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Wednesday, February 9, 2011

The U.S. Government to the Rescue of Troubled States: Larger Faultlines

The New York Times reported on February 9, 2011 that President Obama was "proposing to ride to the rescue of states" that had borrowed billions of dollars from the federal government by continuing to pay unemployment benefits during the economic downturn. His plan would "give the states a two-year breather before automatic tax increases would hit employers, and before states would have to start paying interest on the loans." Many of the states began the recession with "too little money in their unemployment trust funds," and they "quickly ran through what little they had as unemployment rose and remained stubbornly high month after month. With their own trust funds depleted, 30 states borrowed $42 billion from the federal government to continue paying unemployment benefits." These state were facing an estimated $1.3 billion in interest payments to Washington due in the fall of 2011. To make up for the loss of this interest income to the federal government, the President’s proposal would raise the minimum taxable wage base of $7000 to $15,000 in 2014. "The rate of the federal portion of the unemployment taxes would then be lowered, so the proposal would not raise federal taxes on states that do not owe the federal government money. But it would speed the rate at which states that do owe money repay the federal government, and allow states to collect more unemployment taxes to rebuild their trust funds if they do not lower their tax rates." By February, 2011, eighteen states had already raised their minimum taxable wage base to $15,000 or more, according to the National Association of State Workforce Agencies. Iris Lav, an advisor at the Center on Budget and Policy Priorities, said that the unemployment system as “a constellation of problems that need to be solved. . . . The near-term problem is the economy . . . and both the interest payments and the principal repayments are cutting into employers, and it makes great sense to postpone them. The larger question is how you get states to solvency.”

Analysis:

The proposal itself makes sense from the standpoint of getting thirty states out of a tight fix. The debate on whether taxes should go up in 2011 or 2014 ought to be dwarfed by the larger structural faultlines, which are only hinted at by the President's proposal to ease up on States in trouble in the unemployment compensation system. In other words, the necessity of having extended unemployment's term to cover the length of the recession following the financial crisis of 2008 itself implies higher taxes (or debt). Whether the states' borrowing for unemployment is covered beginning in 2011 or 2014 can be debated (e.g., avoiding recessionary tax increases during a recession vs. the higher deficits), but we ought not allow it to divert attention entirely from the larger structural faultlines that are intimated by the President's proposal.

First, the "rescue" is limited to that program; neither the Federal Reserve nor the U.S. Government would come to the rescue of the states concerning their deficits and debt. Moreover, that the U.S. take on taxes limited the ability of state governments to tax in sufficient amounts to cover their expenditures is not touched. Furthermore, that the U.S. Government would be rescuing states intimates the dependence of the latter and the overwhelming power of the former. Perhaps the "cooperation," or intermixing, of the two systems of government in the unemployment system is problematic because it gives the U.S. Government a way to dominate states. According to Jacobs and Karst, “It is the preservation of the balance between the central authority and the constituent states that is the essence of federalism.” Yet, “In the American federal structure the central authority is stronger." Rescuing thirty states evinces this imbalance, and thus the failure of the United States to preserve the essence of federalism. Maintaining at least one autonomous domain for the states is not sufficient for a viable federal system; balance is essential or the two systems of government will not be able to act as a check on each other. Debating whether to raise taxes in 2011 or 2014 would mean once again ignoring our failure to preserve our federal system; it would mean blindly sitting by once again while the political consolidation of a diverse continent proceeds full throttle ahead to a "one size fits all" and the resultant building pressure, which is apt to explode one day. 

Second, the unemployment system itself, being limited to helping the unemployed for discreet periods often shorter than a given recession, is not addressed fundamentally. In other words, the X weeks feature of being on unemployment compensation treats "convenient" things like food, rent and utilities as though they were optional commodities that could be skipped after the Xth week on unemployment. The nature of unemployment is rooted in survival, which if one believes in human rights, including life, is properly unconditional. The basic structural problem with the unemployment system in the U.S. is in turn a symptom of the inability of the private sector to bring the U.S. population to full employment. That is to say, relying exclusively on business to bring us to full employment is problematic, again from the standpoint of survival as a human right. To be sure, the recognition of survival as a human right implies higher taxes than are necessary in simply treating survival as a matter for the state of nature--as in Paul's dictum that those who don't work don't eat. This broader debate is typically ignored as we debate incremental changes in policy, even if those changes have implications in terms of the broader faultline.

Sources:

http://www.nytimes.com/2011/02/09/us/politics/09states.html?pagewanted=1&ref=todayspaper

Jacobs, Francis G. and Kenneth L. Karst, “The 'Federal' Legal Order: The U.S.A. And Europe Compared A Juridical Perspective,” in Integration Through Law: Europe and the American Federal Experience, Mauro Cappelletti, Monica Seccombe, and Joseph Weiler, eds., Vol. 1, Methods, Tools and Institutions. Bk. 1, “A Political, Legal and Economic Overview” (Berlin: Walter de Gruyter, 1986), pp. 169-244, p. 171.