The American welfare state is not yet as intrusive and destructive as its European counterparts, but we are not far behind the Old World on the downhill slope. Therefore, it is very important that we pay attention to what is happening in Europe and how they are dealing with their welfare state. We cannot hope to learn anything positive – Europe has been in a state of economic decline for three decades now – but we can make a habit out of not copying their mistakes. A good example is the latest stunt out of Brussels, the EU capital, where the Eurocrats now declare a desire for even more central government control over economic policy and, in the end, the European economy. The Financial Times reports:
Brussels will on Wednesday propose measures giving it more authority over the national budgets of eurozone states, including a requirement to submit tax and spending plans to European Union authorities before their national parliaments. The proposals, obtained by the Financial Times, would also allow the European Commission, the EU’s executive arm, to send fiscal inspectors to eurozone capitals if it decides a country is “experiencing severe difficulties” – even if that country’s government has not requested them.
In an American context this would be the same as if the U.S. Treasury, per orders from the president, sent “fiscal inspectors” to Sacramento to get involved in how the state legislators in California handle their finances. This is not far-fetched: the U.S. government is far more involved with the state governments than the EU government is involved with the EU member states. Our federal government pays for one third of all state expenditures; the EU contributions amount to a couple of percent of member state government spending.
From a factual point of view this kind of involvement from the central/federal government would be far more likely here in America. This does not make it right, of course, and there is no threat of this kind of involvement for now. But there is a relatively realistic scenario under which this might happen. In 2010 the federal government sent $630 billion to the states, accounting again for one third of state spending. The federal government is in deep trouble and has an urgent need to get its fiscal house in order. (The failure of the super-committee only reinforces the urgency of this issue.) At some point Congress is going to start cutting federal aid to states, and part of its efforts to do so could indeed include a more direct involvement of the U.S. Treasury in state fiscal affairs.
This danger of further centralization of state affairs will grow exponentially if the federal government starts bailing out states. That, again, is not an immediate issue, but given how states like California keep struggling to get a grip on their fiscal problems, a state bailout program is unfortunately not inconceivable. It would be a disastrous thing to do, of course – the federal government is in deep enough trouble as it is – but we also have to keep in mind that our Congress and our presidents (past and current included) have made many disastrous decisions through the years, especially on fiscal policy.
A far better way forward is of course for states to liberate themselves of dependency on the deeply indebted federal government. Fiscal sovereignty at the state level is a far better platform for sound budgeting than the current, rather messy entanglement between Washington and the states. They can gain this independence with gradual reforms that step by step get the federal government out of programs such as Medicaid, welfare, transportation and education.