Federal Funding and You - Largesse is not

In the Governor's state of the state address he claimed that California gets a raw deal in terms of the money we send to Washington versus what we get back. Our junior senator (who evidently thinks she is in a tougher race than most analysts do) quickly put out a "study" which claimed that indeed in the last couple of years, mostly because of Boxer's efforts, we now get tons of money.

Here are some thoughts on both the Governor's and Senator Boxer's claims:

First, no matter how much money we send to Washington there is always an efficiency loss that has been estimated from tiny to gigantic. FIgure it like this - when you send money to any government some bureaucrat has to process the dough. That is not free. Don't try to get to precise here because a lot of the precision comes from ideology. But the point is clear - money sent to Washington does not come back to us whole. There are some things like defense, which we cannot efficiently provide through the market. But most things are better in quality and delivery if they are delivered as a result of consumer choice. The efficiency loss is exacerbated by earmarks. We decide to fund a library in Jamestown because a congressman from South Carolina thinks he can get it added to a bill - not necessarily because that is where the next marginal dollar should be sent.

Second, federal expenditures in the states come from only a couple of sources - they come from payments to individuals - those include things like social security, salaries to employees, other kinds of direct payments(for example student aid) ; program money (for all the things that the feds want to encourage); federal installations (military bases or even federal buildings); and direct purchases. The chart gives you the Concord Coalition's division - which is about as good as any. There is not magic here. Because of the efficiency loss we are not really benefitting as a result of more dough. On the payment side of the ledger, if you are a small or poor state, you are not likely to have very large payments to the federal government.

Third, the positive versus negative balance is conditioned on a lot of things which are not necessarily positive for a state. For example, if a state has a lot of very low income people (so lots of payments to individuals), lots of federal buildings and employees and a relatively small population your ratio of tax dollars received to those paid is very high. Mississippi gets about $2 for every one it sends. The District of Columbia gets more than $5 per dollar sent.

Members of Congress including Senator Boxer try to get us to believe that they somehow can rain largesse down on their constituents and that the money comes for free. That is utter nonsense. But there is a final important conclusion to this debate - where the Governor's criticisms seem to be very much on point. Federal money has an efficiency loss but it also comes with strings. For years California has had to pay excess costs based on federal policy. The feds mandate things like reimbursement rates for all of their health payments - and in many cases those mandates ultimately cost each of us more in dollars and more in liberty than they offer in monetary support. But the balance sheet that Boxer offered in her defense of being a rain maker is just bunk.

The next time Senator Boxer claims that she has successfully raised the payments to California from 78¢ to $1.45 per dollar sent to Washington - a) don't believe her numbers, but b) also ask her whether she believes in free lunches.