In a New York Times op-ed, Chris Edley rightly warns that state budget cuts and tax increases are undermining federal efforts to boost the economy; that’s why we’ve recommended (most recently here) that Congress extend the state fiscal assistance in last year’s Recovery Act.
In contrast, Edley’s proposed solution — to allow states to borrow from the federal Treasury and repay it through cuts in future federal payments for programs like Medicaid — isn’t workable. Some states might not be able to borrow these funds, and many of those that could borrow them wouldn’t want to because it would worsen the already difficult fiscal situation they’ll face after the recession.
The constitutions of five states prohibit debt altogether, according to the National Conference of State Legislatures, which could make it impossible for them to accept the loans. At least 16 other states require voter approval of debt backed by general tax revenue; while it’s unclear whether borrowing from the Treasury for operating expenses would fall into this category, the matter could be tied up in debate or litigation for a substantial period of time, and it would take further time until such measures could be placed on state ballots and voted on in states found to require such approval.
To keep deeper state budget cuts from slowing economic growth, however, and to protect critical state services from severe cuts, the fiscal relief is needed now, not at some potentially distant future point.
Even states that didn’t face these barriers would want to think twice about accepting the proposed loans, which would add to the very large budgetary obligations they’ll already face when economic conditions improve:
Facing all of these pressures, states will be very hard pressed to do what Edley’s proposal would require — raise billions of dollars more in taxes or make billions of dollars more in budget cuts to compensate for future reductions in federal support.
Fortunately, we don’t need to adopt an untried, unworkable loan mechanism to provide temporary aid to states to help them weather the worst economic downturn since the Depression. The fiscal assistance in last year’s Recovery Act, by closing part of states’ budget shortfalls, has preserved hundreds of thousands of jobs and kept state budget problems from acting as an even bigger drag on the economy. With the economy very weak, unemployment very high, and state revenues deeply depressed, Congress should extend this assistance for a modest additional period, as legislation pending in Congress would do.