It’s time for Donald Trump, the “King of Debt,” to spend big on state governments.

It’s Time for Donald Trump, the “King of Debt,” to Spend Big on State Governments

It’s Time for Donald Trump, the “King of Debt,” to Spend Big on State Governments

Who's winning, who's losing, and why.
March 30 2017 4:48 PM

The Return of the King of Debt

To save his presidency, Donald Trump must spend big on bailing out state governments.

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Photo illustration by Derreck Johnson. Images via Jim Watson/AFP/Getty Images; ikachan999, peshkov/iStock.

Last summer, back when the idea of President Donald Trump was still borderline unthinkable, the then–front-runner for the Republican nomination told CBS’s Norah O’Donnell that he was “the king of debt.” To the shock and horror of the fiscally abstemious, Trump bragged about his willingness not just to take on large amounts of debt to help build his fortune but also to renege on paying it back in full. This is obviously wildly irresponsible, and pretty much everyone freaked out at the notion of treating the federal government’s debt the way you’d write down losses on a low-rent casino. And so the King of Debt went into hiding, locked in a sarcophagus miles below Trump Tower.

Since then, we’ve seen a good deal of Scary Bannon Trump and occasional flashes of Truck-Loving Trump. For the most part, though, the administration has been dominated by Regular Republican Trump, who worked hand in glove with Paul Ryan to pass health reform legislation that had little going for it beyond the fact that it was expected to reduce future federal deficits. The result? Miserable failure, sinking approval ratings, and a growing number of mutinous Republicans. In a desperate bid to save himself, Regular Republican Trump is trying to woo Democrats to his side on infrastructure and tax reform and perhaps even another round of health care reform, which of course won’t work. Why exactly would Chuck Schumer and Nancy Pelosi throw Regular Republican Trump a lifeline when they could instead sip chablis as he writhes in pain?

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The time has come for the King of Debt to emerge from his musty antechamber. Before Trump and his allies can make a big push for various conservative reforms, they first need to do something big and bold. Their best option on that front is to bail out state governments across the country. By helping out state governments by taking on a fiscal burden that the federal government is better equipped to handle than the states—the Trump administration would open up all kinds of political possibilities.

Many of the most important things government does are accomplished in large measure at the state and local level, from financing K-12 education to maintaining transportation infrastructure to administering social-welfare programs that people depend on when they fall on hard times. At the same time, state governments are constrained by balanced-budget requirements, which means state governments often struggle to stay afloat when there’s an economic downturn. That doesn’t mean we should just scrap balanced-budget requirements. There is a real danger that state governments will spend themselves into a deep, dank hole of debt from which they can’t escape, and every taxpayer who isn’t literally nailed down to the ground will abscond to states whose holes are somewhat less deep and/or dank.

To get around this problem, the federal government often gives states money to help finance various programs, usually with lots of strings attached. This creates its own problem, which is that lines of accountability are blurred.

Consider the case of Medicaid, which was founded in 1965 to provide medical care for the poor. Medicaid is administered by state governments, which receive between 50 and 73 percent of the funding for the program from the federal government, a rate that varies according to state per capita income. The bigger the federal contribution, the “cheaper” the Medicaid program is from the perspective of a state government. If a state gets a 50 percent match from the feds, it would need to cut $2 to yield a $1 reduction in state spending. Not surprisingly, Medicaid spending has proved difficult to contain, and the program is threatening to crowd out pretty much everything else state governments do, from financing education to transportation infrastructure to nonmedical social programs aimed at bettering the lives of the poor. While Obamacare changed Medicaid a bit—the federal government covers a much higher share of the costs of newly eligible enrollees—it didn’t alter this fundamental dynamic.

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One of the main reasons the American Health Care Act was so unpopular is that it tried to put the brakes on Medicaid costs by establishing per capita caps. The AHCA would have required the federal government to give states a fixed amount of money for each Medicaid enrollee. If a recession hit and the Medicaid rolls expanded, state governments would have received more money. If costs per enrollee soared, however, state governments would have been on the hook for the additional costs. The idea here was to encourage states to take more responsibility. The problem here is that state governments are expecting a tsunami of rising Medicaid costs as the population ages, and more and more older Americans depend on Medicaid to provide them with nursing-home care.

This leads us to a solution perfectly suited to the King of Debt: have the federal government take over all of the Medicaid costs of older beneficiaries who are also eligible for Medicare in those states that accept per capita caps for the rest of their Medicaid beneficiaries. In one fell swoop, you’d drastically reduce the Medicaid costs borne by states, which would make them far more inclined to accept per capita caps for the younger, healthier, and cheaper Medicaid beneficiaries who’d remain on their rolls. And it doesn’t hurt that old people are Donald Trump’s core constituency.

Why stop there? State governments across the country face huge pension costs they’ve been neglecting for years and that are now coming due. To keep the promises elected officials of earlier eras made to retired public employees, today’s elected officials find themselves with little choice but to either hike taxes or slash spending on education, infrastructure, and other investments in future economic growth. One way forward would be for the federal government to offer state governments yet another deal, first proposed by economists Joshua Rauh and Robert Novy-Marx: If you fully fund pension contributions from this point on, and if you move all new public employees to a more sustainable pension system, the King of Debt will take on some of the massive pension debt you’ve accumulated. Not every state would jump at this deal, which would be politically painful. But for states with their backs against the wall, this could be huge—an opportunity to get out from under a huge financial burden so they could start investing in their future. This could be an especially big boon for cash-strapped Rust Belt states that might be up for grabs come 2020.

What both of these ideas have in common is that they offer huge wins to state governments, whether they’re governed by Republicans or Democrats. Those fiscal victories would free them up to hike spending on schools and roads and all the other good stuff we want state governments to spend on. And they’d leverage the fact that for the foreseeable future, people are willing to lend the federal government money at extremely low rates. If there was ever a perfect moment for the King of Debt to make attractive deals, it’s now. Of course, shifting costs from state governments to the federal government will make the federal balance sheet look worse. That will drive GOP deficit-phobes up the wall. But the best way to address deficits and debt is to increase the economy’s growth potential. By freeing states to make bigger and better public investments, you will do just that. Moreover, you’d make pro-growth tax reform way more likely, by making it clear that you have no intention of screwing over the states.

Granted, all of this assumes that Regular Republican Trump didn’t drown the King of Debt in a bathtub shortly after the inauguration. Let’s hope he’s still alive, somewhere, waiting for just the right moment to reemerge.

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