Was Turning Down Stimulus Money Smart After All?


This weekend's Wall Street Journal, in the course of sketching out the fiscal contours of Stimulus II, makes that claim. Excerpt:

We'll be using this once a week, forever

Remember how $200 billion in federal stimulus cash was supposed to save the states from fiscal calamity? Well, hold on to your paychecks, because a big story of 2010 will be how all that free money has set the states up for an even bigger mess this year and into the future.

The combined deficits of the states for 2010 and 2011 could hit $260 billion, according to a survey by the liberal Center on Budget and Policy Priorities. Ten states have a deficit, relative to the size of their expenditures, as bleak as that of near-bankrupt California. The Golden State starts the year another $6 billion in arrears despite a large income and sales tax hike last year. New York is literally down to its last dollar. Revenues are down, to be sure, but in several ways the stimulus has also made things worse.

How's that? Read on:

First, in most state capitals the stimulus enticed state lawmakers to spend on new programs rather than adjusting to lean times. They added health and welfare benefits and child care programs. Now they have to pay for those additions with their own state's money. […]

A few governors, such as Mitch Daniels of Indiana and Rick Perry of Texas, had the foresight to turn down their share of the $7 billion for unemployment insurance, realizing that once the federal funds run out, benefits would be unpayable. "One of the smartest decisions we made," says Mr. Daniels. Many governors now probably wish they had done the same.

These boots are made for stomping…ON YOUR FACE

Second, stimulus dollars came with strings attached that are now causing enormous budget headaches. Many environmental grants have matching requirements, so to get a federal dollar, states and cities had to spend a dollar even when they were facing huge deficits. The new construction projects built with federal funds also have federal Davis-Bacon wage requirements that raise state building costs to pay inflated union salaries.

Worst of all, at the behest of the public employee unions, Congress imposed "maintenance of effort" spending requirements on states. These federal laws prohibit state legislatures from cutting spending on 15 programs, from road building to welfare, if the state took even a dollar of stimulus cash for these purposes.

The upshot?

This is the opposite of what the White House and Congress claimed when they said the stimulus funds would prevent economically harmful state tax increases. In 2009, 10 states raised income or sales taxes, and another 15 introduced new fees on everything from beer to cellphone ringers to hunting and fishing. The states pocketed the federal money and raised taxes anyway.

Now, in an election year, Congress wants to pass another $100 billion aid package for ailing states to sustain the mess the first stimulus helped to create.

Whole thing here. Do yourself a favor: If you don't subscribe to Reason's print magazine yet, fix that problem. And while you wait for the paperwork to be processed, get thee to a newsstand and buy our February cover story on public sector unions (pictured), which people are already applying to their own lousy government situations. Also, Happy New Year!

NEXT: "Ron Paul's ideas no longer fringe"

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  1. Thanks for that heart warming post first thing in the morning.

    Dick 🙂

  2. Well, I read that whole post thinking I was being informed on the negative stimulus impact on state budgets, only to get to the end and find out the whole thing was an ad for the print rag.

    1. Why can’t it be both?

  3. This is the opposite of what the White House and Congress claimed when they said the stimulus funds would prevent economically harmful state tax increases.

    Who could have *possibly* foreseen this?! Does the government have a crystal ball?!

    Seriously — paging Dr. Romer, paging Dr. Summers, ….

  4. I can see where the matching funds idea might be appealing to an apparatchik who’s spending other people’s money anyway, but doesn’t this basically screw the taxpayers twice as much?


    1. That is a fascinating part of local pet projects like civic centers and such. They get sold to the people with the promise that the feds are picking up 80% of the cost and the city/county only has to pay 20%. People don’t seem to realize that it is 100% of their taxes. They seem to forget that all that money that the feds are pissing away came out of their pockets.

      1. They also forget that the money doesn’t come without favors. It drives me crazy when I hear people from Massachusetts back when Ted Kennedy was still alive talk about how they hated Teddy but they still voted for him because he brought so much money to the state. How do they think he got that money? Good looks and personality? No, he got it by voting for everyone else’s boondoggle. That money didn’t come for free. It came at the price of funding every other state’s goodies.

      2. This happened in my hometown. They built a big new arena, mostly with OPM, and now they are going to have to raise taxes to keep it open, what with the maintenance and all.

        People are Not. Happy.

  5. Que MNG and Tony to stutter and spit about how Republican governors were crazy and didn’t care about their own people when they refused to accept the stimulus.

    1. I think it was because they hated black people.

  6. I saw this over the weekend and thought it may be relevant to the story.

  7. No way dude, never look a gift horse in the mouth.


    1. I got your gift horse right here sweety.

  8. Thanks for the great reporting and Steven Greenhut’s article, Matt.

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