Among the issues most commonly discussed are individuality, the rights of the individual, the limits of legitimate government, morality, history, economics, government policy, science, business, education, health care, energy, and man-made global warming evaluations. My posts are aimed at thinking, intelligent individuals, whose comments are very welcome.

"No matter how vast your knowledge or how modest, it is your own mind that has to acquire it." Ayn Rand

07 March 2012

Leftist Calls for Blue States to Go Galt on Red States

Long ago I realized the irony that the Blue States heavily subsidize most of the Red States with the money they pay in federal taxes.  A Progressive Elitist, Sara Robinson, has somewhat cleverly used this to imply that the richer, more productive Blue States are being charitable to the mooching Blue States and they should Go Galt on the Blue States until the bigoted, backward people of the Red States are suitably grateful. Her article is entitled, Ayn Rand Worshippers Should Face Facts: Blue States Are the Providers, Red States Are the Parasites.  Her argument is worthy of some thought, though she is way over the top in her VERY SUPERIOR condescension toward the people of the Red States.  In that she is so childish and ill-informed that I will not bother to discuss her broad characterizations of the people of the Red States.

Her principal point is based upon a recent NY Times story that discussed this map of tax payments versus benefit payments on a state basis:

For the most part, the Red States do receive more in benefit payments than they pay in taxes and most of the Blue States pay more in taxes than they get back in benefits.  Part of the reason for this is that population density is higher on the East and West Coasts and this has trade and commercial benefits of itself.  The East Coast is the longest settled area and has had the easiest trade ties to a long wealthy Europe.  The Southeast was destroyed by the Civil War and had been too rural and slave-dependent even before that.  The Northeast first developed manufacturing on a major scale and the principal financial centers grew up there.  The nation's capital is also on the East Coast.  All of these factors helped to make the Northeast a wealthy area early on.  The West Coast became much wealthier during the military build-up of WWII and then continued to have trade advantages with Asia thereafter.  It definitely deserves praise for its development of many high technology businesses in the last several decades.

To address the issue of whether the Blue States really are more productive than the Red States, however, we should actually look at the Per Capita Income by State.  In 2010, those numbers are well presented by the Tax Foundation here.  By my reckoning, I identified 26 states as fairly reliable Red States and found that 10 of them were ranked among the top 25 states in per capita income.  Four of the Red States are in the top 10 states by per capita income.

It also tends to be the case that the cost of living in Red States is lower than that in Blue States.  Lower state and local taxes and fewer expensive state and local laws and regulations help to make a dollar go further.  Some costs such as land costs go down simply because many of the Red States are less densely populated.  Generally, housing costs are lower.  The cost of doing business is often lower also.  Meanwhile, Blue Staters are paying slightly higher tax rates on their federal income taxes because of the progressive tax rates.  Their meaninglessly higher incomes suffer a larger fraction of tax loss due to the foolish idea of using fixed tax rates across the entire country.  Correspondingly, many benefits are given out on the basis of income, so the lower apparent incomes of Red State people is more likely to induce a flow of federal money to them.  These effects actually are not avoidable, but the problems can and should be minimized by minimizing the federal government.

The end result is that it is not entirely obvious that somewhat higher per capita income in the Blue States means that the people of the Blue States are actually more productive.  It is not clear that money changing hands more rapidly actually means more productive work was done and more was actually accomplished.  One can use a lot of energy spinning one's wheels, as is all too evident in many socialist countries.  But, for the moment, let us allow that the Blue States may be slightly more productive, albeit maybe owing in good part to locational and historical advantages.

There is no question that the Blue States giving up more in taxes than they are getting back in benefits are draining their private sectors of wealth.  Thus they are suffering a real handicap to business investment and are retarding their future GDP growth.  The people of these states are lowering their standard of living.

