If the Federal Government Won’t Fund the States’ Emergency Needs, There Is Another Solution

Posted on by

Yves here. I’m glad to see Marshall Auerback mention the program that great American socialist Richard Nixon implemented, revenue sharing, which was the Federal government handing out money to local government. The opening paragraphs of a RIP in the New York Times in 1986:

In the first week of October, 39,000 cities, counties, towns, villages and other communities across the county received checks from the Treasury, some as small as $201. The biggest -$41,957,530 – went to New York City. With these checks, the program of Federal revenue-sharing came to an end, 14 years and $85 billion after it began.

In that span of time, from before Watergate to the afternoon of the Reagan era, this low-overhead, highly practical, widely popular program brought an extraordinary array of benefits to the people of New York and every state. Revenue-sharing paid for teachers in Manhattan and streetlights in Buffalo, provided snowplows for Adirondack villages and built the community hall and ice rink in New Hartford.

Note that Nixon didn’t believe in MMT. But he did recognize that the Federal government could collect taxes cheaply and more efficiently that states and cities, while local governments were closer to the needs of their citizens and could often deploy funds more efficiently and in a more tailored manner than the Federal government. Revenue sharing did have anti-fraud checks but otherwise was a streamlined program.

So we once had low-friction, routinized distribution of dough from the Federal government to communities. Here even in an emergency, we have difficulty getting that done, for all sorts of bad reasons.

By Marshall Auerback, a market analyst and commentator. Produced by Economy for All, a project of the Independent Media Institute

Many states are now experiencing severe budget deficits as they cope with the combined collapse of tax revenues and corresponding expansion of spending brought about by the coronavirus. Although the most recent $3 trillion fiscal package of the House Democrats proposes significant funding for the state and local governments, the GOP and the president have already said it’s “DOA.” That’s despite the fact that California Governor Gavin Newsom has already announced that the federal government has “an ethical obligation” to send money to the states in order to fund many of the frontline workers working to contain the coronavirus. New York Governor Andrew Cuomo also has called for hundreds of billions more in federal funding for the states not only to get through this phase of the crisis but also to protect their citizens moving forward in the event of a feared second wave. Absent this assistance from the federal government, many of the country’s states might have to introduce cuts amid a crisis at a time when the economy has already collapsed into a depression. That would be the worst thing to do at this juncture.

Today’s dire situation evokes what many states experienced in the wake of the 2008 financial crisis (if not worse). At that time, many of the same arguments marshaled against revenue sharing for the states were being made (especially by Republicans)—namely, that this kind of a measure represented a bailout for fiscally irresponsible governments that were failing to adequately reform their bloated pension schemes or undertake “meaningful reforms” (which in many cases was code for weakening public-sector unions that espoused political views contrary to the prevailing orthodoxy). Former Wisconsin Governor Scott Walker (a noted union-buster when he ran his state) is making exactly this case today.

But the truth is that today we are in the midst of a pandemic. Unlike 2008, it is a federal government-mandated shutdown that is the key precipitating factor behind the states’ respective fiscal crises, not runaway pension funds or uncontrolled government spending.

Washington should therefore supply the funds required to help the states close their budget gaps and to maintain public services at baseline levels, for the duration of the crisis. That’s the norm. Anytime a state is hit with a national emergency, the federal government does not first demand that the state government get its fiscal house in order. It mobilizes national funding immediately to deal with the crisis at hand, whatever the cause.

If the federal government persists in ignoring the fiscal needs of the states, a more radical approach might be required. California’s own history provides a potential path forward.

Back in 2009, when faced with a similar fiscal crisis, California’s state controller, John Chiang, began printing IOUs in lieu of cash to pay taxpayers, vendors, and local governments. In the context of a $26 billion fiscal deficit, the amount of IOUs created was actually quite small: 28,750 IOUs worth $53.3 million issued initially. But these IOUs came with a potentially radical provision, namely allowing them to be used for personal income tax refunds—an action that effectively would have meant that California was de facto entering the currency issuing business.

The tax payment provisions of the IOU program were headed off before they came into use. There were indications that Treasury Secretary Timothy Geithner pressured the banks not to accept the IOUs as payment for taxes. In any case, the Obama administration ultimately passed a sufficiently large-scale fiscal relief package (the 2009 American Recovery and Reinvestment Act) that alleviated the need for the more extreme measures contemplated by the California state government at that time.

