I haven’t read the whole thing yet, but a National Bureau of Economic Research paper on the effect of the stimulus on state budgets finds, to no one’s surprise, that the ARRA failed even on its own terms. Instead of closing extraordinary budget gaps, stimulating demand and creating jobs, most ARRA dollars went through the existing big-government entitlements like Medicaid or through new government programs favored by key Democrats:

. . .while ARRA did provide significant aggregate fiscal relief to all state governments, the allocation of the program’s funds provided at best weak relief for those states in greatest fiscal distress. Only $.23 of each ARRA dollar was explicitly targeted to closing the states’ mid-year deficit gaps. The remaining $.77 of each ARRA dollar went towards increased funding of state services generally or to new programs favored by Congress and the Obama administration. Congressional politics played a significant role in allocating these new programmatic dollars.

The paper also argues that states would do better to fund extraordinary budget shortfalls from “rainy day” funds, but that, much as is the case with Wall Street, state legislatures have little incentive to create such funds if there are implicit or explicit promises of federal bailouts:

Second, the analysis of state budgeting in normal times suggests an alternative way to manage state finances in times of fiscal distress. That is to encourage each state to maintain a budget stabilization or “rainy day” fund, perhaps as much as ten percent of general fund expenditures. Pre-FY 2009 levels of such funds were typically less than five percent and in hindsight were insufficient to meet the needs of the current recession. States will only have the incentive to save for such events if Congress can credibly commit to no federal bailouts in times of fiscal distress. Congress first did so in response to the state fiscal crises of the 1840’s and has continued this tradition down to President Gerald Ford’s emphatic ‘No’ to the bailout requests of New York City and New York state during their fiscal crises of 1974.

Full paper here.