New Jersey and the Economist

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For each $1.00 New Jersey gets back from the fed, they have to give the fed $1.64, they have to pay $.18 in compliance costs, and the government borrows about $.81 of that dollar, and sticks New Jersey with the debt obligation. On top of that, federal work-rules and controls means that dollar is actually only about as effective as $.60 would be if it was under local or private hiring practices.

Progressives see the $.60 of real value as a net win. Anyone else, can see that you paid about $2.63 to get it.

Progressives think you can make it up in volume: if you just continued to lose $2.00 for each $.60 of value you get out of the system, you'd eventually come out ahead. Non-progressives recognize the seen versus the unseen (The Broken Window Fallacy) and the $2.00 of hurt you did, for each $.60 in help.

Intro

I had this discussion the other day with a friend and coworker who repeated many myths in one:

  • Blue States give more than they get
  • Red States get more than they give
  • Red States are subsidized by the Blue States
  • Red States are hypocrites for complaining about government, while getting more than they put in

Only the first one is true, all the others are false. But they read it on a few liberal sources back in 2011 (or a repeat of that fake article), and it stuck in their psyche. All they prove is that a lie can travel around the world before the truth can even put its shoes on.

The (Left Leaning) Economist

This all started when the Economist did this misleading article. Basically, it claims that some states get more out than they put in (and others put in more than they get out). That's an easily disproven lie.

All the other articles I've seen on the topic, either source this, or use the same flawed math/logic/methodology seen here:

Some claim the Economist is a "right wing" publication. It isn't. It's a left wing paper that's just slightly less left wing than many of its readers (or other publications) in the UK. Both are to the left, so it's just less left than many. But you get them on many issues, and they can be Keynesian, pro Global-Warming-Is-A-Crisis and other left leaning things.

What are the lies?

Well first:

  • Hawaii, Virginia, New Mexico and Puerto Rico aren't Red States, and were winners
  • Many Red States are losers like Texas, Nebraska, Arkansas

So the data doesn't match the conclusion. But ignoring that, there's quite a few logic holes that demonstrate that either the Economist doesn't know economics (something I doubt), or they're flim-flamming and they're playing a front for Labour/Democrat party talking points.

What about debt?

New Jersey is an extremely bad example for the pro-government position, so I'll use an easier one (on the cusp). Imagine you're Kansas, and I told you, give me $307B, and I'll give you $330B to spend how you want. Sounds like a $23B ROI. Those red-staters are mooching off of losers like Delaware (which has to put in $211B to only get $86B back).

Now what if I tell you the rest of the story (the lies of omission left out of the economist article)?

I'll not only give Kansas $330B, but also a credit card account that has $73B in debt, that they have to pay back. So they actually spent $380B to get $330B back. That suddenly doesn't sound so good, now does it.

That's Kansas portion of the actual debt the fed accrued for Kansas. And the economist stopped their numbers in 2009, where things started getting much worse. The debt has gone up 61% more since then, meaning Kansas really owes more than $117B on that credit card. And not only do they owe the debt, AND the interest on that debt (in perpetuity), but the government will keep the credit card and keep spending on Kansas's behalf.

And now you now get a better picture why Kansas is saying, "stop, STOP!" They're smart enough to realize that they're not winning, even if 25 other states are envious of them, because those other states are getting screwed even worse. Leaving debt out of a balance sheet isn't just a rookie mistake by the economist, it's criminal. And no publication or writer that quoted the economist article, without recognizing the mistake, is competent on the topic of business to have failed to catch it.

Compliance costs

Another big flaw is you don't put $100 in and get $100 out from the federal government, you have to do a bunch of work, create agencies and studies and wasted bureaucracy to meet governments terms for getting that money back.

How much is that? It varies, but let's use 18% (since that was a number I found for New Jersey's estimated compliance costs, more bureaucratic states will be more). That means you have to put in $118 (dollars + compliance) to get your $100 back. Again, ignoring compliance costs of capital, is a rookie mistake that smells of incompetence or bias.

Efficiency

Another huge oversight is to not include efficiency of spending: a lot of that money that came back to your state, came with all sorts of restrictions on how it can be spent -- like on federal roads, with federal rules for making and maintaining them (only government union workers), and so on.

It is estimated, conservatively, that the spending is at least 25% less efficient than local or state is, because of work terms/rules, and so on. And state and local is less efficient than the private sector.

Prioritization

That's before factoring in that many of the things you must spend the money on, in order to get your money back, may not be the highest priorities. Prioritization is subtly different than compliance costs, or efficiency.

For example, midnight Basketball subsidies at a school for the blind, bridges to nowhere, and that form of waste. It's just mis-targeted funds, that few politicians will pass up, because the money is already taken out of their State, so they'll fight to get some of it back, whether they need it or not. But remember, these are a cost. Just because you got a free road/bridge or basketball court, doesn't mean it was "free" (even if you ignore compliance costs). Now you don't really have a pure asset, but a liability on your books: you must maintain it, even if it is under utilized. Maintenance is on you.