That said, the economics behind the 2009 California project were solid, even though the experiment was never seen through to its full conclusion. In the words of the American economist Abba Lerner, from his essay in the 1947 edition of the American Economic Review:

“The modern state can make anything it chooses generally acceptable as money… It is true that a simple declaration that such and such is money will not do, even if backed by the most convincing constitutional evidence of the state’s absolute sovereignty. But if the state is willing to accept the proposed money in the payment of taxes and other obligations to itself the trick is done.” [emphasis added]

The key insight from Lerner here is that in a world of fiat currencies (i.e., money established via government fiat), both the use of currency and the value of said currency are based on the power of the issuing authority, as opposed to some underlying intrinsic value (as would be the case, say, if a currency was backed by gold). As I have written before, “The tax (and the corresponding ability to enforce payment) is what gives an otherwise worthless piece of paper with pictures of dead presidents on it its value. Even though this paper is not ‘backed’ by anything, taxes function to create the notional demand for said paper dollars.” The tax provision itself imparts the value or, as the economist A. Mitchell Innes termed it, “A dollar of money is a dollar, not because of the material of which it is made, but because of the dollar of tax which is imposed to redeem it.”

There’s no question that if the California government were to pursue this course today, they would be moving in a radically new direction because money creation has long been a monopoly function of the federal government, as the issuer of the dollar. States and municipalities are currency users and, as such, are limited in their ability to spend by taxation and bond revenues raised in the capital markets. They do not have access to a currency-creating printing press.

But if California did move in this direction, it would not be historically unique. Economist Rob Parenteau and I have documented five instances of paper currency being used simultaneously and interchangeably in the U.S. in the 1920s:

  1. Gold Certificates (redeemable in gold coin until FDR’s prohibition on private citizens holding gold)
  2. Silver Certificates (redeemable for coin or bullion)
  3. National Bank Notes (issued by U.S. government-chartered banks with equivalent face value of bonds deposited by bank at Treasury)
  4. United States Notes (issued directly by Treasury and called Legal Tender Notes, but with no “backing”)
  5. Federal Reserve Notes (redeemable in gold on demand at Treasury or in gold or “lawful money” at any Federal Reserve Bank, until FDR’s prohibition, when it was just declared legal tender redeemable in lawful money at the Fed or Treasury).

Similarly, in this instance, the proposed IOU would not replace the dollar, but could operate in parallel to extinguish state liabilities. By no means would this fully resolve California’s fiscal crisis (or any other state that adopts the proposal for that matter). But imparting a value to these IOUs (i.e., letting them be used to settle state tax) would ensure a demand for them and mitigate the immediate budgetary crisis faced by the states.

To be clear, this is not an ideal way to proceed. Far better would be immediate per capita distributions to all states to allow them to sustain relief efforts and public health policies designed to mitigate the spread of the coronavirus, similar in model to the range of block grants that the federal government has in the past allocated nationally.

There is nothing inherently radical or “un-American” about this proposal. Indeed, it was a Republican president, Richard Nixon, who first introduced the concept. As I described in an earlier piece:

Nixon viewed the federal bureaucracy as a poor revenue manager and argued that much counter-cyclical spending should go to the states, as they are closer to people’s needs and more directly hurt by falling revenues. But instead of simply cutting taxes, as later conservatives would, he proposed a new system called revenue sharing, which redirected funds to states and municipalities… Passed after contentious debate, the State and Local Assistance Act of 1972 initially delivered $4 billion per year in matching funds to states and municipalities. The program, which distributed some $83 billion before it was killed by Ronald Reagan in 1986, proved enormously popular.

And the mechanics today would likewise be very easy: the Treasury would appropriate the funds and the Federal Reserve would credit the states’ existing bank accounts. The states in turn could then spend those dollars to sustain vital services. This is another instance where the GOP’s obliviousness to the ramifications of the states’ respective fiscal crises is likely to make things far worse. At a minimum, Governor Newsom should force the issue before resorting to the drastic expedient of cutting essential workers.

The U.S. already operates a fiscal transfer union, so the chaotic issues of distribution and implementation that have characterized many of the newer federal relief programs would be non-factors here. There would be no bureaucratic obstacles to overcome, as has characterized other programs, such as the government’s Paycheck Protection Program (PPP) nightmare.

Done on a per capita basis, it would be effective at dealing with fiscal crises in a manner less prone to the kind of fascistic crony capitalism that continues to erode the political legitimacy of our existing institutions. But if per capita revenue distributions fail to pass muster in Washington, then California, as it has done so many times in the past, should be prepared to adopt a more radical policy stance in order to help lead the nation as a whole out of a self-inflicted fiscal crisis.

