The Economics Behind the Issues: The Dependency Trap
2005-09-01 dependency on benefits cure 226
At this month's Citizen Education Seminar on Kentucky's economic competitiveness, jointly hosted by the Bluegrass Institute and the Mercatus Center at George Mason University, John Garen, Ph.D., economics professor at the University of Kentucky and chair of the Bluegrass Institute's Board of Scholars, discussed the "dependency trap" which the commonwealth has fallen so deeply into.
In layman's terms, the dependency trap is the phenomenon of states accepting more and more dollars from the feds despite the fact that in the long-run, such redistribution of resources from one region to another slowly bankrupts the states and causes them to become - well, dependent. The states are forced to give up more and more of their sovereignty over their economy, healthcare, education, and in a host of other areas - or risk the their caretakers in Washington D.C. cutting off their allowance.
So just how do the states fall for this trap, and why do they dig deeper and deeper into it year after year?
The succinct explanation for this quandary is the presence of dispersed costs and concentrated benefits. Let's say Kentucky is considering accepting federal dollars for an infrastructure project, or healthcare assistance, or a police state, or an amusement park, or whatever else is on the menu this particular day. If Kentucky succeeds in lobbying for these various projects, the benefits are enjoyed exclusively by Kentuckians. The benefits are concentrated to one relatively small region of the country, while residents in far-off states like New York or California, or even in neighboring states like Indiana or Tennessee generally don't see a dime of the booty.
But they do see the bill - or at least part of it.
The way the feds pay for Kentucky's newest hand-out is through national taxation. So while the benefits of this new program are concentrated to Kentucky, the costs are dispersed across the entire country. For an individual state, its share of the total bill is relatively small since the costs are so dispersed. As a result, no one state has a great incentive to rise up in an uproar and demand Kentucky not receive special favors and take resources from the rest of the nation.
In the end, Kentucky succeeds in attaining federal funds for this or that new program because no other state has a great incentive to block them.
So...Kentucky wins, right? Wrong.
The problem is that the same process happens in every other state in the nation. So while Kentucky succeeds in forcing other states to pay for its special program, there exist 49 other states that are doing the same thing to Kentucky! In every individual circumstance, no state has a great incentive to stand up and demand this or that special program get the kibosh. But when you add all the special programs together, the costs to Kentucky are extraordinary, and Kentucky becomes ever more dependent on our federal masters.
Professor Garen provides an illustrative example of this unfortunate phenomenon:
Let's say the total cost of a program aimed at improving Kentucky's environment and wildlife is $100 million. But let's also assume the benefits to Kentuckians add up to only $30 million. Logic would have the program not go through because the costs far outweigh the benefits - but logic is not what determines how the feds tax and spend your money.
Because each state, including Kentucky, only has to pay about 1/50 of the total cost, or $2 million, Kentucky is greatly incentivized to lobby strongly for this project. The costs to Kentuckians are only $2 million while the benefits are $30 million. Since the costs to every other state are relatively small, no state stands up in opposition. What a steal for Kentucky!
Of course, every other state will want to do the same thing, meaning the total costs for all these programs combined will be 50 x $100 million, or $5 billion. The total benefits in this example? $150 million.
No good.
The dependency trap is the unfortunate outcome of a federal government that can create such dispersed costs and concentrated benefits.