlie Brown Club.

Trump also doesn’t like federalism. Assuming he even knows what it is. In his column for the Washington Post, Professor Jonathan Adler shares some Q&A from a recent CNN interview with Trump.

QUESTION:  In your opinion, what are the top three functions of the United States government?

TRUMP:  Well, the greatest function of all by far is security for our nation.  I would also say health care, I would also say education.

This doesn’t sound like a candidate who wants to reduce the federal government’s footprint.

Here’s more of the interview.

COOPER:  So in terms of federal government role, you’re saying security, but you also say health care and education should be provided by the federal government?

TRUMP:  Well, those are two of the things.  Yes, sure.  I mean, there are obviously many things, housing, providing great neighborhoods…

Huh, providing “great neighborhoods” is now a legitimate function of the federal government?!? I guess if Washington gets to be involved with underwear, neighborhood policy is just fine.

And why is he talking about education when the goal should be to eliminate the Department of Education?

To be fair, Trump also said in the interview that he wants to get rid of Common Core.  So it’s unclear what he actually envisions.

His answer on healthcare is similarly hazy.

COOPER:  And federal health care run by the federal government?

TRUMP:  Health care – we need health care for our people.  We need a good – Obamacare is a disaster.  It’s proven to be…

COOPER:  But is that something the federal government should be doing?

TRUMP:  The government can lead it.

So he wants the federal government involved, but he also thinks Obamacare is a “disaster.” I certainly agree about the Obamacare part, but once again we’re left with no idea whether a President Trump would make good reforms of bad reforms (i.e., would he move the “health care freedom meter” in the right direction or wrong direction?).

One thing that is clear, however, is that Trump doesn’t seem to have any core principles about the size and scope of the federal government.

He may not even realize that federalism is a key issue for advocates of limited and constitutional government.

Last but not least, Trump criticized Senator Cruz for the partial government shutdown fight that occurred in 2013. Here are some passages from a report by Byron York in the Washington Examiner.

When Trump did get around to Cruz, his critique focused…on the 2013 partial government shutdown. …He goes and he stands on the floor of the Senate for a day and a half and he filibusters …. To stand there and to rant and rave for two days and to show people you can filibuster — and in the meantime, nothing was accomplished.

I guess this isn’t an issue of underlying principles, but it does give us some idea of whether a President Trump would be willing to fight the Washington establishment.

Moreover, his assessment of the shutdown fight is completely wrong. By reminding voters that Republicans were opposed to Obamacare, the GOP won a landslide victory in 2014.

But you don’t have to believe me. Even an ultra-establishment, anti-Cruz figure like Trent Lott (former senator and now lobbyist) grudgingly admits that the shutdown was a success.

Cruz views the shutdown as a victory because the Affordable Care Act remains unpopular and Republicans swept to victory in 2014. Lott said…“That was their strategy, and it worked, so maybe they’re right and I’m wrong.”

The bottom line is that America is heading in the wrong direction, with Washington projected to consume ever-larger amounts of the economy’s output. This is a recipe for continued economic weakness in the short run and economic crisis in the long run.

Turning policy in the right direction requires a principled President who is fully committed to overcoming resistance from the special interests that dominate Washington’s culture.

I still don’t pretend to know where Donald Trump is on the big issues, but I’m not holding my breath for good results if he somehow gets elected.

P.S. Though I do expect more examples of clever political humor the longer he’s in the public eye.

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For a wide range of reasons, the federal government should get out of the redistribution racket.

Welfare programs are costly, but they’re also not among the enumerated powers granted to the federal government by the Constitution.

But for those who don’t care whether the nation abides by its legal rule book, there’s also a very compelling argument that better policy can be achieved by ceding responsibility for anti-poverty initiatives to state and local governments.

As shown by the 1996 welfare reform, you’re likely to get changes that are good for both taxpayers and poor people.

We even see some glimmers of progress now that states have more ability to police the fraud-riddled food stamp program.

The Heritage Foundation recently published a report on what happened in Maine when the state started to impose a modest work requirement on childless beneficiaries.

