Remembrance of Red State Bailouts Past

Don’t memory-hole what the rest of us did for Texas in the 80s and post-bubble Florida

Remember this? The picture happens to be from Baltimore, but Texas was the epicenter of the crisis:

I received a lot of good feedback over yesterday’s post about how much California has contributed to the U.S. economy over the years, starting with the way California has in effect subsidized poorer, less productive (and yes, generally Republican-voting) states through the federal tax-and-transfer system. It seems that many generally well-informed readers weren’t aware just how big these subsidies are.

I hope that my post made it clear that I’m fine with this cross-subsidization; it’s part of what being a nation is all about. It was right and appropriate for California to aid red states in the past; what’s wrong and shameful is the push by politicians from those states to deny California aid in its own hour of need.

One thing I didn’t point out, however — to be honest, because it slipped my mind — is that our system also provides a safety net for states facing economic or financial stress.

For example, bank deposits are insured at a national level, so a state that for whatever reason experiences a wave of bank failures is effectively compensated for its losses by taxpayers nationwide. If a state experiences a recession, the impact of that slump is diminished in part by the fact that it pays less in taxes while Social Security and Medicare money continues to flow in, in part by the fact that the state gets extra aid from unemployment insurance and means-tested programs like Medicaid and food stamps.

In short, our system more or less automatically bails out states when they run into financial trouble. And as it happens, the biggest such bailouts I’m aware of involved red states.

First up, Texas in the 1980s, which was ground zero for the savings and loan crisis. I found myself thinking about that crisis in 2012, the peak year of the European debt crisis, as a benchmark. Here’s what I wrote:

Something I’ve been looking at: Texas after the savings and loan crisis of the 1980s.

The cleanup from that crisis cost taxpayers about $125 billion, back when that was real money. As best I can tell, around 60 percent of the losses were in Texas. So that’s around $75 billion in aid — not loans, outright transfer.

Texas GDP was about $300 billion in 1987. So this was equivalent to giving — not lending, not even taking an equity stake — Spain 25 percent of its GDP to bail out its banks.

And in the US it wasn’t even treated as an interstate political issue.

Back then, as you can see, I was thinking about Europe. But put it in the current context. California’s GDP is more than $4 trillion. So giving CA a Texas 1987 scale bailout would mean giving it roughly one trillion dollars. [/Dr. Evil]

Then there’s Florida after the 2000s housing bubble. Florida was at the heart of that bubble, and was hit hard when it burst. But not as hard as it would have been if it hadn’t benefited from the de facto safety net our system provides. At the time I found it useful to compare Florida with Spain — two economies with warm climates, with large numbers of holiday homes built near the sea. Housing prices first soared, then crashed, in both places; even the numbers were broadly similar.

Spain, however, experienced a severe post-bubble recession and went through many years of very high unemployment. Florida was hurt too, but the slump was both much shallower and much shorter. The main reason, I argued (gated; sorry) was the fact that Florida had the Federal safety net. It paid a lot less in federal taxes during its slump, but Social Security and Medicare checks kept coming, while unemployment and food stamp checks actually got bigger.

Oh, and the FDIC spent $9.7 billion compensating depositors at failed Florida banks; Fannie Mae and Freddie Mac, the government-sponsored lending agencies, also absorbed large losses on Florida mortgages, although I haven’t managed to put a number to them.

Putting all of this together, I’m pretty sure that post-bubble Florida received de facto federal aid of at least $50 billion and probably considerably more; scaling that up by the size of the state economy, that would be the equivalent of giving California today at least $250 billion.

Now, providing relief for states experiencing natural disasters isn’t a legal obligation like compensating insured depositors, nor is it an automatic mechanism like the way a slumping state pays lower taxes while receiving increased benefits. But the principle is the same, and it would be a break with both traditional practice and fundamental American values to deny aid to California because it voted Democratic, or make that aid contingent on accepting G.O.P. policy demands.

All indications, however, are that Republicans intend to exploit the tragedy in Los Angeles, and in general turn the federal government into an extortion racket. Let’s not pretend otherwise.

MUSICAL CODA

Most readers seemed to like Molly Tuttle and Golden Highway, but a few asked for more of a Los Angeles sound. Will Linda Ronstadt do?