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Monday, March 9, 2009

Bailout of States Violates U.S. Constitution

By Karen McMahan
February 23, 2009

After the $700 billion bailout of the financial industry and the $17.4 billion bailout of domestic automakers, Americans are now being asked to pony up billions more to rescue states that have been fiscally irresponsible. A bailout, many argue, would not force states to re-examine their fiscal policies to prevent future deficits and instead would encourage them to continue to overspend.

With more than 41 states facing budget deficits in the current fiscal year, governors are asking the federal government for $1 trillion to help them pay for education, infrastructure projects, and a host of social and health-care programs, according to the National Conference of State Legislatures.

Just after taking office, Gov. Beverly Perdue met with lawmakers in Washington, D.C., to lobby for federal stimulus money to cover the state’s projected shortfall of $2 billion or more in its fiscal 2008-09 budget.

In a Jan. 15 press release, Perdue said that she plans to “continue our state’s practice of sound fiscal management” and vows to balance the budget as required by state law.

Ironically, in September 2007, the liberal N.C. Justice Center praised the state’s final 2007-09 budget, with its new major policy spending initiatives, as being “an affordable and responsible approach to moving North Carolina forward,” even though the budget increased state spending by $1.79 billion, or 9.5 percent over the prior year, in the first year and an additional $27 million in the second year.

Most of the $1.8 billion increase was for education, both public schools and higher education, to pay for increased teacher and faculty pay raises and for new and expanded programs that require ongoing spending year after year. The fiscal 2007-08 budget for public education was 10.3 percent more than fiscal 2006-07 actual expenditures.

From surplus to deficit

The Justice Center said the budget, in contrast to prior years, was “close to being structurally balanced” because recurring expenditures in 2007-08 would “only exceed recurring revenues by $100 million.”

Analysts and some lawmakers, mostly Republicans, warned in 2007 and 2008 that there were serious structural problems in the budget because it overestimated future revenues and spent a nearly $2 billion surplus from higher revenue growth in 2006-07, a one-time occurrence.

Joseph Coletti, a fiscal policy analyst for the free-market John Locke Foundation, said in June 2008 that “any time you use onetime, or nonrecurring, funds for recurring expenses, you create problems in the next budget.”

Apparently, in just a matter of months the state went from having a $2 billion surplus to a $2 billion deficit.

As legislators were giving tentative approval to the state’s budget in July 2008, Phil Berger, a Rockingham County Republican and Senate minority leader, said that the fiscal 2008-09 budget was much like the “one passed in 2000 that plunged the state into deficit just as Easley took office,” as reported in the News Record of Greensboro.

The Daily Tar Heel at UNC-Chapel Hill said in July 2008 that the state was “rather lucky that as of January it had a $140 million budget surplus for the fiscal year” that ended in June 2008. The article concluded by saying, “We just hope in the future our state officials continue to keep our — the taxpayers’ — finances in good order.”

As it turned out, the surplus was merely a projection.

Not a question of fairness

While some are debating the fairness of citizens in states that have been fiscally responsible being forced to pay for the fiscal irresponsibility of other states, the larger question, according to some legal experts, is whether such a bailout is constitutional.

Nick Dranias, director of the Goldwater Institute’s Center for Constitutional Government, said he believes the bailout of states by the federal government would violate the 10th Amendment of the Constitution, known as the enumerated powers doctrine.

The 10th Amendment states: “The powers not delegated to the United States by the Constitution, nor prohibited by it to the states, are reserved to the states respectively, or to the people.”

This same argument, along with others, has been espoused by Robert A. Levy, chairman of the Cato Institute, to say that the $700 billion Emergency Economic Stabilization Act of 2008 is unconstitutional. Dick Armey, former Republican House majority leader and chairman of the FreedomWorks Foundation, is considering a possible legal challenge to the so-called “Paulson bailout.”

“The federal government does not have the constitutional authority to spend taxpayers’ money to redistribute wealth from one state and give it to another,” Dranias said, as the proposed federal stimulus plan would do because the federal government would be taking possession of a power reserved to the states.

In doing so, the federal government would effectively be “undermining state Sovereignty and rendering meaningless the boundaries among the states and between the states and the federal government,” Dranias said.

“States lack the power by consent to accept the money or to sanction unconstitutional conduct by the federal government,” Dranias said.

If a state creates fiscal policies that lead to a budget deficit, the federal government does not have the authority to take tax dollars of other states to cover the shortfall. Such a bailout would make policy competition among the states impossible, Dranias said.

The framers of our Constitution understood the dangers of unlimited federal power and set up a system of checks and balances to prevent it.

In 1782, Thomas Jefferson wrote that “whensoever the General Government assumes undelegated powers, its acts are unauthoritative, void, and of no force.”

“If Congress can do whatever in their discretion can be done by money, and will promote the general welfare, the government is no longer a limited one possessing enumerated powers, but an indefinite one subject to particular exception,” wrote James Madison in a letter to Edmund Pendleton in January 1792.

Later, in 1825, Jefferson lamented that the federal government had already begun to usurp states’ rights and consolidate its own power, saying, “It is too evident that the three ruling branches of [the federal government] are in combination to strip their colleagues, the State authorities, of the powers reserved by them, and to exercise themselves of all functions foreign and domestic.”

James Madison in an address to the Virginia Assembly in 1799 said that “in the case of deliberate, palpable, and dangerous exercise of other powers [not granted to the federal government in the Constitution], the states who are parties thereto have the right, and are in duty bound, to interpose for arresting the progress of the evil, and for maintaining within their respective limits, the authorities, rights and liberties appertaining to them.”

Challenging the bailouts

Presently, there is no precedent for challenging these bailouts, Dranias said, because of the problem of “taxpayer standing,” meaning it is hard for individual taxpayers to sue the federal government unless they can prove the spending would be injurious to them personally.

However, a state itself could challenge the constitutionality of the bailout, as could members of Congress. Representatives and senators do have “standing” and have exercised that power in the past to challenge certain laws, such as the McCain-Feingold Act dealing with campaign finance reform, said Dranias.

When asked whether citizens could urge their representatives and senators to mount such a challenge, Dranias said they could indeed, but it would likely not be easy. He said that individuals shouldn’t think they can’t file a good-faith lawsuit, even if such a suit were ultimately dismissed.

“One problem with conservatives is that they believe so much in abiding by laws, they often forget that unjust laws do exist,” said Dranius, “and such laws are meant to be broken, peaceably and nonviolently.” He also suggested that those who believe the federal bailout of states would be both an unjust and unconstitutional law could force change much like what happened during the Civil Rights Movement as a result of hundreds of individual lawsuits.

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