California Shows Need to Revive Federalism

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The state of California recently received $60 million in U.S. Department of Labor stimulus funds to upgrade its 23 year-old unemployment benefits system. But according to the Associated Press, California is yet to spend $66 million it received from Labor in 2002 to upgrade its system. The price tag isn’t whopping by federal standards, but it is another reminder of the need to return to fiscal federalism.

Apparently, the Department of Labor couldn’t care less: 

The federal government has no plans to sanction or fine California for not completing the original technology upgrade. The Labor Department said it was more concerned that new stimulus funding is used in a way that will allow more workers to qualify for unemployment assistance. 
At the same time, California’s unemployment insurance fund is $7.4 billion in the red, which has forced it to “borrow” $4.7 billion from the federal government. According to an editorial in the Oakland Tribune, California increased the generosity of its unemployment benefits when the economy was healthy, but now that the economy is stagnant spendthrift policies are creating a fiscal crisis.  
 
Alan Reynolds reminds that the federal stimulus package “bribed states to extend benefits — which have now been stretched to an unprecedented 79 weeks in 28 states and to 46 to 72 weeks in the rest.” When you subsidize something you get more of it—federal subsidies prompt more state subsidies to the unemployed, which generates more unemployment. Alan concludes that “the February stimulus bill has added at least two percentage points to the unemployment rate.”
 
California’s unemployment rate of 12.5 percent is the state’s highest since the end of the Great Depression. Once again we see that when the line of responsibility between federal and state government is blurred, the result is more of both and poor policies compounded.