Print Friendly, PDF & Email

65 comments

  1. JBird4049

    GOP’s obliviousness to the ramifications of the states’ respective fiscal crises is likely to make things far worse

    This might be true, but it also might be not letting a disaster go to waste. First, it allows the erosion of local governments, their unions, and endangers pensions is all good especially as the thought was that the blue states were going to be hit hardest. Second, all this hubbub hides Mitch McConnell rapid approvals of very conservative people for federal judgeships that have been blocked for years. Supposedly very convenient disaster for Senator Majority Leader Mitch McConnell to use.

    McConnell is probably the single most important person in blocking noncorupt, adequate stimulus or emergency aid to small and medium businesses, individuals, and local governments; he is gambling that he has the driver’s seat, and since he might lose the upcoming re-election, this is the best and possibly last chance to complete as mentioned before some goals such as destroying or degrading local governments, unions and public pensions. This despite the intense screaming by governors and mayors of both parties and in both blue and red states for aid.

    However, both the Democratic and Republican Parties at the national level seem to be catastrophically underestimating the economic and social damage that has already happened and the much greater damage when COVID-19 re-emerges in a few months, possibly mutated into a deadlier strain as diseases tend to do in idea environments, and that the economy simply does not have enough resources for buying and selling products and services. At the local levels they are somewhat more aware of the existing damage because everyone is making sure that they are.

    If the likely unemployment rate today is 40% or about 15 percentage points higher than the highest unemployment level of the Great Depression what will it be like at Summer’s end? Further, if it becomes the general consensus that not only the bottom 90% of Americans, but also the national economy is being deliberately, let’s politely say hindered for more pillaging and power plays despite the ability of the national government to adequately fund any aid or stimulus needed, just how angry will people be?

    I mean the bank bailouts for crooks and the general screwing of the population after 2008 is generally agreed across the political spectrum. Everybody knows the system is rigged and the rich get richer, and the poor get poorer. However, seeing people encouraging a pandemic and a general economic collapse even by the likes of Mitch McConnell is disheartening. This is not merely ideological blindness, but a ruthless smash and grab by both parties. McConnell is merely the point man and distraction.

    Reply
    1. NotTimothyGeithner

      The GOP has been bad since 1865, but the consequences of so many non entities in Team Blue is there is simply no way of discussionew at the elite level to even seep through. They have no interest or knowledge of the world around them they can’t even act like they care.

      I mean Klobuchar is really out there discussing a $4000 tax credit for retraining. This is Dan Quayle territory all things considered. This might be the most bizarre proposal I’ve seen. The idea the states are going broke probably can’t even register.

      Reply
      1. Oh

        This nonsense about a tax credit won’t help people who pay little or no taxes. What’s the point if it doesn’t help the most needy? And the retraining scam is to help her buddies who run worthlss training classes. What’s the training for? Basket weaving? Chinese language class? Nursing when nurses are being laid off? C’mon!

        Reply
  2. Tom

    Nice post NC! But if people don’t elect the right people in but keep voting for the likes of Biden, how are we ever going to get these ideas implemented? There’s no lack of ideas, just a lack of will on the behalf of voters.

    Reply
    1. Tom Stone

      Tom,to paraphrase the late George Washington Plunkittt, “I don’t care who does the voting so long as I do the Nominating”

      Reply
      1. Carla

        Well, the people actually had a choice this time, and the people didn’t choose Bernie. They preferred the cognitively vacant, profoundly corrupt Biden. And then Bernie abandoned all who had supported him long before the primary season was over. Another clusterf*ck because the Covid-19 Depression wasn’t enough.

        Reply
      2. Adam Eran

        Don’t forget Boss Tweed’s saying: “I don’t care who people vote for as long as I can pick the candidates”

        And P.T. Barnum: “No one ever lost money underestimating the intelligence of the American public.”

        Or maybe Winston Churchill: “I can always rely on my American friends to do the right thing. Unfortunately, it’s often after they’ve tried everything else.”

        Reply
        1. rob

          or something maybe said by stalin..
          ” It doesn’t matter who votes, only who counts the votes”

          Electronic voting machine proprietary software anyone?

          Reply
  3. Mikel

    “Both the use of currency and the value of said currency are based on the power of the issuing authority, as opposed to some underlying intrinsic value (as would be the case, say, if a currency was backed by gold).

    Determining value is also related to power.
    The “value” of gold was an edict that came from the powerful. In ancient cultures, various things had value as currency.
    So just magically pick something else found in the ground or wherever, coronate it however necessary, and say it’s backing your currency since people are hung up on that concept.

    Reply
    1. anon16

      So just magically pick something else found in the ground or wherever, coronate it however necessary, and say it’s backing your currency since people are hung up on that concept. Mikel

      Except it’s the truth that sets people free – not convenient lies.

      And the truth is that the State’s money, fiat, is backed by the taxation authority and power of the State and should not be needlessly expensive, including in environmental terms.

