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States to win big in stimulus sweepstakes

House bill allots almost one-quarter of the $825 billion recovery package to states, localities. How will that boost the economy?

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“We presented President Obama with our ideas to jump-start the economy through fast-acting tax relief, not slow-moving government spending programs,” said House Republican leader John Boehner of Ohio.

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In contrast, proponents of the fiscal package contend that aid to state and local governments, in particular, would be an effective way to boost the economy.

For one thing, such spending would flow through existing programs and budgets, so that setting up entire new bureaucracies to spend most of the cash is not needed. The extra Medicaid funds, for instance, could be spent “very fast,” says Nicholas Johnson, director of state fiscal policy at the Center on Budget and Policy Priorities (CBPP).

Medicaid is a joint federal-state entity that provides healthcare to some 59 million needy and disabled Americans. It is one of the fastest-growing of US government programs, even in good times, and governors and legislatures in many states often struggle to find the funds to pay their Medicaid portions.

Medicaid enrollment is now increasing quickly, as it does in every recession. As people lose their jobs and incomes, they often lose their health insurance.

“This is a big concern for state budgets right now,” says Mr. Johnson.

Overall, states face deficits equal to about $350 billion over the next two years, according to CBPP figures. At least 33 have already proposed health and education cuts. Unlike the federal government, many states must balance their budgets every year, under state law.

Aid allocated by the House version of the stimulus bill would cover only about half of the shortfall states face. Still, it could keep states, cities, and towns from making difficult layoffs of teachers and police, which would add to the already-dim unemployment picture.

“We have to ensure that states don’t have to take actions that damage the economy further,” says Johnson.

Many Republicans, by contrast, say much of the state and local aid would be doled out too slowly to jolt the economy out of its doldrums. They point to a recent Congressional Budget Office study that found that less than half the money for roads, school construction, and other infrastructure projects is likely to be spent within the next two years.

Critics also argue that states spent too much in the flush times, when they should have saved against a possible downturn. They expanded Medicaid coverage, for instance, to the point where in some instances it pays for antiobesity and substance-abuse programs, says the Heritage Foundation’s Mr. Riedl.

In the 1990s, state budgets grew by about 6 percent per year. Some states, such as California and New York, now face especially acute shortfalls. “To demand that residents from other states bail out California is really unfair,” says Riedl.