Government Planning in Indiana with Federal Funds

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According to popular myth, Democrats favor government planning of the economy and Republicans favor free markets. Today’s example of why this is baloney comes from the Republican governor of Indiana, Mike Pence. Before I get to the story, readers should know up front that I was a state budget official (2006-2008) in the prior administration of Gov. Mitch Daniels (R). 

Yesterday, the Indiana Department of Energy Development announced that it will be “crafting a new energy plan for the state of Indiana.” Well, praise the Lord – the state’s energy planners are going to work with “stakeholders” to make sure Hoosiers won’t be forced to turn to whale oil lamps. No, seriously, Indiana is in trouble. According to the announcement, that’s because the state’s current plan apparently just hasn’t panned out: 

Indiana’s current energy plan, the Homegrown Energy Plan, was written in 2006. Since that time, Indiana’s cost of electricity for industrial customers has increased, causing Indiana to slip from 5th lowest in the country to 27th lowest. 

Oops. 

Okay, a new vision is clearly needed. Enter former radio host Gov. Mike Pence: 

“Here in Indiana, we make things, and we grow things,” said Governor Mike Pence. “These activities require enormous amounts of energy. In order to maintain our historic advantage for low cost of energy, we need a new, updated energy plan.” 

Whoa – that’s deep. Think about what Pence is saying: Hoosiers make things…Hoosiersgrow things. Only a cold-hearted cynic doesn’t feel a tingle after contemplating such profound insights. 

As the saying goes, great leaders surround themselves with great people. Heading up the state’s development of a new energy plan is my former colleague, Tristan Vance. According to a press release announcing Vance’s reappointment, he has extensive experience working in state government. There’s no mention of Vance having real world experience in the energy sector that he’s now in charge of planning, but he did monitor the agency as a state budget official prior to heading it. 

Eh, close enough. 

Snark aside, there’s a deeper policy concern here that affects taxpayers in all states. Much of the Indiana Department of Energy Development’s funding comes from the federal government (about 70 percent if my reading of state budget numbers is correct). That means, dear federal taxpayers, you’ll be subsidizing the bulk of whatever “plan” the Pence administration comes up with.   

Now as I noted in an Indianapolis Star op-ed back in June, Indiana’s dependence on federal funds isn’t unique. Indeed, the other 49 states are similarly dependent on handouts from Uncle Sam. But state taxpayers should understand that federal funds are not a “free” lunch: 

The appeal of federal funds to governors is obvious: They get to spend additional money without having to raise taxes on their voters to pay for it. A problem with this arrangement is that it creates a fiscal illusion — state taxpayers perceive the cost of government to be cheaper than it really is. In effect, the federal money and a large part of the annual budget appears to be “free.”

But Hoosiers should be mindful that every dollar Washington sends to Indianapolis is a dollar taken from taxpayers in Indiana and the other states. (The return is actually less than a dollar since the federal bureaucracy takes its cut). The situation is no different when the federal dollars go instead to, say, Sacramento. In addition, economists have found that federal subsidies to the states lead to higher state taxes and spending in the long-run because the federal “seed money” creates a demand for more government.

One could argue that so long as Hoosiers have to send money to Washington, Indiana might as well get a share of the loot. That’s an understandable sentiment, but the blatantly self-serving manner in which the Pence administration goes about distributing the bounty should give Hoosiers pause.

Indeed, the self-serving manner in which the nation’s governors go about playing with federal funds should give all taxpayers pause.