FT On Stimulus II

The Financial Times comes out in support of a second stimulus package to prop up state spending:

Things will get worse before they get better. Even as the economy improves, profits and incomes will take time to recover. Unemployment is worse than expected.

It is imperative to limit further spending cuts. Existing grants to states in the federal stimulus cover about one-third of the funding gaps; an additional fiscal stimulus aimed directly at state budgets is now timely. The beneficial effect would be immediate as it would prevent imminent cuts.

States will not change their perverse fiscal rules without Washington’s firm prompting. Further fiscal relief from Congress must be on an equal per-capita basis, so as not to reward past profligacy. It should also be conditional on realistic plans for taking state finances well into the black when the economy recovers. States’ fiscal autonomy is a fine thing, but must not make the recession worse or turn federalism into moral hazard.

The notion of allotting federal spending on an equal per-capita basis, something I’m broadly in favor of, would be earth-shaking in U. S. politics. I wonder if the FT recognizes that some of the the richest, largest states in the United States are also those who receive the least per-capita. Consider this table.

California, which has been airing its dirty fiscal laundry in public for all to see, is among the lower recipients of federal dollars per capita as are all of the large states. It’s also one of the states in the greatest economic straits. However, as its budget fights have shown, it’s one of the states least likely to spend a more stimulus money prudently.

Illinois, as usual, is near the bottom when it comes to per capita federal spending (not to mention ROI on federal spending). It’s nearly as fiscally imprudent as California although it’s not in the dire economic condition of California, Nevada, Arizona, Michigan, or Florida.

My conclusion from all of this is that there’s no simple relationship among a state’s fiscal prudence, its economic condition, and per capita federal spending in the state.

2 comments… add one
  • Matt Link

    One dynamic that I think is worth noting is that Federal taxes make up the vast majority of taxes paid by all citizens.

    Why shouldn’t states like California be able to raise taxes a bit when necessary? Oddly it’s only because the burden of Federal taxation is so high that the highest taxing states hover around 10%.

    Imagine a world in which Federal taxes were 10% and states could tax according to local/regional preferences… perhaps California would choose 15%.

    It seems odd that both parties benefit from the imbalance — the Iraq war would never have happened if the “average american” had to pay even $200 more in taxes per year. And Obama would have no reason to consider national healthcare if the Federal government didn’t crowd out state healthcare initiatives.

  • Your point about the relationship between federal taxation and state taxation is a good one, Matt. I’m not so sure about the observation of federal crowding out of state healthcare initiatives. Massachusetts has a pretty ambitious plan in place which doesn’t seem to be faring so well.

    That’s unfortunate. The Massachusetts experience is a pretty damning piece of evidence that cost control will take a lot more than universal coverage.

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