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Federalism: Objectively Pro-Recessions

I keep meaning to link to James Surowiecki's excellent take on the problems with fiscal federalism, but keep forgetting. So I'm just going to do it. Before I forget. No excuses. Here we go!

If you came up with a list of obstacles to economic recovery in this country, it would include all the usual suspects—our still weak banking system, falling house prices, overindebted consumers, cautious companies. But here are fifty culprits you might not have thought of: the states. Federalism, often described as one of the great strengths of the American system, has become a serious impediment to reversing the downturn.

It’s easy enough, of course, to mock state governments nowadays, what with California issuing I.O.U.s to pay its bills and New York’s statehouse becoming the site of palace coups and senatorial sit-ins. But the real problem isn’t the fecklessness of local politicians. It’s the ordinary way in which state governments go about their business.

Think about the $787-billion federal stimulus package. It’s built on the idea that during serious economic downturns the government can use spending increases and tax cuts to counteract the effects of consumers who are cutting back on spending and businesses that are cutting back on investment. So fiscal policy at the national level is countercyclical: as the economy shrinks, government expands.

At the state level, though, the opposite is happening. Nearly every state government is required to balance its budget. When times are bad, jobs vanish, sales plummet, investment declines, and tax revenues fall precipitously—in New York, for instance, state revenues in April and May were down thirty-six per cent from a year earlier. So states have to raise taxes or cut spending, or both, and that’s precisely what they’re doing: states from New Jersey to Oregon have raised taxes in the past year, while significant budget cuts have become routine and are likely to get only deeper in the year ahead. The states’ fiscal policy, then, is procyclical: it’s amplifying the effects of the downturn, instead of mitigating them. Even as the federal government is pouring money into the economy, state governments are effectively taking it out. It’s a push-me, pull-you approach to fighting the recession.

Good stuff, huh? It's also why one of the best things that Congress could do to protect states from not only this recession, but also the next recession, is to make Medicaid a federal program, rather than an inane and complicated partnership between the Feds and the states.

By Ezra Klein  |  July 24, 2009; 11:30 AM ET
Categories:  Economic Policy , Solutions  
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Comments

I basically agree (I think I wrote almost the same post yesterday), but please own the fact that making Medicaid a federal program would have consequences for women's health. Right now about 20 states allow reproductive services to be provided under Medicaid by using state allotments of dollars to pay for them, getting around the Hyde Amendment. That would end if it moved to an exclusive federal program.

Posted by: dday212 | July 24, 2009 11:42 AM | Report abuse

Or better yet, eliminate Medicaid and enroll all low income households, including those with children, into Wyden-Bennett type "exchanges" along with sliding subsidies.

Posted by: Dellis2 | July 24, 2009 12:33 PM | Report abuse

Ironically enough, I actually wrote something on this over a month ago.

http://realignmentproject.wordpress.com/2009/06/08/50-state-keynesianism-a-proposal/

Now I can feel I scooped the New Yorker, even if it's just in my own mind.

Posted by: StevenAttewell | July 24, 2009 12:56 PM | Report abuse

"So fiscal policy at the national level is countercyclical: as the economy shrinks, government expands."

There is another way to look at this - when the "free market" implodes on itself, the government expands.

There is a huge reason why the economy shrank - so much of our capital was tied up in bad business deals - the government needed to step and pick up the spending slack when everyone else became too terrified or too poor to spend money.

Posted by: anne3 | July 24, 2009 1:33 PM | Report abuse

I would love for our state governments to relinquish funding power, and power in general to the federal government. Not only is it confusing, certain states set ridiculously high standards for qualifying for Medicaid (Alabama, and other poor states). It is certainly underfunded, and could benefit greatly from simplification and consolidation of programs.

I hadn't thought about the Hyde Amendment, I'm sure there are other ways to use public funds, like increasing public funds for clinics and in that way sidestep using medicaid to distribute the funds.

Also I must point out an apparent misuse of "irony"...It seems we will never fully have a grasp on that word (including myself of course)

Posted by: AScharf | July 24, 2009 11:19 PM | Report abuse

Increasing tax rates in these cases is just keeping tax revenue stable. The downside to borrowing is that it increases the liabilities later. Politicians love to borrow today and have their successors be the ones to pay it back.

Posted by: staticvars | July 26, 2009 10:21 PM | Report abuse

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