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December 18, 2009

Obama's Vote-Buying Dilemma

By Monty Pelerin
Does President Obama want to make new friends or alienate old ones? That is the interesting political problem shaping up for him and other Democrats. This problem will manifest in the coming collision between states and Obama's reelection strategy.

Federal bailout money helped many states with their shortfalls. A Government Accounting Office (GAO) report indicated that much of the stimulus was used to fill state budget gaps. As a result, underlying fiscal problems were not solved, but merely papered over. Downsizing is anathema to all politicians, but necessary to resolve these issues. The stimulus allowed state layoffs to be avoided, but only temporarily.

States presented "balanced" budgets at the start of this fiscal year. Continued economic deterioration created shortfalls in these budgets after a few months:

Thirty-six states face budget shortfalls totaling $28 billion in the fiscal year that began just five months ago, according to a new 50-state report. The assessment predicts another $56 billion in shortfalls across 35 states next fiscal year and $69 billion in shortfalls across 23 states the year after that. (John Gramlich)

While the state faces a deficit of more than $3 billion for the remaining four and a half months of this fiscal year, the greater worries among state officials are the unprecedented deficits the state faces in 2011 and 2012, after the expiration of federal stimulus financing and a temporary tax increase on the wealthy. (NY Times)

The rate of decline in state fiscal conditions has accelerated. Favorable third and estimated fourth quarter GDP numbers do not reflect either economic reality or state budgets. No recovery at any level in the economy can occur without job creation in the private sector. As discussed in "Why Obamanomics Will Not Improve The Economy," recovery cannot occur with current economic policies. Unless a resizing of state and local governments takes place, federal bailouts will be required (or at least demanded) over the next several years.

If massively underfunded local and state pension problems surface, estimated current shortfalls will shoot upward by several orders of magnitude. Additional unfunded Washington mandates from health care reform or other new legislation will have the same effect. The Obama administration reportedly came into being with an FDR model in mind. One of FDR's successes was spending money in places where voters could be converted. While this strategy did not end the Depression, it was political genius in the sense that it ensured dominance for the Democrat Party in national elections for several decades.
Rational politicians, regardless of party, spread spending, pork, and favors where they can do other politicians (and themselves) the most good. Crises like those faced by FDR and Obama provided truly unique opportunities for such behavior. However, Obama is likely to be constrained by the severe state fiscal crises. Funds diverted to states restrict the amounts available for political allocation.

Smart Politics dissects the states in the most trouble:

... analysis finds Democrats are in charge of 35 of the 40 chambers in states with the 20 largest deficits, including control of both the Senate and House in 17 of these 20 states.

... [The downturn] is ... highlighting those states that placed themselves in the most precarious positions due to their previous legislative spending and revenue decisions.

The states referred to are heavily Democrat, with seventeen of them going for Obama in the last election. They are also high-tax states like CA, NY, NJ, CT, and MA, which should give the lie to the notion that higher taxes produce balanced budgets. It is unlikely that citizens in these states will accept more taxation. For example, $4.3 billion in taxable income was estimated to have fled NY state taxes in the last year.

State deficits show no sign of decreasing as stimulus funds (some might say "slush" funds) continue to run down. Without an additional stimulus package, it is unlikely that the administration will have enough to cover state deficits much longer.

If Obama finds himself in a tough reelection campaign, he will not have the resources necessary to both bail out states and "buy votes." Of the two objectives, one will have to be sacrificed. Because there is no loyalty amongst thieves, my bet is that the states will be "thrown under the bus." The administration will do everything it can to retain office, including sacrifice loyal Democrats.

National elections are about electoral votes. Winning a particular state by one vote captures all the votes in that state. A rational election strategy allocates funding in a way that enhances winning the marginal, or "swing," states. States which cannot be won or lost are not worth any effort or resources. It is this strategy that makes the next election so interesting.

Obama's political life appears as though it will be on the line in 2012. Democrat states most in need of deficit funding also happen to be the least important states in terms of Obama's reelection. Funds diverted to them are "wasted" in terms of Obama's needs because he already owns these states.  

The bizarre situation of loyal Democrat states "starving" while money is showered on marginally Republican and Democrat states is both likely and ironic. One can almost hear the uncontrolled laughter of H. L. Mencken and other like-minded political cynics.

This next election cycle will be political theatre never experienced in our lifetimes. How will it play out? Will Democrats turn on Democrats under these dire conditions? Will the experience be traumatic enough to reorder the political landscape in the U.S.? The dynamics will be fascinating for political buffs. They will be particularly dangerous for Democrats and mismanaged states.

States should recognize their coming vulnerability and commence real budgetary reforms. Given the nature of politics, proactive steps are unlikely. Rather, we are likely to experience the bizarre scene of large Democrat states flirting with financial ruin while Obama attempts to avoid personal ruin. 

The backbiting and infighting should be a sight to behold. Hang on tight, and enjoy the soon-to-be Democrat political circus.

on "Obama's Vote-Buying Dilemma"