Food stamps is one of the government’s largest means-tested welfare programs, with roughly 46 million participants and costing $80 billion a year. Since 2009, the fastest growth in participation has occurred among able-bodied adults without dependents (ABAWDs). …Maine implemented a work requirement for ABAWDs. As a result, their ABAWD caseload dropped by 80 percent within a few months, declining from 13,332 recipients in December 2014 to 2,678 in March 2015.

And here’s a very powerful chart from the study.

Wow, more than 4 out of 5 recipients decided to drop off the rolls rather than get a job.

Which shows that they never needed the handouts in the first place, already had a job in the shadow economy, or got a new job.

Investor’s Business Daily summarizes the situation with characteristic clarity.

The number of childless, able-bodied adult food stamp recipients in a New England state fell by 80% over the course of a few months. This didn’t require magic, just common sense. …This is a remarkable change and needs to be repeated in government programs across the country. How Maine achieved this is no mystery. Gov. Paul LePage simply established work requirements for food stamp recipients who have no dependents and are able enough to be employed.

This type of reform should be replicated, with big savings for taxpayers and even bigger benefits for those who shake off the emotionally crippling burden of dependency and become self sufficient.

The Heritage report says that if the Maine policy were repeated nationally, and the caseload dropped “at the same rate it did in Maine (which is very likely), taxpayer savings would be over $8.4 billion per year.” “Further reforms could bring the savings to $9.7 billion per year: around $100 per year for every individual currently paying federal income tax.” On top of the savings, there would be the added benefit of increasing the number of productive members of the economy, and cutting the cycle of government dependence that is ruinous to a society. …putting the able-bodied in position to be self-sufficient is a service to them, helping them shake their soul-strangling dependency on the state.

By the way, Maine isn’t the only state that is trying to be responsible and proactive.

Wisconsin also is taking some modest steps to curtail dependency. Here are some blurbs from a story in the Wisconsin State Journal.

The 2013-15 state budget created a rule for some recipients of the state’s food stamp program known as FoodShare: If you’re an able-bodied adult without children living at home, you must work at least 80 hours a month or look for work to stay in the program. That rule went into effect in April, and between July and September, about 25 percent of the 60,000 recipients eligible to work were dropped from the program when the penalty took effect, according to DHS data.

That’s good news for taxpayers.

But there’s also even better news for some of the recipients.

…about 4,500 recipients found work.

Yup, sometimes a bit of tough love is what’s needed to save people from life-destroying dependency.

That’s the good news.

The bad news is that these reforms in Maine and Wisconsin are just drops in the bucket. The federal government mostly has been a destructive force in recent years, working to expand the welfare state (in some cases using utterly dishonest means).

And even when Washington hasn’t been trying to make things worse, many state and local governments are perfectly content to watch federal money flow into the their state, even if the net result is to trap people in poverty.

Which bring us back to the main policy lesson. We need to get Washington out of the business of redistributing income. To the extent government involvement is necessary, state and local governments should be responsible for both raising and spending the money.

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Remember the cluster-you-know-what in New Orleans following Hurricane Katrina? Corrupt and incompetent politicians in both the city and at the state level acted passively, assuming that Uncle Sam somehow should be responsible for dealing with the storm.

And we’ve seen similar behavior from other state and local politicians before, during, and after other natural disasters.

The obvious lesson to be learned is that the federal government shouldn’t have any responsibility for dealing with natural disasters. All that does it create a wasteful layer of bureaucracy, while also inculcating a sense of learned helplessness on the part of state and local officials who should be responsible for dealing with storms and other local crises.

In other words, the answer is federalism. State and local governments should be solely responsible for state and local issues.

But not just because of some abstract principle. There’s a very strong practical argument that you get more sensible decisions when the public sector is limited (as Mark Steyn humorously explained) and there is clear responsibility and accountability at various levels of government.

And this is why the biggest lesson from the scandal of tainted water in Flint, Michigan, is that local politicians and bureaucrats should not be able to shift the blame either to the state or federal government. Which was my main point in this interview.

