States become wealthy by protecting private property, maintaining a stable system of low taxes, decentralizing its infrastructure, and by minimizing intervention in private capital flows. Such policies, from generation to generation, encourage good work habits, longer time horizons, and increased capital from other states where wealth is less secure. Unfortunately, these are policies that will be pursued by the political class in Montgomery only to the extent that they promote the mobilization of voting blocs that ensure the maintenance of power. As a result, economic and political incentives can be at odds with each other. Unfortunately, policies that reward the existing political class in the short run can hinder a state s ability to develop a legal and economic infrastructure that promotes long-term capital creation and that encourages capital mobility and investment.
Federal spending can become an enemy of such outcomes.
Increasing federal funding to the poor states enables them to avoid these reforms, while at the same time it penalizes rich states for implementing them. The long run consequences of maintaining such a system is a skewing of the incentive structure and a diminution of the ethos of wealth creation that allows states to become wealthy in the first place. Furthermore, on a national basis, forced wealth transfers between states promote a divisiveness that otherwise would not exist. The consumers include anyone whose income is made up of public funds, be they federal, state, or local. In theory, these are people whose purpose in the macroeconomy is to serve the net taxpayers.