Federalism, Self Reliance, March Madness and North Dakota vs. California, Indiana vs. Illinois, Michigan vs. Texas and Wisconsin by Itself

The Founding Fathers created an overall system of self government called federalism.

In simple terms, the individual states and national government split the responsibilities of what the Founders intended to be limited government with maximum individual liberty retained by individual citizens. We the People were given that federalist government, because the Founders believed it to be the optimal way to govern ourselves, all things considered.

In so doing, the ongoing opportunity to experiment, compare and learn from each other was institutionalized within and among the various states. So today we have tremendous opportunities to learn from the various fiscal experiments being conducted in the fifty separate states. How fortunate!

States Keep Axes Sharpened makes clear that the laboratory experiments within each state to match revenues with expenditures have been and will be more successful in some states than in others. Hence, the federalist system of government, like all experiments, can teach us much about what's likely to work and what's likely to fail. All we have to do is watch, compare, reflect and learn.

The aforementioned article describes the current situation:

"Tax receipts in many states have risen in recent months as companies post higher profits and more people find jobs. And several states lowered their costs with earlier rounds of budget cuts. But for many, revenue gains haven't kept up with surging costs for health care and pensions. Meanwhile, federal stimulus funding is drying up.

That means another round of cuts for many states—a process many economists cite as one reason the recovery remains so weak. The Florida legislature on Friday approved a $70 billion budget eliminating 4,355 jobs and reducing funding for hospitals and colleges to close an estimated $1.7 billion shortfall in the fiscal year that begins in July. The plan is expected to be signed by Republican Gov. Rick Scott in coming weeks.

Pennsylvania lawmakers are preparing to take up Republican Gov. Tom Corbett's proposed budget, which calls for cutting state funds for colleges by as much as 30% to close an estimated $746 million gap. New York's Democratic Gov. Andrew Cuomo has proposed cutting aid to local governments, eliminating cost-of-living increases for some state employees and extending a temporary tax on the wealthy to help close an estimated $3.5 billion gap.

"I think the new normal is that we are every single year going to have to be very much focused on wringing efficiencies out," said Delaware Gov. Jack Markell, a Democrat who serves as vice-chairman of the National Governors Association.

Unlike the federal government, states aren't permitted to borrow money to balance their budgets, so they must close gaps by raising taxes, cutting spending, operating more efficiently or all three.

State and local governments have sliced 647,000 jobs from their collective payrolls since mid-2008, government figures show. Of late, the pace of those job cuts has eased—and, in some cases, workers have been added. In February, state and local governments stepped up hiring of education workers, the Labor Department said last week. Overall, local governments added 2,000 jobs last month while states cut 1,000. . . .

The states' fiscal health varies widely. Nevada, still reeling from a severe housing bust, is in the worst shape, facing a $1.2 billion budget shortfall-the equivalent of 37% of its current budget, according to the Center on Budget and Policy Priorities. Meanwhile, states rich in natural resources, such as coal and oil, have generally fared better. Two states, North Dakota and Montana, have had no budget shortfalls during the recovery, according to the Center."

Interesting March Madness Matchups ... California vs. North Dakota

Now let's get a bit more specific about what the scientific method, or trial and error approach to learning, has to teach us about self government. In the spirit of March Madness, we'll look at three matchups and the keys to each game.

Michigan vs. Texas, Illinois vs. Indiana, and certainly California vs. North Dakota all are interesting contests. And since Wisconsin is in a league of its own, it gets a first round bye.

We've selected California vs. North Dakota for a detailed review since it's an energy story.

What North Dakota Could Teach California contrasts the different approaches to energy output by the two states and the effect it has had on their financial well being. It says this in pertinent part:

"In his speech last week responding to high gas prices, President Barack Obama insisted that "we can't just drill our way out of" our energy woes. Actually, we can—and if the president wants proof, he should travel to boomtown USA: Williston, North Dakota.