To be sure, it is outrageous that state and federal bureaucrats knew about the problem and didn’t make it public, so I surely don’t object to officials in Lansing and Washington getting fired.

But I do object to the political finger pointing, with Democrats trying to blame the Republican Governor and Republicans trying to blame the Democratic President.

Nope, the problem is an incompetent local government that failed to fulfill a core responsibility.

The Wall Street Journal has the same perspective, opining that the mess in Flint is a failure of government.

…the real Flint story is a cascade of government failure, including the Environmental Protection Agency.

More specifically (and as I noted in the interview), we have a local government that became a fiefdom for a self-serving bureaucracy that was more concerned with its privileged status than in providing core government services.

…after decades of misrule: More than 40% of residents live in poverty; the population has fallen by half since the 1960s to about 100,000. Bloated pensions and retiree health care gobble up about 33 cents of every dollar in the general fund.

And the WSJ editorial also castigated the state and federal bureaucrats that wrote memos rather than warning citizens.

MDEQ and the EPA were chatting about Flint’s system as early as February. MDEQ said it wanted to test the water more before deciding on corrosion controls, though it isn’t clear that federal law allows this. …the region’s top EPA official, political appointee Susan Hedman, responded… “When the report has been revised and fully vetted by EPA management, the findings and recommendations will be shared with the City and MDEQ and MDEQ will be responsible for following up with the City.” She also noted over email that it’s “a preliminary draft” and it’d be “premature to draw any conclusions.” The EPA did not notify the public.

The lesson is that adding state and federal bureaucracy impedes effective and competent local government.

The broader lesson is that ladling on layers of bureaucracy doesn’t result in better oversight and safety. It sometimes lets agencies shirk responsibility for the basic public services like clean water that government is responsible for providing.

Here’s the bottom line.

Federalism is about getting better government by creating clear lines of responsibility and accountability in an environment that allows state and local governments to learn from each other on best practices.

The current system blurs responsibility and accountability, by contrast, while also imposing needless expense and bureaucracy. And we get Katrina and Flint with this dysfunctional approach.

So whether it’s Medicaid, education, transportation, welfare, or disasters, involvement from Washington makes things worse rather than better.

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Federalism is great for many reasons. When you have dozens of states with the freedom to choose different policies, you get lots of innovation and diversity, which helps identify policies that work.

You also can minimize the cost of mistakes. When a policy error occurs in one state (for example, government-run healthcare in Vermont), it quickly becomes obvious and the damage can be contained and maybe even reversed. But when a mistake is made nationally (such as Obamacare), it’s not as easy to pinpoint why the economy is weakening and fixing the error thus becomes more difficult.

And it should go without saying that federalism is desirable because it facilitates and enables competition among jurisdictions. And that limits the power of governments to impose bad policy.

These are some of the reasons why I’m a huge fan of the Tax Foundation’s State Business Tax Climate Index. It’s a rigorous publication that calculates the good and bad features of every state’s tax system. It then add together all that data to generate a very helpful ranking of the nation’s best and worst state tax systems.

And since that’s what people care most about, let’s cut to the chase and look at the states at the top and the bottom of the Index.

There are a couple of things which should be obvious from these two lists.

First, it’s a very good idea to be part of the no-income-tax club. It’s no coincidence that 7 out of the top 10 states don’t have that pernicious levy.

Second, perhaps the biggest lesson from the states in the bottom 10 is that it’s basically impossible for a state with a big government to have a good tax system.

Third (and here’s where I’m going to be a contrarian), I’m not sure that Wyoming and Alaska really deserve their high rankings. Both states use energy severance taxes to finance relatively large public sectors. And while it’s true that energy severance taxes don’t do as much damage to a state’s competitiveness as other revenue sources, I nonetheless think there should be an asterisk next to those two states.

So I actually put South Dakota in first place (though I realize I’m implicitly incorporating government spending into the equation while the Tax Foundation is only measuring the tax environment for business).

Now that we’ve hit the main highlights, here’s some explanatory information from the Index.

