Feds Starving States to Concoct Funding Imperatives

Federal systems, in a similar way to a common currency zone, seem tailor made for neoliberalism. By starving currency-using state governments of funds, a currency-issuing federal government is able artificially to create a need for the states to find private sources of funding that would be better provided through fiscal transfers. Details from one federal system to another differ. In Australia, the taxing powers of the states are deliberately restricted relative to their responsibilities over service provision. In the eurozone, member governments have voluntarily poleaxed their capacity to run deficits.

An example of the consequences of starving the states is government-run buses, light rail, trams and trains getting covered with advertising billboards as a way to recoup some of the costs of providing public transport. Rather than the feds imposing taxes on the corporations engaged in advertising of an amount equivalent to that spent on advertising, the corporations get to detract from the aesthetics of urban environments at a price. The currency user instead could simply provide the fiscal transfers necessary for the states to administer the transport services, and the corporations could be required to pay tax without defecating on cityscapes. If it is desirable to have visual graphics on buses or other modes of transport, the space could be opened up for artists to create an array of designs. The public could vote on these, improving cities visually while also providing opportunities for artists and greater scope for creative expression.

When hospitals and schools are the responsibility of the states, it is a simple matter for the feds and states to blame each other for the intentional decline in services. The feds and states are in cahoots, legitimizing austerity imposed at the state level. In reality, there is never a need for limiting education and health services below the level clearly possible given the number of trained teachers and medical practitioners. An unemployed teacher or nurse is always affordable when the currency issuer makes the appropriate fiscal transfers to currency-using state governments.

Another example is privately-owned casinos, which have sprouted like mushrooms, especially in the US but also in other federal systems. The pretext is the state governments’ manufactured need for additional funding from the private sector. The incentive structure from the perspective of the average punter – or the dependents of a hapless problem gambler – are all wrong. It is in the interests of state governments that casino profits boom. This means more tax revenue for the financially starved states. The result is bad games, steeper odds against the punter, less consumer protections, more problem gambling, and a blind eye to money laundering. All this is in the interests of the states under present arrangements.

To be clear, the point is not anti-gambling as such, but rather that there is no need actively to encourage the construction of a community-unfriendly casino and sports-betting industry that is basically designed to impoverish problem gamblers and their dependents, break up families, rip off the unsuspecting casual casino goer, and facilitate organized crime. If we are to have casinos, they could be publicly owned and run to be revenue neutral. Games could be designed to provide no advantage, on average, to the players or the casinos. Food, beverages, accommodation and entertainment could be priced at a level aimed at offsetting the wages and salaries of casino employees. Periodically, any net revenue collected by the government could be transferred to the treatment of problem gambling or used as giveaways to punters.

If skilled players threatened the overall revenue neutrality of the games, relevant games could be tightened or skilled players could be restricted to a lower bet range (not flat betted) but otherwise allowed to play. In other words, if casinos provide a valid and net-positive form of recreation, they need not be for private profit or revenue raising.

There are plenty of other examples of the consequences of currency issuers starving currency-using governments. Toll roads and the privatization of public utilities are trends that immediately come to mind. These practices provide no efficiency gain. The appropriateness of the road or public utility is determined through government and community consultation irrespective of whether it is privately or publicly owned, so there is no improvement in resource allocation, even for those who embrace the mythology that markets and the profit motive do a better job of determining social priorities than democratic processes. The quality and reliability of service inevitably deteriorates due to out-of-whack incentives which encourage cost cutting to the detriment of service users. In all likelihood, the public will also end up paying higher prices for the services because a profit margin must be left over for the private corporation. Privatization of utilities essentially converts the bill payments of customers from what used to be tax payments (enriching nobody) to a form of private taxation that enriches private owners of the enterprises involved, a form of rent seeking.

All this and more is currently commonplace because the currency-issuing federal government opts intentionally to starve currency-using state governments of funds. Whether voters take their frustration out on the feds, the states, or both, it makes no difference. Federal and state politicians are in it together, along with their benefactors and prospective future private-sector employers.