Recalculating

When you put those variables that were left out, into the equations, what do we find?

Only 4 territories came out ahead: West Virginia, Mississippi, New Mexico and Puerto Rico -- the other 47 states all came out behind.

Of those 4, New Mexico and Puerto Rico are definitely Democrat. West Virginia being Purple (2 of the last four elections went to each party), and only Mississippi being Red. And the only reason it's not worse? Because they put deep blue DC in with Maryland, instead of keeping it separate like they should have been -- then it would have been 3/1/1 (D/I/R) instead of 2/1/1.

But wait, there's more

To make matters worse, is this is ALL money that comes back from the fed. But what's the #1 return? Social Security.

So in that program, what you're seeing is people getting their own money back, decades after contributing it (at gunpoint). That's not really a net benefit. That's not stealing money from other states -- it's just showing that the demographics of some red states is older than those of blue states. And it shouldn't be on the balance sheet at all.

Well, Social Security and Medicaid sorta is a benefit, because despite the lies told since its inception, it isn't really your money. You're just taxing youth, because as youth you were taxed for the elderly too, in a ponzi scam. And if you live that long, most people collect far more than they put in, due to the poor structure of those programs. But we're sticking with the progressive fallacies that they've spread for 70 years, that it's your money.

But why are red states older than blue states? People can't afford to live in Blue States as much, so they are driven out and forced to move to Red States to retire, which skews the result.

So that's not the Red States benefiting from redistribution from Blue States -- it's that Blue States driving out their seniors like Logan's Run. It's the failed policies of Blue States and the high costs of living, forcing seniors to become more wise as they age about the true costs of Blue State policies. (They don't want to see the tax and spend policies putting them in the poor house, now that they're living on fixed incomes). Thus that's the Red States doing a service for the Blue States, by giving those who got off the treadmill, a place to live. (It also drags down the income averages of Red States -- not because of failure of Red States, but because of their successes at being more cost effective).

Where do the subsidies go

So if you take Social Security and Medicare out of the equation, and just look at the true social programs (subsidies), where does that go: the urban blue cities and states or rural red cities and states? The blue cities and states get far more federal returns than the rural or suburban red areas. (Other than a few farm subsidies aside).

So no matter which state you're in, it's easy to see how the Federal Government, taking your money to buy votes of Democrats (in Blue Cities), is not a win for you, if you're a conservative or libertarian voter. Certainly not if you're a rural voter.

And that's before we apply basic business rules, like "opportunity costs of capital" or other things.

Opportunity costs of capital just means that giving you a 20% total return for a 20 year investment, is actually a net loss, since inflation is greater than that 1%/year, and eats any theoretical profits. Giving you a dollar today or a dollar in 5 years, means the dollar today is always worth more. I could put the dollar in my own investment, give you your dollar back in 5 years, and keep the interest. Which is what happens when the government taxes money today, to return it in 5 or 10 years, with restrictions.

Conclusion

Obamas-Pot-of-Gold.jpg

So what happens isn't what articles tell you, that Red States win and Blue States lose. The facts are that all States lose, some just lose more than others. And within the State, the Red Areas and Blue Areas don't win evenly -- the Blue Areas that win far more than the Red areas Which is why Democrats like using government spending to buy votes: their areas see more short term benefits and fewer of the costs. Their people still lose in the big picture -- but their voters are more easily flim-flammed to ignore the costs and see the benefits. Hence why red areas aren't enthused about subsidizing Blue Areas.

There's no magic where you can send a dollar to the fed, have them spend a little, waste a bunch, send a fraction back (with their regulations/rules on how to spend it on top), and the community comes out ahead. Math and economics doesn't work that way. Every dollar comes back smaller than what you sent in. It's not even a zero-sum game, it's a negative-sum game.

NOTE: In theory, in the micro-economic level, it can work selectively for some areas, for short amounts of time. Like disaster relief. But the programs area always losses in the macroeconomic level or over the long term. It helps to remember that folks like Paul Krugman are micro-economists, with puny minds and views of problems, that ignore the bigger picture. Helping a few by hurting the many is a win for them. Just not the economy as a whole.

In the end the average is that the states lose 35% in a return on investment level. For each dollar they put in, they get $.65 back. Years later, and with all sorts of restrictions on how to spend it. That might make sense to DC bureaucrats (who keep their cut, with vigorish), but makes far less sense for the State, City or Town that pays that much to get that little back.

Republicans by being opposed to more federal government spending are applying common sense, economics and reason. They get it. Democrats claiming they're being hypocritical, only think that because they haven't thought through the issues enough to understand what's really going on.

If the Economist or other so called "economists" that write on this stuff, don't know the points mentioned in this article, then they're incompetent. If they do know it, and omitted it from their articles, then they're polemic frauds.

References