In recent months, a number of states, especially New York, have been cranking up the volume on their need for bailouts. Their tax revenues have fallen sharply and they are facing large budget deficits. As far as I am aware, no state allows itself a budget deficit. If revenues drop, they have to cut spending. Those who believe in Big Government don't think they should be bound by budget constraints. Now they have found powerful friends in Congress to help them out.
The Wall Street Journal quotes Congressman Charlie Rangel:
Our hope is that the leadership of both parties will be able to confer and come back after the election, and see what we can do to provide assistance to our local and state governments, as we have been able to do for our banking and finance industry
Moral Hazard is the result of removing the downside risks of personal behavior. In my industry, Insurance, we see this all the time. Even in Life Insurance, people are slightly more likely to commit suicide when they have significant coverage.
Now we have states that spent more during the good times, and don't want to have to cut back in the bad times. Bailing these states out will insure that their spending continues to climb in the future. What lesson does this provide for other states, like Texas, that have braved political fallout by ruthlessly cutting spending during previous downturns?
The simple message of this plan to state politicians is: If you cut spending you'll get bad press and your citizens will have subsidize the bailouts of states more wasteful than your own. Don't cut spending, increase your begging.