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State Bailouts

There is a debate raging on whether to bail out a state or not.  There are conspiracy theorists that say governors are using their power to keep states closed until they get a bail out.  It doesn’t help that NY Gov Andrew Cuomo said exactly that in a press conference.

We also can’t bailout states by passing an infrastructure bill. It didn’t work in 2009 and it won’t work now.

Cuomo also said that bailing out states was necessary because if we didn’t our economy would crater.  What, worse than it is now that government has deliberately cratered it?  That’s just fear mongering.  The fact is, our private sector is our economy and it would not crater if we didn’t bail out states and forced them into bankruptcy.

My home state governor JB Pritzker (D-Madigan) told a whopper.  Not just a whopper, but a deceitful lie.  He said that the Illinois budget would be balanced if Covid 19 hadn’t happened.  Illinois has been run by the Democratic Machine for over two decades.  The reason the budget is so screwed up is that the state caters to public sector unions.  Period.  Illinois has roughly 110,000 public sector employees making over $100k per year-and by the way none of them lost pay nor were they furloughed during the shutdown.

There should be no quarry given from any part of the Federal government when it comes to state finances.  I was dismayed the Fed stepped in and helped Illinois.  Let the bond market be the disciplinarian.  Congress ought to pass a law that allows states to go bankrupt.

The downside, there is moral hazard.  However, fool me once….the simple fact is the market wouldn’t believe them and they’d only be able to go bankrupt once.  The bond market is the strictist disciplinarian.  The stock market can get fluffy.  Bond markets are the old Catholic school nun that rapped your knuckles with a ruler.

The simple fact is when it comes to macroeconomics, government spending doesn’t add a lot to the gross domestic product of a country. Every dollar a government spends comes from a tax, or from debt which is simply a tax on the future earnings of citizens.  If you are wondering about the academic basis, read this by Professor John Cochrane.  It’s also why any “infrastructure bill” touted by Trump and others is absolute smoke and mirrors.  Cochrane writes,

Before we spend a trillion dollars or so, it’s important to understand how it’s supposed to work.  Spending supported by taxes pretty obviously won’t work:  If the government taxes A by $1 and gives the money to B, B can spend $1 more. But A spends $1 less and we are not collectively any better off2.

“Stimulus” supposes that if the government borrows $1 from A and gives it to B we get a fundamentally different result, and we all are $1.50 better off.

But here’s the catch: to borrow today, (Read more…)

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