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Fiscal Policy: Chris Edley Is Making Sense--a Long-Term Deficit-Neutral State Aid During Recessions Proposal

I favor the Fed rather than the Treasury, and rather more oversight to qualify for the loans than Chris Edley's advances proposal--but Chris is making sense:

Chris Edley: [S]everal 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.... 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....

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.

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.

It seems clearer every day that there isn’t the political will for another traditional federal stimulus package large enough to be effective in a $14 trillion economy. This proposal, however, 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, our best shot at devising United States economic policy may be to give the states the role of creating and carrying out the economic stimulus we so desperately need.