The Corner

Another Downside of Bailout Nation

Among the many reasons to be infuriated at the massive expansion of borrowing and spending by the federal government is that the relationship between Washington and other levels of government is being warped beyond recognition.

Federal funds are now the single-largest revenue source for state and local governments, edging out retail sales taxes. Of course, all federal funds derive from taxpayers who also live in states and localities, so the fiction of “free” money from “Washington” is one of the problems with this. Essentially, Congress and the administration issued a bunch of federal debt to finance state and local operating deficits — a subversion of legal and constitutional rules against the practice in most parts of the country, by the way — and thus bailed out state and local politicians who would have otherwise had to take responsibility for their past fiscal decisions and enact larger budget savings or tax hikes. Reckless fiscal policies, in other words, have been rewarded. Expect more.

Now that the Feds are their biggest paymaster, state and localities will face even more perverse incentives. Fiscal policy decisions previously made elsewhere will now be made in Washington, where special-interest pleading is usually more egregious than in legislatures or city halls. And I’d be willing to bet a significant sum (though I’d prefer to risk dollars than gold certificates) that Congress will end up renewing a significant share of the supposedly short-term “stimulus” bailout of states and localities in 2011.