      Reply
      1. Mikel

        The denseness around “what is backed by” drives me up the wall.
        All of that “gold” has intrinsic value BS is so hard to get around.

        Determining value is related to power: my main point.

        I’m fine with your point too.

        Overall, the world has changed and we’re tied to old myths of value.

        Whatever it takes to get us over this “manufactured scarcity” to preserve a false sense of growing wealth for a few.

        Reply
        1. anon17

          Whatever it takes to get us over this “manufactured scarcity” to preserve a false sense of growing wealth for a few. Mikel

          It’s not just the supply of fiat that is important but also the demand for it and we should note that the demand for fiat is unjustly suppressed in that only private depository institutions (aka “the banks”) may even use fiat except for mere grubby physical fiat, coins and paper Central Bank Notes which the non-bank private sector may use to a limited extent.

          So although the Gold Standard has been abolished, we continue with the Gold Standard banking model or as Allan Greenspan said, “We have learned to make fiat behave like gold”, as if that’s a good thing.

          Reply
  4. Watt4Bob

    Yes but, you’re talking about denying plutocrats their god-given right to the opportunities afforded by the crisis.

    Every dollar used to ease the burden of the states and cities lessens the necessity of imposing austerity.

    “Come on, man…”

    Without ever-increasing austerity how are we to maintain the flow of wealth upward?

    Reply
  5. LowellHighlander

    A brilliant post, and a stellar example of why one of my old professors from graduate school (Robert Prasch, Ph.D. in Econ from UC-Berkeley) called Naked Capitalism “must” reading.

    Inasmuch as sophisticated people in the Imperial Capital love the mantra “Never let a serious crisis go to waste”, can we also take this opportunity to push for the creation of State Banks, a la North Dakota’s, as has long been advocated by Ms. Ellen Brown, Esq.?

    Reply
    1. Marshall Auerback

      Bob was a friend of mine. Great man and a truly outstanding economist. We lost him way too soon.

      Reply
  6. Shiloh1

    This article has motivated me to re-listen to the Jim Sinclair interview by Greg Hunter on USA Watchdog about 3 weeks ago regarding 2 U.S. currency resets and the price of gold.

    Reply
    1. Generalfeldmarschall von Hindenburg

      I had forgotten about that guy. Whatever is really happening with this crisis, it’s bringing attention to a lot of heterodox thinking. So at least it’s done some good

      Reply
  7. The Rev Kev

    I heard that the rule of thumb is that if you can pay taxes with it, it is a currency. Even if California issues currency to just pay Californian taxes and the like, this should be a huge help. There is at least one place which established a proof of concept for this – in a small town in Austria back in the 30s. It was an outstanding success so the Austrian central bank and Austrian court killed it before it could spread.

    At the moment the Federal government will not help. It may be that this is by intent so that all the States go into a ditch and Wall Street can go in with the trillions given to them in the CARES bill and buy up anything not nailed down. Jimmy Dore & Dylan Ratigan say it is like if your car runs out of gas so the Feds come along, steal your tires and rip your radio out before driving off. So if you follow the rules set out in front of you that will lead to your destruction, then it is time to kick the table over and start doing something different and issuing a currency would help.

    Maybe forming a State bank along the lines of the Bank of North Dakota too might help. In for a penny, in for a pound? And it has not escaped my notice that if it can be done in the US, then perhaps it can be done in the countries of the EU as well with their problems. Below are links to that Austrian experiment

    http://www.lietaer.com/2010/03/the-worgl-experiment/

    https://mises.org/library/free-money-miracle

    Reply
    1. NotTimothyGeithner

      The biggest problem is where we get our food and supplies or where our landlords/banks are. In the end too many vendors simply wouldn’t take anote alternative currency.

      Reply
      1. juno mas

        That’s what the Western States Alliance(CA,OR,WA,NV,AZ,CO) is for. Plenty of food, electrical power, transportation, recreation, diverse economy, science and education, money. The Pacific ocean for protection on the one side and the great expanse of desert and plains on the other. Let’s go!

        Reply
  8. rob

    This doesn’t seem to be “currency”.. It seems like “company scrip”.
    It is like your employer paying you in “their scrip”…
    they also happen to be your landlord/…. so you can use it to pay rent..
    they also own the general store… so you can buy your food and stuff..
    but .. the bus in town,,,,
    Only takes cash…. so
    if you try to leave…. you’re walking.

    Currency, ought to be universal.
    And if those credits from california gov’t are not “transferable” to someone else…. IT IS NOT “money”
    But if this “gimmick” works , in situations where the states don’t have the flexibility of banks;” to create their own money.”… good for them.

