The Agenda

Centralization and the Blue-State Bailout

An intriguing finding from Paul E. Peterson and Daniel Nadler of Harvard’s Program on Education Policy and Governance:

 

In a new study at Harvard’s Program on Education Policy and Governance, we discovered why the Obama administration is so interested in helping out the states. States with a bluish hue—that is, states with legislatures that are heavily Democratic and have a highly unionized public-sector work force—must pay interest rates that are often an extra half a percentage point higher than states with a reddish coloring.

Specifically, a 20 percentage-point increment in either the Democratic share of the state legislature or a comparable increase in the share of the public work force that is unionized drives up interest rates by nearly a half a percentage point on a five-year security note. That amount is nontrivial. In Obama’s home state of Illinois, it is costing governments over $700 million annually.

The impact of these political factors on interest rates is in addition to the impact of standard economic factors, such as a state’s unemployment rate, its gross domestic product growth, and its debt-to-GDP ratio, all of which are themselves shaped in part by the state’s political climate.

In short, the bond market has concluded that the more unionized the state and the bluer its political coloring, the riskier it is to hold bonds marketed by that state.

For those of us who see the centralization of power in Washington, D.C., and more to the point in an increasingly powerful executive branch, as a problem, this is an ominous development. Additional federal aid will come with strings attached. Blue-state legislators will push for tax harmonization efforts, for nationalizing the regulation of health insurance and education and other domains that give state and local governments room for maneuver, etc., all to avoid a “race to the bottom.”

As Michael Greve wrote in his excellent Real Federalism, the “race to the bottom” argument conceals more than it reveals:

The metaphor of a “race” conceals that that the collective action problem runs in several directions at once. The same competitive dynamic that may inhibit public-regarding legislation also inhibits states from legislating extortionate special-interest schemes. … One need not subscribe to an extreme cynicism to suspect that the benefits of forestalling interest group rackets and political redistribution exceed the costs of losing a few public goods in a “race to the bottom.” 

“Inhibits” is the operative word here. One problem that can’t be solved is that governments in beautiful, fun places can extort a great deal from taxpayers.

Reihan Salam is president of the Manhattan Institute and a contributing editor of National Review.

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