Transferring Wealth Across State Lines

July 05, 2012

Over at Forbes.com, Barry Poulson has a great article on a specific bailout few people are talking about, the silent bailout.  Much like large corporate handouts from the federal government, state governments are getting bailouts as well.  Years of fiscal disarray and irresponsible spending by some states is leaving them with mountains of debt, which is being paid for by tax payers from other states.

Silent bailouts entail the allocation of federal tax dollars to reckless states to help them meet their unrealistic spending obligations. This transfer shifts the debt burden of those states onto their responsible, wealth-creating neighbors.

For instance, Kansas, Oklahoma, Nebraska and some other ‘heartland’ states that have adopted fiscal policies to restrain growth in spending have been able to keep their budgets in check and, therefore, propose or enact cuts in their income taxes. In contrast profligate states, such as California and Illinois, have failed to reduce the growth in their own spending and continue to face sizeable deficits and accumulate debt.

The important economic truth is wealth can not be created out of thin air.  Every dollar the government (federal or state) spends, is one less dollar for private consumers or businesses to spend or invest.  Higher spending by government must be followed by higher taxes.  Higher taxes means slower economic growth.  Why is reckless spending (and slower growth) being rewarded with piles of cash?

With all this bailing out, one must ask, who will bailout the bailouters?

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