    Reply
  9. Tom Stone

    40 Million unemployed, mostly in low paid service jobs.
    How many will end up homeless. 10%?
    More?
    And they have already lost their lousy health insurance, during a pandemic.
    By November, in an election year.
    Thank goodness for total information awareness and the 1033 program or this might become a problem.

    Reply
  10. Rodger Mitchell

    Every form of money is a form of debt backed by the full faith and of the issuer, i.e. the debtor. (https://mythfighter.com/2010/02/23/understanding-federal-debt/)

    The notion that money is, or ever was, backed by gold, silver, or some other valuable physical asset is nonsense, since it is the issuer that determines the backing (aka “collateral”)..

    When gold and silver supposedly collateralized the U.S. dollar, the U.S. arbitrarily changed this “backing” on several occasions. Because a money issuer arbitrarily can change the collateral, of what use is the collateral?

    The U.S. states vis a vis the U.S. government are in exactly the same position as the euro nations vis a vis the EU.

    Like the U.S. states, the euro nations cannot control their money supply nor do they have the unlimited ability to create money.

    That is why some of the euro nations and some of the U.S. states are in perpetual financial difficulty. The entire process of one Monetarily Sovereign entity controlling multiple monetarily non-sovereign entities is broken.

    Reply
  11. blakkman

    I’d much prefer to see a Governor take a more rebellious posture and say, simply: “if the Federal Government has taken the position that we are to go bankrupt in the middle of a dire worldwide emergency, then we have to ask the basic question of why we pay Federal Taxes. I will encourage my citizens to pay their Federal Taxes directly to the State. Let the Federal Government build large enough prisons to house everyone.”
    Is there really a future for this union anyhow?

    Reply
  12. chuck roast

    Nice…now lets discuss praxis. How is this theory implemented efficiently in a modern economy? Certainly Newsom will not be issuing paper Calnotes. It would have to be some sort of digital (gaaahhhh!) currency. Will it rope us all into the dreaded “smart” world whether we like it or not? How about block chain…a solution looking for a problem? Could block chain be helpful as a payment and receipt mechanism or would the associated costs drown the benefits?

    Come on Marshall! You throw these genius theories out there, now put some flesh on these bones. How would this thingy work in practice?

    Reply
    1. rob

      There was an article the other day about something just like this
      In forbes online “digital greenbacks”
      https:www.forbes.com/sites/rhockett/2020/05/17/digital-greenbacks/#60ba482d3b88

      It would be in the ballpark of something… if preceeded by passage and implementation of “the need act”
      https://www.congress.gov/bill/112-thcongress/house-bill/2990/text

      And not just being another fee base for the private banking system that charges everyone interest for creating money for them…. i.e. national debt.

      Reply
  13. Billy

    “Newsom has already announced that the federal government has “an ethical obligation” to send money to the states in order to fund many of the frontline workers working to contain the coronavirus.”

    Doesn’t Newsom have an ‘ethical obligation’ to follow federal law then? i.e. immigration?
    And, the budget hole he has created by using California taxpayers dollars to pay for other countries’ non-legal residents, through sanctuary state, free healthcare for illegal children and adults, shouldn’t he stop digging that hole first, before begging for other state’s taxpayer money to help fill it?

    Reply
    1. GF

      What Newsom is spending on non-legal residents is a drop in the bucket compared to the cost of treating those immigrants that get infected by the virus. It is just common sense. It would be easier to let them all get sick and infect everyone in the state, but Newsom doesn’t like that option.

      Reply
      1. periol

        “It would be easier to let them all get sick and infect everyone in the state”

        Sure, it would be “easier”.

        I’m trying to understand why anyone who has taken a serious look at this virus and what it does would advocate for this option.

        Reply
    2. periol

      I mean, if we’re really going to talk about illegal immigration than surely we can talk about the conditions that make it possible. It’s no secret that illegal immigration largely benefits the wealthy. I have no problem with Newsom being compassionate towards people who are here because the elite use them as a tool to suppress the lower class. They are pawns, and deserve our support.

      If you want to get serious about illegal immigration, get mad at the people who created the problem, not the people who are unwitting pawns and just doing their best to get by. We should want them to become citizens. Their illegal status only benefits one class.

      Reply
      1. Aumua

        Well if we’re going to talk about the conditions that make illegal immigration possible, then maybe we should talk about global poverty and what causes are behind that.

        Reply
        1. Adam Eran

          …or maybe the fact that between 1798 and 1994 the U.S. was responsible for 41 changes of government south of its borders. The military and political attacks have literally been creating refugees for centuries.

