Economics

Here's an Idea for Fixing State Budgets! Give Them Free Money!

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We'll be responsible during the good times! We promise!

Speaking of nationally impacting fiscal irresponsibility at the state and local level, UC Berkeley Law School Dean Christopher Edley Jr, takes to The New York Times today to explain why the 50 states should be allowed to borrow money directly from the U.S. Treasury. After all, "We did this for Wall Street and Detroit, fending off disaster. It's even more important for states." Excerpt:

Congress should pass legislation that would allow a state to simply get an "advance" on these future federal dollars expected from entitlement programs. The advance could then be used for regional stimulus, to continue state services and to hasten our recovery.

The Treasury Department, which writes the checks to the states, could be assured of repayment (with interest) by simply cutting the federal matching rate by the needed amount over, say, five years. Of course, when Treasury eventually collected what it was owed, the state would have to cut spending or find new revenue sources. But that would happen after the recession, when both tasks would likely prove easier economically and politically.

What would this cost the federal government? Nothing. There would be zero risk of default, and a guarantee of full repayment plus interest equal to what Treasury pays in the bond markets to borrow. Congress would need only to appropriate the administrative costs of this program, which would be minimal.

Cuz everybody knows that the good times is passed out cold

I'm totally convinced. Excerpt for the part about how after the last recession, states did not find it politically easier to "cut spending"–they boosted spending twice as much as the rate of inflation. A refresher course from our May 2009 "Failed States" cover story, with its prescient subhed "After a long spending binge, governors go begging for a handout. It won't be their last":

In 2002 the National Governors Association issued a press release saying the "states face the most dire fiscal situation since World War II." In 1990 The New York Times reported that states and cities faced a "fiscal calamity." Fire up Google, pick almost any year, and you'll find plenty of stories about a "fiscal crisis" around the nation.

For decades statehouses have followed a predictable schedule. In good economic times, they collect a lot more tax revenue than they really need. But instead of giving the money back to taxpayers or putting it in a rainy day fund, they pretend the good times will never end. When the good times do inevitably come to a close, governors plead poverty and either ask the federal government for help or raise taxes on their beleaguered citizens. Eventually, the economy rebounds and the vicious cycle starts again. […]

That's one for you 19 for me

In the five years between 2002 and 2007, combined state general-fund revenue increased twice as fast as the rate of inflation, producing an excess $600 billion. If legislatures had chosen to be responsible, they could have maintained all current state services, increased spending to compensate for inflation and population growth, and still enacted a $500 billion tax cut.

Instead, lawmakers spent the windfall. From 2002 to 2007, overall spending rose 50 percent faster than inflation. Education spending increased almost 70 percent faster than inflation, even though the relative school-age population was falling. Medicaid and salaries for state workers rose almost twice as fast as inflation.

Hey, let's give this gang the same money-printing license as the feds! What could possibly go wrong!