Monday, November 17, 2008

Don't Bail out the States, Either

Lou Cannon, writing for Statenet's weekly journal, argues in favor of a federal stimulus package that would benefit state governments. However, this is the ultimate example of a bail out that will create a moral hazard: states that squandered rainy day funds during good economic times are spared the need to tighten the belt when checkbooks get tight.

This would be doubly unfortunate, as state governments are among the few entities that are forced to live responsibly: most of them are required by their constitutions to balance their budgets. Their bailout would provide a bad precedent.

What is worse is that Mr. Cannon succumbs to the revered, but wrong, historical perspective that Franklin Roosevelt provides clear guidance on how to respond to these times of economic extremity. Unfortunately for Mr. Cannon, and all the high school history teachers who failed to read beyond their text books, President Roosevelt's policies did not end the Depression: they extended it (here's a blogger that gets it right!). The Depression did not end until the Japanese and German governments pressed American industry into war production.

While Mr. Roosevelt's policies did not bring about the end of the Depression, his oratory did help people feel better about their squalor. While President elect Obama also possesses noteworthy oratorical skills, one hopes that he does not leave us with the same legacy.

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