Point/Counterpoint

At the New York Times Jacob Hacker makes his case that high income states should not subsidize low income states:

Republican leaders are betting that enough blue-state Republicans will put loyalty to party ahead of the prosperity of their state — or at least recognize that the first part of the Republican two-step (big tax cuts for rich people in blue as well as red states) may redound to their benefit even if the second (pay-fors aimed at blue states) doesn’t.

But if their bet pays off, it isn’t just blue states that will suffer. Red America may hold the key to Republicans’ control of government, but blue America holds many of the keys to our nation’s economic future. Indeed, among the blue-state pay-fors, the most troubling may be those that will bleed institutions of higher education, particularly in the House bill. In their zeal to extract revenues from blue states, Republicans are threatening our nation’s ability to excel in a global knowledge economy.

He’s writing about the proposed tax code reform plan but the argument pertains equally well to the many other subsidies which, when looked at from an ROI standpoint, mean that people who live in some states subsidize people who live in other states.

Taking the opposite position Cullen Roche explains how people who live in high income states benefit from the arrangement:

Basically, states like New York are like Germany. They produce a lot and pay a ton of taxes into the Federal Government’s coffers every year. They also get less in Federal expenditures than they pay in. So they are a net giver to the Federal Government. A state like Florida, on the other hand, is a net recipient as they pay in less than they get. Basically, Florida doesn’t produce as much as they earn so they get more Federal aid. They need this federal aid because they don’t have a currency that can become devalued so their output can become more attractively priced relative to New York’s so the balance of payments can correct over time.

This is a cool arrangement because Florida can be a net taker and never really have to worry about its solvency because it’s getting help from its friends (the rest of us). Now, this might sound like a raw deal for all those blue states in the picture below but it actually works out to New York’s benefit because many of New York’s customers are probably from Florida and the Federal aid they get means that Florida can remain solvent and not have to worry about dragging New York into some sort of recession once every few years because it doesn’t have funding.

Basically, a little redistribution makes the whole system more stable and results in more consistent growth with all the benefits & cost savings we have from using the same currency. If we didn’t have this system of redistribution then all those red states in the bottom right hand of the picture would go into recession much more often and they’d inevitably suck down the blue states with them as the blue states experienced reduced aggregate demand. But we don’t have to worry about that because the blue states’s poker chips get taxed more heavily and so the game goes on rather than coming to a screeching halt once every few decades because some of the players run out of chips.

Looking at things from a marginal standpoint and writing as someone who lives in the state with one of the very worst ROIs of taxes sent to Washington compared to federal spending in the state, I would like to ask Dr. Hacker why Illinois should be subsidizing New York and California. Because using his argument that’s exactly what’s happening.