So failed states become a drain on everyone & at the same time the most economically challenged within the state pay the brunt of that failure as they cant move.
No they aren't. A failing state doesn't look like Mad Max, it looks like Michigan or West Virginia or Mississippi. The federal government has no constitutional obligation to bail them out.
> So failed states become a drain on everyone & at the same time the most economically challenged within the state pay the brunt of that failure as they cant move.
The risk of failure is the price of success. Either states make their own decisions and take their own lumps, or we have some Borg Collective mandatory national conformity to complex corruption-informed uniform regulations with 2000% bureaucratic overhead.
Example: https://slatestarcodex.com/2017/08/29/my-irb-nightmare/
Michigan actually does not look bad on a wide range of metrics. It's unemployment rate is right at the national average and it get about as much money from the federal government as it gives back. People pay attention to it because it's close to average not because it's failing.
EX: "Michigan's poverty rate dropped 0.4 percentage points to 15.8 percent last year but the nation saw a bigger drop of 0.8 percentage points to 14.7 percent."
And wealth transfers from richer states to poorer ones are the inevitable (indeed intended) consequence of federal income redistribution. They're a problem if they're disproportionate, i.e. two states are equally poor but one gets more money because it somehow has undue political power. Obvious example is Florida. Other than that it's no different than redistribution from richer people in California to poorer people in California, except that they happen to be in different states.
Another problem is the state-level consequences of some of the income cliffs the feds have in place, i.e. six independent subsidies phase out at the same time with higher income.
The states need the incentive to improve. Increasing average income by $4 shouldn't cause the feds to take away $5 from the state.
But if that happens, the cause is flawed federal policy, not state-level diversity.
This is a wealth transfer to failing states to prevent complete collapse or an a massive exodus of the population.
Because a bail out is normally a cliff and cliffs are moral hazards.
Suppose Level 10 is great, Level 5 is mediocre and Level 1 is a disaster. Now suppose that there is a federal policy that says if anybody gets down to Level 1, we shower them with money until they get up to Level 5. What incentive does this create for a state currently at Level 3?
Compare this to something like a $12,000/year federal UBI with a 30% flat tax rate. In that case an unemployed person gets $12,000 and someone with a $20,000/year job gets $26,000 ($12,000 + 0.7*$20,000), which is obviously better than just $12,000. Moreover, the UBI is unconditional regardless of which state you live in, so if your state is terrible, the level of assistance isn't conditional on you continuing to live somewhere unsustainable.
> This is a wealth transfer to failing states to prevent complete collapse or an a massive exodus of the population.
But that's what's supposed to happen. WV has negative population growth. There is nothing wrong with that. It doesn't need to be stopped. It's completely natural for unsustainable places to be abandoned.
Places aren't people. There is no need to save them through external intervention.
PS: IMO, death spirals from economic shifts such as lower demand for coal miners are longer term problems, but just as much a crisis.
The externalities that cannot be internalized at the state level are the exception. That is why, as I explained, environmental regulations have to be national -- pollution crosses state lines. And if you go above the national level, climate change is one of the only examples.
Most of the things a state does has minimal effect on other states. If people are homeless in Miami, that may be bad, but it has minimal effect on people in San Francisco.
This is true for positive externalities as well, such as education and public health. Firms can simply move to the states that invest the least in public services and have healthy, educated adult workers provided by other states move there. Tax competition undermines the mechanism of internalizing the taxpayer-funded cost of their education and health.
But how does it motivate states to have weaker environmental regulations?
Suppose it saves a company $10M to not have to comply with environmental regulations, but as a result $25M in damage is done to the state.
A state has no rational incentive to do that. They are paying $25M in costs to give the company a $10M incentive. They could give them $10M in tax credits instead and be ahead by $15M.
Irrational or corrupt states may do it anyway, but in that case the problem isn't competitive pressure, it's stupidity or corruption. And then the next state over can out-compete them by offering environmental regulations with a $12M tax credit which the dumb state can't afford because it lost those resources to pollution.
> This is true for positive externalities as well, such as education and public health. Firms can simply move to the states that invest the least in public services and have healthy, educated adult workers provided by other states move there. Tax competition undermines the mechanism of internalizing the taxpayer-funded cost of their education and health.
No it doesn't. A state doesn't provide good schools because it's trying to please school children, it does it to satisfy the parents. You can't stock up on healthcare and once you've accumulated 20 years of it, go move somewhere without it and not need it anymore.
Workers are not going to leave a place with good schools and government subsidized healthcare for a place without them unless the company pays them enough to afford private schools for their children and private healthcare. Which, if the government was providing efficient schools and heathcare, will cost as much as the difference in taxes.
Even things with positive externalities are not inherently problematic. If Massachusetts spends $10M on scientific research and the result is $25M in benefits for Massachusetts and $500M in benefits for the rest of the world, they have no incentive to stop doing it because they're still coming out ahead by $15M.
There may be other programs that yield the same benefits and cost $50M instead of $10M, but a state that yields the $25M partial benefit will never have the incentive to fund those. For that you need federal grants in the same way you need federal environmental regulations for interstate pollution.
Well it's both, isn't it? Corporations seek out the most "stupid and corrupt" state with weak environmental regulations that will drive them to ruin, but maximize short-term private profit. Also, not that hard to do when the corporate elite fund elections.
> And then the next state over can out-compete them by offering environmental regulations with a $12M tax credit which the dumb state can't afford because it lost those resources to pollution.
Great. So your corrective mechanism for corruption is, states first have to fail due to extreme environmental pollution. Which happens over multiple generations, long after the corporations that drove the process have distributed profits and moved on. Not a really primo solution there. That is exactly why we have global warming. I guess our next planet can learn from Earth's "stupid and corrupt" mistakes, as part of a natural market correction, right?
Environmental regulations prevent a harm. A dollar value can be attached to the harm, the cost to compensate victims and clean up the damage. If a company is polluting but not providing enough value to compensate for that pollution then they're a parasite and the state does not benefit from avoiding environmental regulations in order to attract them.
In practice not polluting is almost always more cost effective than polluting and then cleaning it up afterwards, so states that have environmental regulations will out compete states that allow pollution and then have taxes high enough to recover the cost of pollution from local companies.
If that wasn't the case then it wouldn't actually be a problem. Suppose someone invented a way of converting CO2 + H2O + sunlight into hydrocarbons that was so efficient it put all the oil companies out of business. Now everyone is still emitting carbon, and increasing carbon would still cause climate change, but recovering the carbon using that process would be more cost effective than alternatives that don't emit carbon to begin with. Which would make doing that a completely reasonable thing to do.
The problem case is when the state is externalizing its costs, e.g. West Virginia burns coal and the pollution spreads to many other states. Those are the cases where national regulations (or international treaties) are necessary. Not because the state is allowing a company to externalize costs, since it has no incentive to do that if the state is the one paying the full cost of that. But instead because the state itself is externalizing costs and that requires some external force to prevent it, equivalent to the need for the state to prevent the company.