          And then there are the economic attacks. NAFTA unleashed capital flight (remember the Clinton administration’s $20 billion emergency loan, bailing out U.S. banks in Mexico?) and shipped a bunch of subsidized Iowa corn down south. Big Mexican farmers got a bailout, but the little subsistence farmers keeping the disease resistance and diversity of the corn genome alive got nothing but the incentive to come north and mow lawns.

          In the wake of Lehman’s bankruptcy, Mexican real median income declined 34%. One has to revisit the Great Depression to find a figure like that in the U.S. economy.

          Reply
        2. periol

          Sure, we could macro-view everything, or we could talk about how ICE only seems to raid places that hire illegal immigrants (meatpackers, for instance) when the workers start getting uppity…

          Reply
    3. juno mas

      What are you having for dinner tonight? Salad? Meatloaf? Strawberry pie for dessert?

      Lettuce grown in California is picked by those immigrants. Meat processing is performed by those immigrants. The fresh strawberries come from Oxnard,CA and are picked, packed, and shipped by those immigrants. Careful what you wish for. It’s only seven missed meals to anarchy.

      Reply
      1. Billy

        Seriously? You don’t know the difference between “immigrants” “legal citizens” and “Illegals”?
        96 percent of illegals work in non-agricuture jobs, per Cornel U study.

        Reply
        1. juno mas

          Seriously. Your comment was about Gavin Newsome. That’s California. Live here? While immigrants (documented or undocumented) work in ALL aspects of the California economy, they dominate the hard labor necessary for the agriculture industry to bring food to your table. Let’s see the citation for the Cornel study. Does it focus on the US or California? Enjoy your dinner.

          Reply
  14. orlbucfan

    “that great American socialist Richard Nixon…”
    Thanks for the laugh, Yves. Always welcomed medicine.

    Reply
  15. Tim Smyth

    Revenue sharing or tax collection agreements are in fact the primary means of revenue collection in most “Federal” countries outside of the US so Australia, Canada, Germany, Switzerland for example. Australian states turned over all of their income tax powers to the Federal government years ago and sales tax(GST) collection in the late 1990s. Canada is perhaps the weakest of this model with Quebec and some Western Canadian regionalists being opposed to too much centralization of revenue collection in Ottawa. Canada is notable I would say for the so called tax collection agreements where provinces still maintain a provincial income tax in a legal sense but all of the actual collection is done by the Federal government. Even so I suspect most Finance Dept officials in Ottawa would view the Australian model where everything is collected by Canberra to be superior(This in fact was the model Canada had temporarily during World War II).

    I will also add that revenue sharing and fiscal transfer have a very long history in Canada. In fact Ontario received a greater percentage of it’s budget from Federal transfers a 100 years ago compared to today(Not counting TCA agreements however).

    Reply
    1. wilroncanada

      Thanks, Tim Smith, for the comparisons to countries like Australia, Canada, Germany, Switzerland. But there was just one note missing. Those are First world countries. The US is, without its bullies (military), a Third World shit-hole country, run by a strong-men cabal for the benefit of a few insiders. In other words, it is North Korea, or Guatemala, with a talking shop in Washington to keep the people distracted..

      Reply
    2. Keith Newman

      A small addition to Tim Smyth’s comment: I live in the province of Quebec and just finished doing my income tax returns, one federal, one provincial. My point being that Quebec actually does collect its own income taxes. There are substantial federal transfers to the province, as there are to all provinces, for public health care, education and welfare.
      As an aside, the federal government has just announced it is discussing with the provinces the possibility of establishing a Canada-wide 10 days per year paid sick leave provision for all workers in the country as an anti-COVID measure.

      Reply
      1. Tim Smyth

        Thanks Keith,

        I wasn’t clear enough but yes Quebec is the one province in Canada that collects it’s own personal income tax(and corporate tax and sales tax). Some Western provinces still collect their own sales taxes(BC, SK, and MB) or corporate tax(Alberta). Nonetheless even Quebec receives substantial federal transfers compared to US states as you mentioned.

        Ontario and the Atlantic provinces outsource almost all of their tax collection to Ottawa on the other hand more akin to the Australian model.

        Another Canadian twist is that unemployment insurance is a exclusive Federal competency.

        Reply
  16. Susan the other

    State currency could see us through the collapse of our country. Until we can come together again and write a new constitution with a modern social contract. Right now we are falling apart not because there are crazy revolutionaries out there with pitchforks (Obama’s ignorant, smug analysis) – we are falling apart because the government is operating on an idea whose time has gone. We are lucky we have good state governments because we have suffered far too long by federal misgovernment to let it continue. There is no excuse for it. There is no excuse for a man like Mitch McConnell to be making our decisions in the 21st century.

