During the debate over the stimulus program in early 2009, Senate Minority Leader Mitch McConnell proposed, "If the money were lent rather than just granted, states would, I think, spend it wisely and the states that didn't need it at all wouldn't take any." Now would be a good time to take him up on his offer.
After all, state and local governments have already slashed hundreds of thousands of jobs, and facing a staggering $175 billion budget gap over the next two and a half years, are certain to shed hundreds of thousands more. Last week, the Commerce Department revised down its fourth quarter GDP estimate, confirming once again that draconian state budget cuts are putting the U.S. economic recovery at risk.
So here is a modest proposal to rescue the states and protect the fragile American economy. Establish a $200 billion, two-year federal fund providing loans to those states desiring them to prevent further layoffs and to help pay for the rising, recession-induced costs of Medicaid, unemployment and other essential services. Call it the State Assistance Fund (SAF).
How Would the State Assistance Fund Work?
As the Congressional Budget Office (CBO) and Moody's economist and former John McCain adviser Mark Zandi each documented last year, aid to state and local government provides among the biggest "bangs for the buck" of any federal stimulus spending. While the CBO estimated "transfer payments to state and local governments" provides a multiplier as high as 1.8 (that is, delivers $1.80 in economic returns for each dollar spent), Zandi's model showed a 1.41 multiplier. As he put it last July:
Federal aid to strapped state and local governments also is providing significant economic benefits, lessening their need to slash programs and jobs or to hike taxes and fees.
Unlike the American Recovery and Reinvestment Act (ARRA), the State Assistance Fund would not offer grants, but instead low (or no) interest loans to state governments. With the approval of their legislatures and governors, states could apply for their share of the $200 billion pool of emergency assistance funds. While the formula for divvying up funds would have to address the relative size and need of the states, they themselves would control how the money is spent.
Keeping police, teachers and firefighters on payroll, bolstering depleted unemployment insurance funds, funding the increased costs of Medicaid for swollen ranks of the jobless, distributing aid to counties and municipalities or even addressing shortfalls in public employee pension funds, state capitals would make those decisions. The only requirement is to repay the U.S. Treasury within 10 years.
Participation in the program is entirely voluntary. If states for fiscal - or ideological reasons - did not need or want the help from Washington, they need not ask for it. So while cash-strapped California, New York and Illinois might take that deal, similarly situated states like Rick Perry's Texas, Chris Christie's New Jersey or Scott Walker's Wisconsin might take a pass.
Forty-nine of 50 states are required by law to balance their budgets. Mercifully, to fight wars and economic calamities like the Bush recession, the federal government is not.
As the Washington Post, the New York Times, Reuters, Bloomberg and the Wall Street Journal among others recently detailed, state and local governments are fiscal facing a fiscal triple-whammy. Even with spending now well below 2008 levels, the downturn-induced drop in revenues and increased demand for social services coupled with the looming end of the American Recovery and Reinvestment Act (ARRA) is producing yawning gaps in state budgets. And the states, all but one of which must balance its budget each year, are responding with sharp spending cuts, massive layoffs, deferred payments to state employee pension funds and, in some cases, tax hikes.
The numbers are staggering. By November, the Economic Policy Institute estimated that state and local governments had shed 407,000 jobs since their August 2008 peak. With state budget shortfalls estimated to approach $100 billion for each of the next two years, analysts including Moody's Economics and the Center on Budget and Policy Priorities have forecast more state and local job losses reaching between 400,000 and 900,000.
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