Federal Transfers Are Not ‘Free’ Money

by Heather Mac Donald

The federal government’s biggest con game is promoting the fiction that federal dollars doled out to states and localities are “free” money — whether the Medicaid funds at stake in the Obamacare decision, food-stamp reimbursements, job-training money, or grants to local colleges for minority education in the sciences. In advance of the Obamacare decision, the Los Angeles Times warned about the $15 billion dollars in federal money that California would lose if the law were struck down: 

The cost of treating the uninsured here currently is borne by taxpayers, as well as consumers and employers who pay higher insurance premiums to subsidize their care. . . . The healthcare law that passed Congress in 2010 was designed to ease that burden by pumping in money from the federal government. California could receive as much as $9 billion a year to expand Medi-Cal, the government program for the poor and disabled. . . . An additional $6 billion a year would go directly to low- and middle-income people who buy subsidized policies through a state-run exchange that would open in 2014.

Where is this “new” federal money coming from if not from California’s taxpayers? Is everyone else in the country subsidizing California? No, every other state is expecting the same putative windfall from Obamacare, which they imagine is coming from taxpayers in other states. But it cannot be the case that every state is profiting at the expense of every other one.  

Nor is it the case that there is systematic redistribution from rich to poor states, otherwise, California should not be getting its health costs subsidized by taxpayers in Mississippi. If, however, in the final tally, after the thousands of grant programs emanating from the hundreds of federal bureaucracies play out, the 25 wealthiest states are subsidizing the 25 poorest states, say, then that $15 billion that California is salivating for doesn’t begin to compensate it for the tax dollars that its residents send to Washington, which are then routed elsewhere. 

The math simply doesn’t add up. Federal transfers are not even a zero-sum proposition; they are a negative-sum proposition, leaking value at every step of the way, thanks to the costs of collecting federal tax dollars, then trickling them back out to the states’ own costly bureaucracies via federal paper-pushers who write and oversee grant programs.  

And yet this massive Ponzi scheme allows the federal government to wield enormous power in the illusion that it is conferring on states and cities free money from some mysterious external source outside of their own businesses and residents. (The only arguable source of such money from beyond local sources would be money borrowed from China, say, which then gets magnanimously doled out to the states by wise federal bureaucrats, but even there, we — not “Washington” — pay the interest on the borrowed funds.) 

Obamacare’s terrifyingly cumbersome, competition-hostile apparatus for controlling medical costs is one of its most obvious flaws. But its promise of enriching state coffers through “federal” dollars is a scam that it shares with almost every other federal grant program. 

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