Everybody wants a piece of federal pie

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Article Highlights

  • Sometimes the unrestrained exercise of raw power is not politically palatable

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  • The government has developed a variety of ways to tempt states into obeying without using its monopoly on violence

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  • There are two ways in which the federal government incentivizes state governments to spend money on things they like

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  • The end result? Higher spending on stuff no state would want to pay for itself, and higher taxes for everyone

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The Founding Fathers granted the federal government several enumerated powers and a few implied ones. The Supreme Court, in National Federation of Independent Businesses v. Sebelius, decided to take that idea a few steps further and granted the federal government the authority to use its taxing power to compel the citizenry to do whatever it wants it to do, as long as it uses certain turns of phrase. But that is only a recent development, and sometimes the unrestrained exercise of raw power is not politically palatable.

Fortunately for ambitious federal officials, there is a cunning, friendly sounding way around this practical problem. The federal government has developed a wide variety of ways to tempt states, local governments and individuals into obeying its most heartfelt wishes and desires without using its monopoly on violence.

Let us focus here on how this works for state governments -- how the federal government deploys its resources to shape the policies state governments "choose" to implement.

There are two basic ways in which the federal government incentivizes state governments to spend money on things the federal government likes: through block grants and through matching grants.

Block grants are a mere lump-sum transfer, conditioned on the state carrying out certain activities.

For example, the federal government promises the states a fixed block grant worth a total of $16.5 billion a year for welfare programs. To qualify for this grant, the states have to spend about $10 billion of state money on those programs.

Matching grants, on the other hand, depend on the states' own specific spending level: The more a state spends, the more money it receives from the federal government.

Medicaid services are a good example. The federal government picks up between 50 percent and 74 percent of the cost of each state's Medicaid program, depending on how rich the state is, for a total of $265 billion this year. To put that number into context, that's about 13 billion lap dances.

The subsidy is even more generous for the Children's Health Insurance Program. And for the cost of covering low-income adults who have become eligible under Obamacare, the federal government foots the full bill.

Now, there are legitimate reasons to do things like this. Some state programs have benefits that spill over to other states, like public-health programs.

Without an incentive to take those benefits into account, individual states will under-invest in such programs. The country as a whole may also feel that a certain level of redistribution from rich states (say Connecticut, Delaware or Massachusetts) to poor states (like Mississippi, Idaho or West Virginia) can help those poor states provide acceptable local public services, much like money is redistributed from rich to poor individuals through the federal tax system to enable the poor to afford higher levels of private consumption.

As is typically the case, the federal government has grown way beyond what would be a reasonable size based on these straightforward considerations.

It seems quite unnecessary for the federal government, for example, to subsidize food stamps for Connecticut residents, as Connecticut is perfectly capable of funding those itself.

An even more extreme example comes from Medicaid: Last year, Minnesota, New Jersey and Washington state started receiving matching federal funds to cover low-income adults who previously were covered exclusively by state-funded insurance, a classic example of "crowd out" that injects a federal bureaucracy into a process that is now funded by a much more diffuse, less attentive group of taxpayers.

This kind of overreach by the federal government is nowhere near the exclusive territory of the big-government left; many of these programs enjoy bipartisan support, and both blue and red governors and state legislatures are more than happy to take federal money whenever they can, be it Arizona Gov. Jan Brewer pushing for Medicaid expansion or former Massachusetts Gov. Mitt Romney lobbying for federal funding for the "Big Dig" highway project.

What this behavior creates is a pernicious race to the ceiling, with all of the states hurrying to get their snouts in the trough. The end result? Higher spending on stuff no state would want to pay for itself, and higher taxes for everyone.

There is no such thing as a free lunch. "But there are heavily discounted lunches!" one may cry out in objection, appalled by the simplicity of that claim. Indeed. But as we have seen, even those come at a price.

Stan Veuger is an economist at the Washington-based American Enterprise Institute. 

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About the Author



  • Stan Veuger is a resident scholar at AEI.  His academic research focuses on political economy, and has been published in The Quarterly Journal of Economics. He writes frequently for popular audiences on a variety of topics, including health and tax policy. He is a regular contributor to The Hill, The National Interest, U.S. News & World Report, and AEIdeas, AEI’s policy blog. Before joining AEI, Dr. Veuger was a teaching fellow at Harvard University and Universitat Pompeu Fabra. He is a board member of the Netherland-American Foundation in Washington and at The Bulwark, a quarterly public policy journal, and was a National Review Institute Washington Fellow. He is a graduate of Utrecht University and Erasmus University Rotterdam, and holds an M.Sc. in Economics from Universitat Pompeu Fabra, as well as A.M. and Ph.D. degrees, also in Economics, from Harvard University. His academic research website can be found here.

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