In Defense of The “Louisiana Purchase”

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"In Defense of The “Louisiana Purchase”"

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The right had such fun making hay out of the “Cornhusker Kickback” that they decided to make up more funny-sounding names for other allegedly shady state-specific deals in the health reform bill. Thus, you might have heard about the “Louisiana Purchase,” that exempts Louisiana from a change to the formula for calculating the state-federal split of Medicaid costs. The thing about this is that, as Katie Connolly argues, the Louisiana Purchase is in fact a perfectly justifiable policy response to a weird situation. The crux of the matter is that the Medicaid formula is supposed to provide more help to poor states than to rich states, and Hurricane Katrina had the weird result of making Louisiana register as suddenly much richer than it used to be:

It’s common knowledge that Hurricane Katrina devastated the state, destroying homes, livelihoods and entire communities. But in the wake of Katrina, millions of dollars flooded into the state, in insurance payments, aid and money for new construction and repairs. Although thousands of people were, and are, still suffering from Katrina’s impact, on paper it looked like the state had gained millions of dollars. On paper, incomes went up by 40%. Yes, some people, mainly those in engineering and construction, did well out of the unfortunate building boom, but in reality, thousands had lost their jobs, their homes and their savings. That sort of thing isn’t accounted for in income calculations.

The result was that because of this perceived increase in income, the funding formula compels the federal government to cut its Medicaid funding to Louisiana. (The federal calculations are done on a three year rolling average, so there’s a lag time between the post-Katrina income spike, which continued for some time, and the changes to federal funding.) The state government, already stretched from all the other post-Katrina demands on spending – repairing roads, schools, basic infrastructure – is looking at paying far more than it’s historic share of Medicaid payments.

Better-educated fans of free market economics will recognize what happened in Louisiana as an instance of Frederic Bastiat’s parable of the broken window. If everyone in Louisiana has insurance on their property, then a giant storm destroys 20 percent of the structures in Louisiana (note, I haven’t looked up the actual numbers), the inflow of insurance payments is going to provide a huge spike in the measured income of the state’s residents. But if Louisiana was a poor state before having 20 percent of its structures destroyed, it’s still poor afterwards. Tweaking the Medicaid rules to account for that properly is a totally reasonable idea.

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Tim Fernolz ads some valuable historical perspective:

On a related note, did you know the original Lousiana Purchase was only approved by a two votes in the House? Just imagine if the Federalists had been able to deploy procedural tricks to prevent Thomas Jefferson from making a deal that greatly expanded the United States. With Republican leader John Boehner accusing the Democrats of disgracing Jeffersonian values, who knew that our third president was the earliest practitioner of Chicago-style thug politics?

I’m not normally a huge Jefferson plan, but history’s definitely vindicated him on this point.

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