Federal subsidies to states — and a bit of political irony

July 3, 2012

In the aftermath of the SCOTUS ruling that upheld Obamacare, Florida Governor Rick Scott is leading the revolt against the ruling and the law itself, by refusing to accept the $1.9 billion in federal medicaid subsidies allocated to his state by the Affordable Care Act.

It got me thinking about federal transfers to states, and about something Paul Krugman wrote (in his blog or his book, I forget where), about the reasons why the United States is not suffering the same type of regional economic malfunction as the EU, even though both the US and EU are large single currency zones comprised of mostly independent governments.

One reason, Krugman notes, is that labor mobility is more constrained in the EU than in the US, due to language barriers and cultural differences and nationalism and whatnot. Even though unemployment is sky high in Spain, it’s still a rather prohibitive task for a Spaniard to move to Germany for work, where the culture and language are vastly different, than it is for, say, an American to move from Nevada to New York.

The other (more relevant to this post) reason Krugman noted is that the EU does not have a federal fiscal union to help mediate severe economic imbalances, such as the imbalances the EU is suffering from today. In the US, when states like Nevada and Florida imploded from the housing collapse, the federal govt was still there to pay for things like entitlements, social safety net programs, unemployment insurance, and even stimulus. In the EU, on the other hand, there’s no fiscal union, so nation states like Spain and Italy, suffering from similar housing collapses, are on their own when it comes to funding their social safety nets. This is severely straining their budgets, forcing them to contract, which only further depresses their economies, causing more unemployment and, in turn, higher safety net costs (and the vicious cycle just goes on and on, with no end in sight). The EU as a whole could easily handle the budgetary problems that the financial crisis has brought about, but the EU as independent fiscal entities is proving that it cannot.

So, getting back to the US, I was curious to see which states receive the most in federal transfers, and from which states those transfers are taken. I found this chart from the economist:

The states in red are net “debtors” — i.e, they receive more in federal funds than they pay in federal taxes. The states in blue are the creditors — they pay more in taxes than they receive in funds. The darker the color, the more extreme the deficit/surplus (in terms of the state’s GDP). So for example, NY, NJ and Minnesota are big creditors, while Mississippi, West Virginia, and New Mexico are big debtors.

All this “red” and “blue”-ness got me thinking about political parties and election results. Here’s the electoral chart from the 2008 presidential election (via npr)

Notice there’s a bit of correlation between the red and blue election results, and the red and blue fiscal positions. In fact, of the 22 states that leaned republican, only 4 are net creditors: Texas, Nebraska, Arkansas, and Georgia (and they’re all the lightest of blue, so just barely in surplus). On the contrary, of the 28 states that voted democratic, 17 are creditors.

Oh, and Florida? A debtor state (tho it did go for Obama in 2008).

So Governor Scott claims that Floridians simply cannot afford the new medicaid provisions under Obamacare, and for his sake, he’s probably right. Because the fact is, over the last 20 years the people of Florida have never been able to afford their entitlement programs.

I suppose you could draw your own conclusions about the correlation here, but it seems like those states that express the most fiery contempt for our overly large and imposing federal union, so happen to be the ones that benefit the most from it.

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One Response to “Federal subsidies to states — and a bit of political irony”

  1. gradivuus Says:

    Or suffer the most from it.


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