Williston sits atop the Bakken Shale, which will later this year be producing more oil than any other site in the country, surpassing even Alaska's Prudhoe Bay, the longtime leader in domestic output. This once-sleepy town is what the Gold Rush might have looked like had it happened in the time of McDonald's, Wal-Mart and Home Depot. And the oil rush is making Dakotans rich in a hurry, with farmers and other landowners becoming overnight millionaires from lucrative royalties and leases. One retired farmer tells me that, thanks to oil rigs churning on his property, he suddenly has a net worth north of $30 million.

When I ask how many people live in Williston, which had a population of 12,000 in 2005, longtime residents shrug and offer different answers: 20,000? 25,000? 30,000? Every night, hundreds of workers sleep in the hulls of their trucks or in temporary housing encampments like soldiers in a war zone. New homes are popping up at breakneck speed. McDonald's is offering workers $18 an hour plus a "signing bonus." In Williston, certainly, America remains the land of opportunity.

All this is thanks to the technological leap forward represented by hydraulic fracking, a process that allows drillers to blast through underground shale rock and pump out oil and natural gas. Projections of how much oil is here seem to grow every year.

In 1995, the U.S. Geological Survey estimated 150 million "technically recoverable barrels of oil" from the Bakken Shale. In April 2008 that number was up to about four billion barrels, and in 2010 geologists at Continental Resources (the major drilling operation in North Dakota) put it at eight billion. This week, given the discovery of a lower shelf of oil, they announced 24 billion barrels. Current technology allows for the extraction of only about 6% of the oil trapped one to two miles beneath the earth's surface, so as the technology advances recoverable oil could eventually exceed 500 billion barrels.

Now contrast this bonanza with what's going on in another energy-rich state: California. While North Dakota's oil production has tripled since 2007 (to more than 150 million barrels in 2011), the Golden State's oil production has fallen by a third in the past 20 years, to 201 million barrels last year from 320 million in 1990. The problem isn't that California is running out of oil: In 2008, when the USGS estimated four billion barrels of recoverable oil from the Bakken, it estimated closer to 15 billion barrels in California's vast Monterey Shale.

Rather, California's problem is politicians—at the behest of their green-energy allies—deciding to wall off the state from developing evil fossil fuels. With its prohibitive environmental regulations, state cap-and-trade law, costly renewable energy mandates and 40 years of prohibitions on almost all offshore drilling, California ranks worst in the country and 91st in the world in its hostility to drilling, according to the Fraser Institute's 2011 Global Petroleum Survey. This month, according to North Dakota's Department of Mineral Resources, California is no longer America's third-largest energy-producing state—leapfrogged by North Dakota.

The Census finds that North Dakota led the nation in job and income growth in 2011. It has the nation's lowest unemployment rate, at 3.3% (California's is 11.1%), and it saw a huge 38.5% increase in its number of millionaires between 2009 and 2010, according to state tax return data. California, by contrast, lost nearly 50,000—or almost one-third—of its high-income residents ($500,000 and above) between 2007 and 2009, according to the Sacramento Bee.

North Dakota is also flush with cash and a budget reserve of at least $1 billion, out of a $3.5 billion biennial budget. The state has already cut income taxes, and it is building thousands of miles of "shovel ready" infrastructure projects—roads, bridges, railroads, pipelines—without almost any of Uncle Sam's funny money. Bismarck may be the only state capital in the country that debates what to do with all its tax riches.

Perhaps they could send it as foreign aid to Sacramento. California's budget analysts just announced their fifth straight year of fiscal plague, with up to $6 billion of red ink for 2012-13. Budgets for schools, transportation, health care, libraries and museums are being cut, even though the state already has one of the nation's highest income and sales taxes. Gov. Jerry Brown is sponsoring a ballot initiative this year to raise those taxes yet again.

He'd be better off leading a fact-finding delegation to North Dakota to learn how to pay bills, create tens of thousands of jobs, and balance a budget. The short answer: Drill, baby, drill. Mr. Obama might want to come on that trip too."

