State Bailouts: The Tragedy of the Commons

Readers may be familiar with Garret Harden's Tragedy of the Commons.  As Wikipedia describes it:

"Central to Hardin's article is an example (first sketched in an 1833 pamphlet by William Forster Lloyd), of a hypothetical and simplified situation based on medieval land tenure in Europe, of herders sharing a common parcel of land, on which they are each entitled to let their cows graze. In Hardin's example, it is in each herder's interest to put the next (and succeeding) cows he acquires onto the land, even if the carrying capacity of the common is exceeded and it is temporarily or permanently damaged for all as a result. The herder receives all of the benefits from an additional cow, while the damage to the common is shared by the entire group. If all herders make this individually rational economic decision, the common will be depleted or even destroyed to the detriment of all."

Simply: each individual has incentive to do the exact action which, if everyone does it, will result in a pareto-inferior (aka: worse) result for everyone.  It's not entirely unlike the Prisoner's Dilemma.

I've been using the Tragedy of the Commons to describe the downward spiral which I think will result if the Federal Government starts bailing out cities and states from their failed budgetary decision.  Today, in the NY Times, I read the article "Obama Presses for Aid to Cities and States," and could only think: and so it begins. {tangent:  this post has nothing to do with Obama - this piece would be identical if you changed all the "Obamas" to "Bush," "Palin," "Clinton," or anyone else - so please save your partisan rantings for another blog}

The NYT says: 

"President Obama on Saturday implored Congress to provide more aid to states and cities to blunt “the devastating economic impact of budget cuts” by local governments that imperil the jobs of teachers, the police, firefighters and other public employees."

Now, the House and Senate have thus far resisted this aid, and my home state Senator Judd Gregg even tried to insert a clause into the financial reform bill which would have prevented the Federal Government from bailing out individual states.  His amendment failed.

The NYT article continues, clarifying:

"Unlike the federal government, all but one state and most local governments are required by their laws to balance their annual budgets, and they continue to struggle against the increased costs of relief programs and lost revenues from high unemployment and home foreclosures."

I do take issue with the argument used by the President:

"Making the economic case for helping the states, Mr. Obama said that if teachers and others are laid off — his education secretary, Arne Duncan, has said that without federal aid, up to 300,000 fewer teachers would be in classrooms this fall — “it will mean more costs helping these Americans look for new work, while their lost paychecks will mean less tax revenues and less demand for the products and services provided by other workers.” 

Now, I love teachers.  I think education is immensely important, and it's one of the main problems we have in our country.  My father was a teacher for over 30 years.  My mother was a teacher for over thirty years.  My sister is a teacher.  My brother-in-law is a teacher.  I am certainly in favor of teachers keeping their jobs and getting paid - and I think most people think similarly - which is why I hate the "we have to give the States all this money or the teachers will lose their jobs and your kids will wallow in their own ignorance" manipulative argument.  What next?  Will the next batch of money go to help save starving puppies and kittens?  After all - we all love puppies and kittens.  It's somewhat disingenuous to suggest that merely because people agree that we need something that the Government has to bail out the decisions of those who failed to adequately provide it.

I live in a town with good schools.  I don't have kids, and the majority of the residents in town also don't have school aged children.  Still, each year, we vote for massive property taxes  (mine are nearly 3% of my home's assessed value!) which go largely to support our schools, because the community values it.

Of course, teachers weren't the only emotional appeal.  In the opening paragraph I quoted, firefighters were also thrown in there.  Who doesn't love firefighters?  I love firefighters - I think they're heroes, and I absolutely want them to be there if my house burns down (although I'm told, slightly tongue-in-cheek,  that out here in the woods, in the Land Without Fire Hydrants, if you call the fire department their main job is to come and watch your house burn).  But wait - THERE'S MORE!  If teachers and firefighters isn't enough for you:

"Mr. Obama had supported about $50 billion in aid initially — $25 billion for public employees, $23 billion of which would go for teachers’ salaries, and $25 billion to offset states’ increased costs for their share of Medicaid, the public health program for the poor, people with disabilities and many nursing home residents....Mr. Obama warned that if Republicans blocked a vote, it would “undoubtedly force some doctors to stop seeing Medicare patients altogether.” 

So now we have teachers, firefighters, poor people, disabled people, nursing home residents, and Medicare patients - you'd have to be Satan Incarnate to vote against this money! (this is starting to remind me of the SnL classic: Steve Martin's Christmas Wish)

Look - we all want all this stuff.  No one wants teachers to lose their jobs, or for doctors to stop seeing Medicare patients.  But States are required by law to balance their budgets.  There are other solutions, and I don't just mean "hoping that the stock market comes back,"  which, horrifyingly,  has been suggested on more than one occasion recently.   Debts must be restructured, benefits must be scaled back, belts must be tightened, and, simply, spending must be less than revenues.  

If, instead, we just resort to Federal bailouts for every state who fails to balance their budget, the result can quickly spiral downward into a Tragedy of the Commons nightmare - where each state lacks the incentive to exercise fiscal prudence, knowing that Uncle Sam will be there to pick up the tab.

No - we're not there yet - this article was about, specifically, teachers and medicare - but once you open Pandora's Box of Bailout Bucks, it can be very hard to close.

-KD

p.s.: I wrote, two weeks ago, an analogy: " Greece : European Union :: Troubled States (CA, NJ, MI, NY) : United States.   Greece is a model for the pending budgetary crises in our respective municipalities, who cannot print their own currencies."