    Reply
    1. Carla

      Excellent comment.

      But when you say “We are lucky we have good state governments because we have suffered far too long by federal misgovernment to let it continue” — I trust you speak for your own state government? Too many Americans do NOT have good state governments, and I am one of them.

      Reply
  17. Marshall Auerback

    Another possibility that came to me subsequent to finishing the article would be the possibility of the Fed buying 30yr state-issued bonds at near zero rates of interest in Qtys approximated by each state’s virus-related shortfall. My hesitation there stems from the fact that I don’t want to give BlackRock another unnecessary windfall, but better the Fed than Mitch McConnell handling this. Who knows, but it would de-politicize the reversal of the negative-feedback loop associated with austerity in the time of contraction.

    Reply
    1. John Anthony La Pietra

      I’ve often wondered if school districts couldn’t put at least some of their bond issues into smaller denominations so citizens could invest in their community schools, not just pay taxes to them. Maybe that kind of model (or the old example of savings bonds) could be applied here — maybe even with a per-capita cap to make sure the benefits spread out a little more.

      Reply
      1. rob

        That is an interesting idea…
        And it would make sense for the “public” schools.

        But right off,
        1)
        wouldn’t it be likely that just like the inequality in funding of public schools which varies in relation to the socio-economic position of the neighborhood each school happens to be in geographically; would just be extended by those who can economically… still investing in schools in THEIR neighborhood. Whereas the poor schools now… are surrounded by poor people, who don’t have extra income to invest in local bonds… at their kids schools.
        Maybe they could invest in state bonds that specifically “even” the spending per pupil to poor schools…

        2)
        then there is the problem..
        a lot of schools are private… or charter,,,
        businesses who teach kids…
        Betsy devos and friends would love another way to collect money for their “school businesses”. And these kinds of players would have the staff and marketing campaigns… to “sell” bonds….
        Just another grift…. for these people.

        Reply
  18. rd

    The loudest calls for immediate re-opening of the country are generally from states that collect above-average percetnge of their revenue from sales taxes: https://taxfoundation.org/sources-state-and-local-tax-revenues/

    States like NYS have fairly balanced tax soruces, so shutting things down is a significant hit, but income tax, property tax etc. keep rolling in especially from the wealthier white collar workers working from home (NYS has barely skipped a beat collecting taxes from me). But those people are not eating in restaurants, buying lots of things in local stores, paying airport taxes, staying in hotels etc.. States that rely greatly on those revenue sources, especially if they rely on out-of-town people paying those sales taxes, are getting hammered. Opening up bars, restaurants, hotels, etc. is existential for them especially since many of the areas that relied on tourists coming down for warmth in March and April saw that completely dry up.

    Arizona, Florida, Nevada, New Mexico, Oklahoma, South Dakota, Texas, etc. rely on sales taxes for over 40% of their revenue, in some cases over 50%. It is not a coincidence that those governors are generally pushing hard for the economy to reopen and consumers to hit the bars. Kentucky has a more balanced revenue stream, so the pressure isn’t as intense there.

    Reply
  19. K teh

    Joining a tribe and clawing to the best possible position makes sense for most, in the short term. The need to belong creates the status quo, which is exploited by the most efficient management system, pulling the distribution backwards with financialization. The 10% bails itself out every cycle with its own jubilee. At the end of a supercycle it entertains a few bananas for the others, to survive another day, until it can’t.

    Physics, for those who work despite every disincentive to do so. Bottom up operational leverage.

    Reply
  20. Michael von Plato

    RE: “…he value of said currency are based on the power of the issuing authority, as opposed to some underlying intrinsic value (as would be the case, say, if a currency was backed by gold).”
    Yves, to which intrinsic value of Au are you referring? The one of August 1980? January 1973? The current one? Or the price prior to Aug. 15, 1971, $35 per ounce before we went off the gold standard?
    https://www.macrotrends.net/1333/historical-gold-prices-100-year-chart

    Reply
  21. smoker

    Thank you for this piece.

    Have to add, that while he’s absolutely correct about our shameless Federal Government, it’s very difficult to hear the words ethical obligation coming from Newsom’s mouth, when he’s never appeared to have any ethics himself (e.g. taking 208k from PG&E for his 2018 campaign after they were convicted of felony death.), particularly as regards the stunning levels of California inequality, poverty and homelessness prior to the pandemic; and particularly when he’s proposing deadly Medi-Cal cuts and reinstating California’s prior onerous Estate Recovery Rules. There’s some Bi-Partisan rumblings among State Legislators regarding Newsom’s current One Man Rule, perhaps they can push him in a far better direction instead of punishing the most vulnerable and powerless.

