America’s Fiscal Union in Action

Here’s a great chart from the Economist about the operation of the American fiscal union. You see that poor states (and to a lesser extent low-population ones) tend to gain transfers, while rich states and big ones lose out. In general the poorer states are more politically conservative than the richer ones, but compare Texas with New Mexico, and you’ll see that income rather than partisan politics is the driver.

Two key points I would make about this in relation to the eurozone are that these transfers are both really big and extremely persistent. Mississippi and Alabama have lagged behind the rest of the nation in economic development for a very long time, and I see no particular reason to believe they’ll ever catch up. Residents of economically backward and politically dysfunctional states can and do exercise their right of exit rather than sticking around and solving problems, and the availability of large and persistent fiscal transfers means that local political elites focus their energies on rent-seeking rather than development. Other places such as Florida and Arizona develop regional economic specialization as low-wage high-temperature retirement zones living off incomes earned in more dynamic economies elsewhere.

Unfortunately, thanks to fiscal austerity, the Census Bureau has canceled the Consolidated Federal Funds Report on whose data the map was based. But the fact that such a thing could be done reflects the fact that America has a real national politics. People think the important question is whether senior citizens get Medicare benefits and which income bracket pays the taxes, not where the seniors are geographically located.