A Quasi-Socialist Answer to a Socialist Dilemma
A Quasi-Socialist Answer to a Socialist Dilemma
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Imagine an upside-down university that gives its best students Ds and Fs, while the worst get the As. The best students will, of course, quickly notice and will seek to outdo the worst, by getting every question wrong, sitting slack-jawed in class, or skiving completely, in order to displace the worst students and capture the As. Realistically, no one would learn.  A system that aggressively rewards the inept, while penalizing the most competent, reaches a sorry endpoint defined by broad indolence.

Our hypothetical upside-down university, courtesy of Art Laffer, comes to mind as we watch the current Congressional spending spree, which follows precisely this model.  In the just-passed $1.9 trillion American Rescue Plan, $350 billion of wealth is distributed directly to our cities, states, and the District of Columbia. These funds are ultimately extracted from the private sector, even if the linkage is obscured by newly printed money.  Most of that money is distributed in proportion to the states’ and cities’ recent rates of unemployment. The states that have inflicted the most damage on their citizenry will have proportionally more dollars to “invest” in whatever programs these hapless governments choose.

Which brings us to the coronavirus that began spreading in the United States in early 2020, and likely earlier. The table below shows that COVID is apolitical and has little respect for shutdowns. It seems viruses don’t curl up and fall asleep in locales where people are forced to shelter-in-place. Unfortunately, economic activity is very sensitive to the doings of politicians and experts in ways that the virus plainly hasn’t been.  

Through March 31, 2021, Democratic “Trifecta” states – states with Democrats controlling the governorship, state Assembly, and state Senate – have near-identical deaths per million as the Republican Trifecta states.  There are fewer cases per million in the Democratic states, but that can just be a matter of more or less aggressive testing.  After all, the CDC estimates that known cases are less than one-third of the likely true total.   

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Employment is a different matter.  The Democratic Trifecta states saw unemployment more than double, from 3.8% to 8.0% on average, in the first 12 months of the pandemic, while the Republican Trifecta states saw unemployment rise from a near-identical 3.6% a year ago to 5.3% recently. For managing the economics of the virus more skillfully, Republican states will pay. Shades of a dystopian university system…And it gets worse.  

Once we’ve rewarded cities and states for soaring unemployment, they are forbidden to return the so-called stimulus to their citizenry with tax cuts in any of the coming four years, unless they want to return the stimulus money; this despite the fact that tax cuts are almost uniformly agreed to be among the most powerful forms of stimulus.  Governors, mayors, and attorneys general have many options to contest this tax-cut prohibition, but those challenges will take months or years to resolve, and the Supreme Court could easily go either way on this topic. The main concern is that bad economic policies will beget bad policies, given the incentives involved. 

Some governors and mayors may believe that the best stimulus is for their residents to receive the money directly, rather than expanding their bureaucracies or widening the yawning gap between public sector and private sector wages.  So, rather than waiting for courts to opine on the constitutionality of the federal government’s prohibiting state and local tax cuts, perhaps these governors and mayors can send state stimulus checks directly to their state residents.  The stimulus bill allocates another $750 billion in direct and indirect payments to the citizenry ($1400 per person direct to individuals, $3000 or more per child, $1000 extra in Earned Income Tax Credit, and a $300 per week supplement to unemployment), so it’s hard to imagine how Congress could thwart any state’s or city’s plans to make these similar distributions.  

Florida has done a good enough job keeping unemployment low that the state is getting “only” $9 billion of the state-stimulus distributions, with a like amount for its cities, while California and its cities are getting roughly $60 billion.  With 29 million residents, perhaps Governor DeSantis can send $300 in “stimulus” to each state resident, rather than spending it, and the mayors of Orlando and Miami can send a like sum to their residents, tacitly daring California and its cities to return their $1500 per resident to their 39 million residents. The full stimulus bill is more than five times as large as the funds sent to the states.  Had the entire $1.9 trillion been distributed to the people, every American would have received $6,000, or $24,000 to every family of four. But…Yes, there’s always “a but.”   

In our dystopian present, the productive are punished so that those sidelined either by choice or bad policy can receive more. In other words,  bad policy will be rewarded, while its continuance will be subsidized.  Who is most hurt by these policies?  Surprise:  these policies hurt the working poor more than anyone else.  Many of the working poor have already become non-working poor and many are likely to remain so. Long-term unemployment often leads to an erosion in self-respect and sense of accomplishment, while also inflicting the loss of both opportunity to grow as a human being and the hope for a better future. 

The best evidence for this unintended consequence is that unemployment is associated with a two- to four-fold increase in suicide, homicide, and overdose.  Largely unnoticed in the pandemic is that unnatural deaths (consisting mostly of accidents, homicides, suicides, and overdoses) have soared by tens of thousands over the past year, as is self-evident in the graph below.  It bears mention that these deaths – most of which happen in a far younger population – cost far more years of life than the average death from COVID, with roughly half of the lethal infections occurring in the older, frailer population likely to have passed away in the past year, even without the disease.   

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While the states that made horrendous economic policy decisions during the pandemic may win more redistribution largesse, their citizens will ultimately lose as a direct consequence. To believe otherwise, is to believe that the politicized distribution of wealth enhances economic outcomes when the economic situation is most dire. No, that’s not serious.  

So while we all lose when government is the allocator of resources, if some states and cities pass the stimulus funds directly to their citizenry, they are at least pursuing less of a socialist solution to a socialist problem. Any advocate of limited government would likely agree that sending checks to the citizenry is less destructive than feeding Leviathan. State and local stimulus distributions to their residents are perhaps the worst use of the state and local distributions in the COVID stimulus bill … other than all the other possibilities.   

Regardless of what states choose to do with their stimulus money, these programs foster a true race to the bottom among states. We are now in Art Laffer’s upside-down university.  Can we please graduate and return to a more sensible world? 

Rob Arnott is Founding Chairman of Research Affiliates, LLC. John Tamny is editor of RealClearMarkets, Vice President at FreedomWorks, and author of the new book, When Politicians Panicked: The New Coronavirus, Expert Opinion, and a Tragic Lapse of Reason.  

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