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Financial Literacy

Financial Literacy

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Budgets: Federal v. State

We live in a big country. Lots of moving parts. There's a minor issue on the border of Arizona and Mexico: Illegal immigrants are coming across the border. Some think it's cool to just let 'em come; others think that there should be a big fat fence.

If the fence does need to get built, who pays for it?

The border between Arizona and Mexico is both a Federal and an Arizona border. It's probably pretty easy to say that this is a national border and that the money for that fence should come from the Fed's pockets.

Okay, 'nother question. Belgium attacks the U.S. Dunno why. Maybe they were bummed out that we're not buying enough of their chocolates lately. But they attack and drop a bomb on Montana. Who pays to bomb 'em back?

Well, here clearly it's a national issue—they weren't attacking Montana, and even if they were, what's Montana gonna fight back with? Angry cattle? It doesn't make sense for a state to have its own military anyway; a military to defend a country is extremely expensive and relies on scale—it needs the tax dollars of hundreds of millions of people to build really smart bombs who can take the SAT and score... high. Local "military" is more the domain of cops where pretty much none of the crime comes from Belgian drones.

What about prisons? There are crimes that happen in a given state, by definition. If a crime happens, it has to have happened... somewhere. Who pays for the prisoner's time? Well, there are Federal prisons paid for by the Feds—"Federal crimes"—and there are State prisons paid for by the State—"State crimes".

The key issue you have to understand is that the Feds tax our income and many other things; and the States tax our income and many other things. But they each run different and often integrated complex budgets which are generally separate. So in theory, Illinois and California could go bankrupt while the Federal government is doin' just fine.

The odds of the above happening in your lifetime are a whole lot better than one in a million, so it may be interesting theater to follow. Hold on to your passport if things get ugly. 

Well, uglier.

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