“Bankrupt” US States Could Get “Advances” from Treasury

The lack of coordination within the United States — and, equally important, the failure to recognize the states as macroeconomic players —

is a significant, but often underappreciated, reason for America’s so-called / alleged / self-styled sluggish  “recovery.”

In California, people tiresomely boast the state’s gross domestic product exceeds that of all but seven nations.

The lack of coordination within the United States — and, equally important, the failure to recognize the states as macroeconomic players —

is a significant, but often underappreciated, reason for America’s so-called / alleged / self-styled sluggish  “recovery.”

In California, people tiresomely boast the state’s gross domestic product exceeds that of all but seven nations.

But it is only one of several states that have country-sized G.D.P.s – without having 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,

argues Christopher Edley Jr., the dean of the University of California, Berkeley, School of Law,

and a White House budget official from 1993 to 1995, in this Op-Ed article in the New York Times.

It was done for Wall Street and Detroit, fending off disaster, Edley maintains, and it’s even more important for states.

Here’s how it might 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 could 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 a “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.

What would this cost the federal government?

Nothing.

There would be zero risk of default, and a guarantee of full repayment plus interest equal to what Treasury pays in the bond markets to borrow.

Congress would need only to appropriate the administrative costs of this program, which would be minimal.

This proposal would merely shift the timing of federal payments to states to help offset economic swings.

It would have the additional merit of finally forging the federal-state partnership that has been missing since 1787,

when the Constitution created a federal government with sufficient legislative authority to shape a nationwide economy out of separate state economies.

Indeed, it may be the best shot at revising United States economic policy to give the states the role of creating and carrying out the economic stimulus America seems so desperately to need.

But we’ll probably never find out.