HERE in California, where people tiresomely boast that the state’s gross domestic product exceeds that of all but seven nations, I keep expecting a ballot initiative demanding admission to the Group of 8 industrialized nations. I’d consider voting for it, too; then maybe Washington would work as hard to synchronize its economic policy with Sacramento as it does with Tokyo and Berlin. The lack of coordination within the United States — and, equally important, the failure to recognize the states as macroeconomic players — helps explain our sluggish recovery.
To make matters worse, several states have country-sized G.D.P.’s, but none has the macroeconomic tools of an independent country. Every state except Vermont has some sort of balanced budget requirement that prevents it from weathering a recession by running up big deficits to keep teachers employed, students in college, welfare payments flowing and construction humming. Nor can New York and California stimulate their economies by, say, printing more currency. Instead, states are managing huge budget crises with the only tools they have, cutting spending and raising taxes — both of which undermine the federal stimulus.
That’s why the best booster shot for this recovery and the next would be to allow states to borrow from the Treasury during recessions. We did this for Wall Street and Detroit, fending off disaster. It’s even more important for states.
Here’s how this would work. 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...
How much 'road' do people think is left for us to kick the can down? How many shell games before the debt markets run out of suckers? Absolutely nuts.