…the Index is designed to show how well states structure their tax systems, and provides a roadmap for improvement. …The absence of a major tax is a common factor among many of the top ten states. …This does not mean, however, that a state cannot rank in the top ten while still levying all the major taxes. Indiana and Utah, for example, levy all of the major tax types, but do so with low rates on broad bases. The states in the bottom 10 tend to have a number of afflictions in common: complex, non-neutral taxes with comparatively high rates.

And here’s some details about the Index’s methodology.

The Index…comparing the states on over 100 different variables in the five major areas of taxation (corporate taxes, individual income taxes, sales taxes, unemployment insurance taxes, and property taxes)… Using the economic literature as our guide, we designed these five components to score each state’s business tax climate…The five components are not weighted equally… This improves the explanatory power of the State Business Tax Climate Index as a whole. …this edition is the 2016 Index and represents the tax climate of each state as of July 1, 2015, the first day of fiscal year 2016 for most states.

Here’s a map showing the ranking of every state.

Top-10 states are in blue and bottom-10 states are in orange. At the risk of repeating myself, notice how zero-income tax states rank highly.

The Wall Street Journal editorial page combed through the report for highlights. The biggest success story in recent years is North Carolina, which joined the flat tax club.

…North Carolina, which in 2013 slashed its top 7.75% income tax to a flat 5.75% and its corporate rate to 5% from 6.9%. The former 44th is now ranked 15th.

Given Martin O’Malley’s horrible record in Maryland, I’m surprised that he hasn’t picked up more support from crazy lefties in the Democratic Party.

As Governor of Maryland from 2007 to 2015, Democrat Martin O’Malley increased some 40 taxes including the corporate rate to 8.25% from 7% and the sales tax to 6% from 5%.

And here’s some good news from an unexpected place.

The trophy for most-improved this year goes to Illinois, which jumped to 23rd from 31st… The Tax Foundation notes that the leap occurred “due to the sunset of corporate and individual income tax increases”… First-year Republican Governor Bruce Rauner has let the income-tax rate lapse to 3.75% from 5% and the corporate rate to 7.75% from 9.5%, though Democrats are trying to push them back up.

Given how the tax hike backfired, let’s hope the Governor holds firm in this fight.

Now let’s return to some of the analysis in the Tax Foundation’s Index. Here’s some of the academic evidence on the importance of low tax burdens.

Helms concluded that a state’s ability to attract, retain, and encourage business activity is significantly affected by its pattern of taxation. Furthermore, tax increases significantly retard economic growth when the revenue is used to fund transfer payments. …Bartik (1989) provides strong evidence that taxes have a negative impact on business startups. He finds specifically that property taxes, because they are paid regardless of profit, have the strongest negative effect on business. Bartik’s econometric model also predicts tax elasticities of –0.1 to –0.5 that imply a 10 percent cut in tax rates will increase business activity by 1 to 5 percent. …Agostini and Tulayasathien (2001)…determined that for “foreign investors, the corporate tax rate is the most relevant tax in their investment decision.” …Mark, McGuire, and Papke (2000) found that taxes are a statistically significant factor in private-sector job growth. Specifically, they found that personal property taxes and sales taxes have economically large negative effects on the annual growth of private employment. …the consensus among recent literature is that state and local taxes negatively affect employment levels. Harden and Hoyt conclude that the corporate income tax has the most significant negative impact on the rate of growth in employment. Gupta and Hofmann (2003)…model covered 14 years of data and determined that firms tend to locate property in states where they are subject to lower income tax burdens.

The message is that all the major revenue sources – income, sales, and property – can have negative effects.

Which explains, of course, why it’s important to control state government spending.

And one final point to make is that we should do everything possible to shrink the size of the central government in Washington and transfer activities to the private sector or states. This isn’t because states don’t make mistakes, but rather because competition between states will produce far better results than a one-size-fits-all approach from Washington.

P.S. A study from German economists finds that decentralization limits economically harmful redistribution outlays.

P.P.S. And a study from the IMF reveals that decentralized government is more competent and efficient.

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