Since states lack the many tools that the national government possesses — the ability to run deficits, to create money from thin air, to tax commerce nationwide and imports from across borders, to spur scientific research and knowledge investments on a global scale — conventional wisdom holds that there’s little states can do to defend themselves if the federal government undermines their economies.
This wisdom is wrong. States can actually take action in all these areas to fight back. Let’s take a look:
Deficit spending: Every state except one (Vermont) constitutionally requires a balanced budget. States (and local governments, for that matter) seemingly lack the fiscal leverage of the federal government. But this is an illusion.
As I wrote in Governing at the depth of the COVID-19 pandemic five years ago, “Borrowing money today and investing it to generate returns tomorrow is something state governments actually do every day.” States can, and do, borrow for all sorts of expenditures. In fact, as the overall economy weakens and interest rates decline, states will likely be able to issue bonds on more favorable terms. Bonds, of course, need to be paid back just like any lending; the key to successful borrowing is to do so only for real investments that will grow the economy and generate a higher return.
Money creation: Supposedly states are without power here, too, as they lack central banks and are constitutionally prohibited from coining money. Again, these limits are somewhat illusory. Only a small fraction of “money” today consists of coins or even hard currency. It’s mostly digital entries on the balance sheets of banks; they, not the government, issue most of that money. But not all banks are under the control of the Federal Reserve: State-chartered banks are regulated by states and thereby manipulate the amount of money in circulation just as the Fed does by altering reserve requirements.
You don’t even need a bank anymore to create money: Anyone can do it. President Donald Trump himself has paved the way. Over the long haul, the $Trump coin probably won’t hold its value as well as a, say, $CalCoin might. On Wednesday, the Bank of North Dakota announced it was issuing the state's first stablecoin, the Roughrider.
Tax outsiders: Taxes are never popular. But there’s a relatively painless workaround: Tax people who will never vote against you — out-of-staters. And, yes, states can do that.
A good example is Delaware, which long ago perfected the art of deriving revenue from non-residents: namely, provide a government service that out-of-staters will pay for. Delaware receives massive revenues (and has built a profitable in-state legal industry) from being the venue that virtually every corporation wants to go to for its expert business-law court system.
Delaware also draws an inordinate share of state revenue from the tolls on its tiny slice of Interstate 95, which allows it to eschew sales taxes on its own residents and businesses. Essentially, every jurisdiction plays a variation of this trick by imposing generally steep hotel taxes on travelers. There are countless other ways to shift taxes to out-of-staters, for instance, by focusing on industries largely operating elsewhere or changing how you define and weigh in-state economic activity in calculating corporate income taxes.
Investing in knowledge: The federal government is currently dismantling its own scientific, statistical and other knowledge infrastructure and cutting off funding for higher education. Although the president has so far focused most of his assault on the country’s elite private colleges, some of the world’s greatest institutions of research and learning are in fact state-created and funded: the universities of Michigan, Illinois and Texas and the University of California system, just to name a few. Arizona State University has become the global leader in online higher ed, meaning that it now has a huge student — and financial — base largely (although clearly not entirely) beyond the reach of the federal wrecking ball.
These university centers generate much of the nation’s wealth and most of its technical advances. States will need to increase their support for these golden-egg producers to compensate at least partially for the federal attempts to kill them. At the same time, they will need to strengthen their own rules for ownership of the intellectual property that their resources produce, such as requiring spinoff companies to operate within their jurisdiction and taking higher equity stakes in innovation. Once again, Trump personally is paving the way for novelties like increased state capitalism, making government stakes in cutting-edge companies now de rigueur. And what's sauce for the goose …
Growing their economies: All of the above is based on one basic premise — that paying for a 21st-century public sector requires a 21st-century private sector. The point of the creative financing methods surveyed above is to put more money into the things that grow even greater wealth in today’s world: science and knowledge, research and development, entrepreneurship and business startups, and human capital investment. The federal government is sabotaging all of these; it is up to states to reignite the cycle of wealth creation.
As already noted, regardless of today’s prevalent anti-government ideology, there are numerous government services people actually want and will pay for. States can get creative with that. A good example is how some have made their 529 college savings plans more attractive.
There are other state services, including health and pension plans for their own employees, which can be turned into market competitors that attract new customers. If activist states formed a consortium, they could even create the type of portable insurance and pension coverage Americans have long needed and the federal government has failed to create.
Some states have significant assets that can be used to create greater wealth. One might think this only applies to energy states such as Texas and Alaska, but all states own real estate they can manage more profitably. Decades ago, for example, Arizona started managing its trust lands from the federal government more like a development portfolio; others can do the same with any form of asset. Several jurisdictions have begun redeveloping such holdings into affordable housing.
Most of all, states and localities should stimulate their private economies by incentivizing employment, for instance by leveraging capital for entrepreneurship through loan guarantees.
Governments that invest in education, job training and high-wage, high-growth economies will attract those Americans who want such jobs — and the high-end services, cleaner environment and better health that come with such job creation. They will vote with their feet, and their wallets, rather than live in an economic backwater.
Ultimately, those are votes the federal government may not be able to stop.
Governing’s opinion columns reflect the views of their authors and not necessarily those of Governing’s editors or management.
Related Articles