See California's Greek Tragedy as well. Here's a brief excerpt:

"Stockton may soon become the state's largest city to go bust. Call it the agony and ecstasy of contemporary California.

California's rising standards of living and outstanding public schools and universities once attracted millions seeking upward economic mobility. But then something went radically wrong as California legislatures and governors built a welfare state on high tax rates, liberal entitlement benefits, and excessive regulation. The results, though predictable, are nonetheless striking. From the mid-1980s to 2005, California's population grew by 10 million, while Medicaid recipients soared by seven million; tax filers paying income taxes rose by just 150,000; and the prison population swelled by 115,000.

California's economy, which used to outperform the rest of the country, now substantially underperforms. The unemployment rate, at 10.9%, is higher than every other state except Nevada and Rhode Island. With 12% of America's population, California has one third of the nation's welfare recipients.

Partly due to generous union wages and benefits, inflexible work rules and lobbying for more spending, many state programs and institutions spend too much and achieve too little. For example, annual spending on each California prison inmate is equal to an entire middle-income family's after-tax income. Many of California's K-12 public schools rank poorly on standardized tests. The unfunded pension and retiree health-care liabilities of workers in the state-run Calpers system, which includes teachers and university personnel, totals around $250 billion."

As they say, it ain't pretty.

Summing Up

California is going broke, and North Dakota is booming. The citizens of each state can choose for themselves which priorities are most important. And those who wish to leave for greener pastures can do that as well. I suspect many will be leaving California while many more will be arriving in North Dakota.

But what about Indiana and Illinois? Well, we have an example of what federalism can teach us about self governance in those two states as well. Indiana recently passed right-to-work legislation and is heavily recruiting new industry. It seems to be winning.

Meanwhile, Illinois remains without right-to-work legislation, appears somewhat hostile to new business formation, and its politicians aren't leading any movement to create new jobs. Instead they're trying not to lose any more. And a team playing not to lose is always playing a losing game.

Finally, taxes were recently raised in Illinois. In comparison, tax increases seem to be a no-no in many other states, including Indiana.

Finally, Texas is doing well financially while Michigan is on the injured list and is much in need of the national government's assistance. That raises a most interesting question relating to our unique brand of U.S. federalism.

What will happen as Michigan requires more government assistance to meet its many unfunded and overpromised obligations? Will residents of other states, such as Texas and North Dakota, be forced to come to the rescue through the national government, or will the individual injured state be forced to clean up its own mess and fend for itself? We'll see.

To U.S. citizens it makes lots of difference. That is, residents of California should be allowed to decide what California decides to do about its many fiscal and self governance issues. That assumes, of course, that the rest of us won't be asked to rescue the good folks of California from their poor decisions.

In other words, non-residents, to the extent we're not required to come to the rescue of California or other states' citizens who have made their bed, so to speak, will not be burdened financially with the poor prior choices Californians have made. That's as it should be. But will it be as it should be? Stay tuned.

Funny thing about California, Michigan and Illinois--they're all blue states, at least for now. And then there's Wisconsin, deciding what it wants to be when it grows up, assuming it decides to grow up. Governor Who is the relevant question in that state for now.

All U.S. citizens beware! Whenever there's a blue state dominated national set of politicians, those in self reliant states need to be on guard. Otherwise we'll be paying for the blues' follies for a long time to come.

That's doesn't seem like what the Founders intended. Welfare states weren't what they had in mind when the federalist system was formulated.

One state paying for the spendthrift ways of another state is hardly a workable approach over time. In fact, it's an even worse idea than the ridiculous state of affairs in Europe today. But we'll leave that story for another day.

Our Founding Fathers believed in individual liberty as paramount. And We the People still do.

I'm anxious for the freedom to be left alone to resume its proper place at the core of our American way of life. And for that of the citizens of each individual state as well.

Thanks. Bob.