Tuesday, July 31, 2012

State trade offs

The message is clear. States are facing trade offs. When the economy is crunching, long term investment is loses out to short term entitlements. In this political environment where government provided health care is less politically popular than education, especially and specifically health care for the less economically well-off, why would this happen? You would expect states curtailing their Medicaid programs long before cutting K-12 education. 

First off, but a less interesting answer:  For states to disentangle themselves from Medicaid would be technically complicated, politically challenging, and time-consuming. Only one governor dares to speak about it. Most governors would not want to spend their entire administration fighting that battle.

Second, and a slightly more interesting answer: Government matching. The Federal government is matching funds at least 1:1 during good times and almost exclusively covered it during the height of the recession (think 20+:1). State governments tend to respond to these matching programs because it means more money coming into their state. Even more so during recessions because that gets employment back down to normal levels faster. This is and was not the case for education. The federal government did not provide much money in the stimulus package to invest in schools. What was provided was short term relief that caused layoffs to happen later rather than sooner. 

Medicaid won out over education on the federal level and therefore the incentives for the states followed suit. I would be interested to see a chart where, for each program, the state budget was compared to its federal matching. See how much states respond to these incentives.

For example, if the highway matching program was so good, then would their be states that pushed all their money into highways and almost nothing into anything else? 

Third, and much more interesting answer: Economic multipliers. A normal rule of thumb is that money given to the least well off tends to be spent in its entirety. They have no savings. In a program like Medicaid and Food stamps, everything has to be spent because the money (not directly at least) is never in the hands of the poor. No wonder the economic multiplier effect is so high. It's a form of stimulus to the whole economy.

Here's the kicker on this: You can guarantee that the poor will be better off in your state; and therefore there is a return on investment inside your state. Almost immediate at that. By giving them food, shelter, and health care, they have the safety net that allows them to take risks and go succeed. They will be more productive.

When you invest in education, the children going to these schools will be more educated. They will be more productive. They will earn more money. Study after study shows how fantastic education is to the growth of the economy and the well being the country. The long term return on investment is nothing short of spectacular. 

Only problem: After you spend 15 years educating these young, bright minds, they will leave. They will seek work in the city where their are jobs for their skills instead of staying on the family farm. Another state perhaps or even another country. So, for all of your time and money spent, you don't really capture the economic benefits of it. The return on investment to your local community is terrible. So, why bother?

Let's go ahead and give health care for the poor - not because it's our first moral choice - but because it will benefit the community in the long run instead of people who will just leave anyways. 

Note: I know that most education funding is on the local level, not the state level. So the graph above doesn't tell the whole story. In fact with the cutting of local government budgets, the trade off is probably much worse than that. Even so, the logic of it all still holds true.

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