Via Matt Yglesias, Christopher Edley Jr., dean of the Berkeley School of Law, a veteran of the Clinton White House, and the father of talented indie rocker Christopher Edley III, better known as Safe, has written an op-ed that captures my intuitions on aid to state governments. Noting that state governments lack the macroeconomic tools afforded sovereign countries, Edley proposes a new mechanism to help states to deal with economic downturns:
States already receive regular federal matching grants to help pay for Medicaid, welfare, highway construction programs and more. For instance, the federal government pays a share of state Medicaid costs, from 50 percent to more than 75 percent, depending on a state’s wealth. The matching rates were temporarily sweetened by last year’s stimulus.
But 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.
One obvious issue is political discipline — what would happen when profligate states appealed for a reprieve? — but the overall logic seems pretty sound.
Ultimately, dealing with the countercyclical impact of state balanced budget requirements is a straightforward technical question. State governments have been profligate for at least the last ten years, and the problems we’re seeing now are a predictable consequence. Letting the states off the hook obviously creates a moral hazard — that’s why many conservatives wanted to make aid to states conditional on broader budget reforms. Edley’s proposal helps mitigate the moral hazard problem, at least in theory.
One question that’s worth asking is if the politics of ARRA would have been different if the Recovery Act had been limited to unemployment extensions, aid to state and local governments, and something like a large Investment Tax Credit. The size of the package could have been very similar! But I sense that Democrats like Alice Rivlin, Clinton’s former OMB director, and a number of congressional Republicans would have found the package more congenial than one that included a large number of spending proposals that seemed likely to become long-term cost centers. It’s certainly true that infrastructure spending did not represent the lion’s share of ARRA, yet Rivlin argued, rightly in my view, that decisions about longer-term spending commitments should have been made deliberatively, with an eye towards sustainable revenue sources.
Unfortunately, the White House and congressional Democrats used ARRA as a lever to fund a number of long-term priorities that arguably didn’t have much to do with fighting the recession. One gets the impression that they many in Congress saw these spending initiatives as a reward for achieving control of the legislative and executive branch, not unlike the Bush tax cuts of 2001. And this engendered considerable distrust. There are, of course, other narratives for what happened, but this one makes as much sense to me as any.