    (Sorry in advance, if anyone responds to this, I can’t nest a further comment directly below it, as allowing scripting is currently crashing my computer.)

    Reply
  22. Oregoncharles

    ” he did recognize that the Federal government could collect taxes cheaply and more efficiently that states and cities, while local governments were closer to the needs of their citizens ”
    Another big advantage: federal taxes are harder to escape. Otherwise, businesses and even individuals will play the states against each other.

    Or so the states and localities tend to think. Countervailing case: a couple of recessions ago, I attended a local legislator’s town hall and heard an OSU economist – “applied economics,” at that – describe Oregon as a low-tax, low-service state. That was always justified as a way to attract “jawbs;” but at the time, Oregon had the WORST unemployment in the entire country – worse than the usual suspects in the South. Apparently businesses don’t really like “low services.” To make it worse, most of the cuts in taxes had been on businesses – same logic – so there was a steadily increasing burden on citizens, leading to a “tax revolt” and a rather nonsensical property tax limitation.

    To my knowledge, despite Oregon’s “blue” reputation, there has been little improvement in the underlying fiscal picture.

    (To be fair, there was another factor: the state “economic development” agency had put all its chips on the high-tech industry, which turned out to be even more pro-cyclical than the declining timber industry. I think that agency would be a good place to save a nice chunk of change.)

    Of course, “low service” also means you don’t have a strong public health system. So far, we’ve been lucky.

    Reply
  23. Barry

    At this point, I have trouble reading any books or columns with earnest proposals of whatever policy solution to address whichever big problem facing the nation today (and I’ve been reading them since the 80s).

    This is like telling the makers of the Encyclopedia Britannica that they should instead be contributors to Wikipedia, because of course they want to most effectively share facts about everything — right?

    The problem isn’t that no one has thought of the right solution or policy.

    The problem is that the government is ruled by neoliberals, and we are not allowed to have anything that neoliberals don’t want us to have. The US government that used to enact sensible policies based on what worked for the nation as a whole (e.g Nixon’s revenue sharing or environmental laws) no longer exists.

    This isn’t just the oligarchs taking advantage of a crisis to grab more power (like they do). This is them striving to prevent the crisis from undoing their 45 years of work. That project has been aimed at both changing the course of the nation AND preventing anyone from organizing to change it back.

    So I feel safe in saying that if any policy proposal arises, at the federal or state level, that would dilute the power of the Boardroom Class and/or shelter the Precariat from the Market’s Divine Judgment; then that policy will be nixed — to the extent of their power to nix it.

    If California for example created a state currency, I would predict that the federal government would use every trick in its book to force California to relent. And the media and the DNC would help.

    This is why we can’t have nice things.

    Reply
    1. GramSci

      Well that begs the question, “what tricks does Washington have in its books?” It seems to me that California’s secession threat will not be easy to deal with.

      Reply
        1. Michael von Plato

          How about greasing the track for the South to leave? Most if not all of the money distributed to the South by the feds comes from Northern taxes paid.

          Reply
      1. Barry

        Given that I was repeatedly surprised by the shenanigans pulled on groups of any scale who have in recent years sought to resist the neoliberal agenda, I would not want to try to say what tricks Washington has in its books.

        I’m not sure what you mean about CA threatening secession. I’m interpreting it as you saying that this would give CA a lot of leverage or bargaining power; if so, I would have to disagree. As much as I daydream about CA seceding from the US, there is no way that it would happen that is not devastating for all involved.

        I don’t know if the neoliberal consensus has enough power to break (for example) California at this point in time. What I am saying is that they would mobilize to stop California from gaining more economic autonomy from Washington (and even if not infested with neoliberalism, what central government wants its territories to break its power over the currency?). And I would further say that they will continue to press on with the project of consolidating their power so that if they can’t break California today, they will be able to do so in the future. Unlike just about everyone else in the US, they are playing the long game.

        Reply
      2. Yves Smith Post author

        California can’t secede. It depends on out of state water, big time. And it doesn’t control its grid either. It would be very easy to get nasty with California if things came to that.

        Reply
  24. ChrisAtRU

    Thank you for this! Especially relevant given how QE is done by the Fed. This sounds too familiar:
    “And the mechanics today would likewise be very easy: the Treasury would appropriate the funds and the Federal Reserve would credit the states’ existing bank accounts.”

    But why do funds have to be appropriated, given what we know about keystroking for QE?! I suspect the answer has to do with “authority” … but I will take this up with Marshsall on #Twitter … unless some kind person in the commentariat would like to elucidate … ;-)

    Reply

Leave a Reply

Your email address will not be published. Required fields are marked *