It has long been assumed that states receiving more in federal benefit payments than they lose in taxes are benefiting from this extra federal income.  This is false, as discussed in my previous post.  I will patch the relevant part of that post in below for my reader's convenience:

More specifically, Harvard Business School professors have published a study of the effects on a state when a Senator or a Representative is moved up to being the Chairman of an important committee for appropriations.  The study, Do Powerful Politicians Cause Corporate Downsizing?,  covers a 42-year period and found that these committee chairman were able to deliver large sums of earmarked or other money to their home states.  In the year following the ascendancy to a chairmanship for the 232 instances studied, the state had a 40 - 50% increase in federal earmark spending, a 9-10% increase in total state government transfers, and a 24% increase in total government contracts.  The professors, Lauren Cohen, Joshua Coval, and Christopher Malloy, expected businesses in the state to benefit from the pumped up economy, consistent with what most Keynesians would expect.  Boy, was that ever wrong!

Instead, they found support for simple neo-classical model in which individuals trade work for more leisure when faced with government spending.
Increased resources from the government that are not expected to be funded by taxes or borrowing induce individuals to increase their consumption and leisure. The resulting decline in the marginal productivity of capital compels companies to scale back investment and output.
Focusing on the investment (capital expenditure), employment, R&D, and payout decisions of these firms, we find strong and widespread evidence of corporate retrenchment in response to government spending shocks. In the year that follows a congressman’s ascendency, the average firm in his state cuts back capital expenditures by roughly 15%. These firms also significantly reduce R&D expenditures and increase payouts to their investors. The magnitude of this private sector response is nontrivial: in the median state (which receives roughly $452 million per year in increased earmarks, federal transfers, and government contracts as a result of a seniority shock), capex and R&D reductions total $48 million and $44 million per year, respectively, while payout increases total $27 million per year. These changes in firm behavior persist throughout the chairmanship and begin to reverse after the congressman relinquishes the chairmanship. We also find some evidence that firms scale back their employment, and experience a decline in sales growth in response to the government spending shock.
There is every reason to believe that such general effects upon companies will have similar effects upon the green energy companies.  Joshua Coval says that these negative results applied to the average firm, large and small firms, and within the industries that are the target of the spending.  Some of the government money hires employees away from other firms.  He also believes that this money contributes to added uncertainty due to government involvement.  He says the results indicate that government spending does not stimulate private economic development.

Thus, what we find is that however charitable the motives of the Blue States may have been, their largesse to the Red States has a most malevolent effect!  The Red States often have a better business environment relative to the state government, but that business advantage is often offset by the negative effect of having Senators and Representatives who are too good at bringing home the bacon.  The Red States would be well-advised to make it clear to their Congressional representatives that they want them to vote against all spending increases by the federal government and that they want them to make every effort to cut back on present government spending.  Contrary to the VERY SUPERIOR Progressive Elitist Sara Robinson's call for the Blue States to GO GALT until the Red States cry Uncle, both the Red States and the Blue States would be very well served if the Blue States were to GO GALT!

I do not actually believe the Blue States were that charitable in intent.  Too many people there (here for me) really do want to live under socialist government.  The cost to them of doing that is to bribe the people of the Red States who do tend to want more freedom with government handouts aimed at getting their politicians to go along with them.  The Red States especially have a bit of a political advantage in the Senate due to their states having smaller populations on average.

This is why the Blue States pursue the growth of more government very vigorously and the Red States complain a bit, but are generally willing to go along at a preferred slower pace.  For instance, the road infrastructure funding bill before Congress now is receiving the votes of almost all of the Democrat and Republican Senators.  Only 11 are lined up against it.  Seven of them are Republicans and four are Democrats up for re-election from states that are basically Red States.  It is long overdue that the people of both the Red and Blue states understand that these money transfers across the country are only hurting themselves, without any beneficial effect at all.  We badly need more federalism, with much less government from the national level.  Then the Red States will prosper much more and the Blue States will at least suffer a little less.  By all means, let us have all of the states Going Galt.

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