Does the Illinois government need more money? Or does it need to reform how it spends money? This is still the question bedeviling the state.
Democrats believe all we need is more (and more!) money. So, Democrats in Washington, D.C., are uncorking a gusher of cash, much of which is pouring into state and municipal governments.
According to Sens. Tammy Duckworth and Dick Durbin, Illinois governments will receive more than $25 billion directly from the federal government (and tens of billions more indirectly) from the COVID relief bill, which is more than 60% of Illinois’s annual state budget! Recall too that the federal government already gave the state many billions last year to cover extraordinary costs arising from the now receding pandemic.
This spending orgy should be deeply troubling for at least three reasons: where the money is coming from, how it will be spent and the financial pain Illinoisans will feel after this cash bender comes to an end.
Where is this money coming from?
The federal government will borrow every nickel it sends to all of the states and we the people will pay for this “help” through either higher future taxes or a devalued dollar and diminished economic opportunities.
Governments that borrow to spend today must repay that debt plus interest out of future tax revenues. However, today’s radical Democrats, who believe in Modern Monetary Theory (or MMT), have a different game plan: The U.S. Treasury will issue $1.9 trillion of new debt in order to fund spending under the bill. But the Federal Reserve will concurrently purchase our debt in the open market with new dollars it creates.
The right hand borrows to spend under this bill, the left hand buys back debt by issuing dollars, so the government ends up in debt to itself. Voila! Money for nothing and socialism for free!
Ostensibly backed by the “full faith and credit of the U.S. government,” creating dollars promiscuously devalues all dollars. If people lose faith in our dollars, they value dollars less, which raises the cost of everything we all buy.
Consider this: 20 years ago Venezuela was the most prosperous nation in South America, and then it adopted socialist policies that debased its own currency. Today, a million Venezuelan bolivars are worth 53 cents.
Consider further: The value of U.S. 10-year bonds have been plummeting, and mortgage rates and gasoline prices are rising, as this bill makes its way through Congress.
So the money in this bill is not free — we the people will pay for this either through higher taxes or higher inflation.
How will this money be spent?
Illinois is in a self-reinforcing swirl of financial failure: Our government’s liabilities grow as our population shrinks, which means the state’s expected future taxes are growing exponentially. This scares more people away, which drives Illinois deeper into a vicious cycle of financial failure.
So, will this cash windfall break Illinois out of our cycle of failure? If our government used this moment and the excess cash to reduce spending and implement reforms to ameliorate its structural financial problems, it could actually help! But what are the odds of that happening under our current leadership? Democrats run this state, and their strategy for dealing with Illinois’s financial crisis has been to raise taxes as much as they can get away with and otherwise to ignore it.
This influx of cash will simply empower a status quo in which the people in government and their allies get a sweet deal, while the rest of us get a raw deal. Bank on it: Our Democrat rulers will use the money to mask structural deficits — and spend more to boot.
What happens after Illinois spends all this cash?
In other words, what happens after a bender comes to an end? Ask any addict: More of what isn’t managed well only postpones the day of reckoning — and increases pain before recovery.
While the extra cash will mask underlying problems with Illinois’s governance, enabling Democrats to kick the reform can down the road and use the excess cash to benefit themselves and their friends, our state’s financial condition will be even worse after the cash is spent.
Illinois, don’t be fooled by all this money! Use the windfall to finance structural reforms to avoid a Blue State Hangover and the mother of all tax hikes in 2023.