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Observation: The States Need the Stimulus. More Important, the Stimulus Needs the States February 2009

The States Need the Stimulus. More Important,
the Stimulus Needs the States

By David Shaffer and David J. Wright

David Shaffer and David J. Wright

Congress and President Obama have a massive, $787 billion “federal” package to stimulate and grow the economy. But when the ink on the bill is dry, much of the job actually will be carried out not by the federal government alone, but through the states. Why is that – and how will it work?



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David Shaffer is a senior fellow at the Nelson A. Rockefeller Institute of Government. David J. Wright is the Institute's director of Urban and Metropolitan Studies. This is an expanded and updated version of an article that originally appeared on Stateline.org.

The “why” is straightforward. Under our system of federalism, Washington must go through the states to implement many of the main objectives of the stimulus bill – speeding help to the unemployed, jump-starting economic activity and promoting long-term growth. Whether the national objective involves sewer projects, energy policy or unemployment insurance, on the ground, states will do much of the work.

How it will go is more complicated. It will take some time before we can see how well the plan has met its objectives. But students of government in the United States will be starting now to monitor the process – to fine-tune performance as we go along, and to ensure that the next time our economy needs a stimulus, we know more about how the federal-state relationship can be used to produce the desired results.

Already, questions have been raised about how well (and how quickly) the stimulus package will work through the states to provide jobs and promote economic recovery. The Congressional Budget Office (CBO) estimated, for example, that as much as two-thirds of the planned highway construction money would be spent in 2011 or later – after (everyone hopes) the recession is over. In Los Angeles, school officials have said they may have to lay off as many as 2,300 teachers even after they get stimulus funds that are supposed to prevent such layoffs. State officials in Florida, where revenues are hard-hit by falling housing values, are worried that their state may not qualify for fiscal relief from Washington, because the states may be required to maintain certain categories of spending at prior-year levels.

It will take time for us to learn just how well this federal-state effort worked in practice; indeed, it will be four years before 90 percent of the overall projected outlays have been spent, according to the CBO. And of course the stimulus bill includes much that the federal government will do on its own, including $289 billion in tax cuts that are intended to spur consumer spending and business investment, as well as direct federal spending on construction at military bases, airports, national parks and government office buildings.

But to see how deeply woven the states are into the overall program, we need only parse out the key role they will play in each of the three core objectives of the stimulus package – relief, jump-start, and long-term growth. The states will not merely be a conduit for the federal money; state officials will play a value-added role in the undertaking.

Relief. The package’s first objective is to get relief quickly to those most immediately impacted by the recession. It would extend and increase unemployment benefits and increase food stamp benefits, among other things. The cost of doing so (at least $55 billion) would be paid by the federal government, but these measures would be administered by the states.

Jump-start. The next objective is classic pump-priming – getting money into the hands of consumers, and helping public- and private-sector employers provide jobs.

This aspect of the stimulus package addresses the states in two different ways:

  • First, it tries to help the states avoid doing things that would directly undermine the federal policy of pump-priming. The federal government can borrow money in order to increase spending and cut taxes. But the states are supposed to run balanced budgets, and the recession is constricting their revenues. Unless they get help they will cut spending, lay off workers and increase taxes – thereby partially negating the federal stimulus. So the federal plan offers fiscal relief to help the states avoid doing that.

  • Second, the package goes through the states, as it must, for much of the public-works spending that is supposed to provide jobs quickly. This includes most of the $27.5 billion in highway spending, the $6 billion for clean water, the $18.1 billion for transit and railways, the $4 billion for public housing upgrades, and school and college construction projects.

Relief Role Dates to FDR

Federal spending on relief programs at the state level dates to Franklin Roosevelt’s first 100 days. He signed the Federal Emergency Relief Act on May 12, 1933, authorizing $500 million for the states to help them provide for the poor – something that, until the Great Depression, even Roosevelt himself had argued was only a state, local or charitable responsibility. Within two hours after starting work as the nation’s relief director, and with his desk still in a hallway, Harry Hopkins sent the first checks to Illinois, Michigan, Texas, Ohio, Colorado, Georgia, Iowa and Mississippi.

– see Adam Cohen, "Nothing to Fear: FDR’s Inner Circle and the Hundred Days that Created Modern America" (New York, the Penguin Press, 2009), 266.

So how well will the federal-state relationship deliver on this jump-starting?

Certainly the fiscal relief in the stimulus package could go a long way toward avoiding layoffs and tax increases by state governments. But it won’t go all the way. According to the National Conference of State Legislatures, the 50 states face budget gaps totaling $132 billion for this year and next. The stimulus bill includes $90 billion in Medicaid funding, $39.5 billion in education aid and $8 billion in general fiscal relief for the states – a total of $138.3 billion, but some of it stretched out over five years.

As for the public-works money, it’s generally agreed that only a portion can be spent within the pump-priming timeframe. Still, the Congressional Budget Office had estimated that about 35 percent of funds provided for the big, state-based construction programs could flow before 2011. Based on preliminary figures about the final package, that probably means $25 billion to $30 billion in quick public-works stimulus through the states.

Another thing to watch for is whether the stimulus bill leads to some unintended consequences. In some ways the package could end up delivering more benefit to states that are relatively well-off than to those that are highly stressed.

For example, requirements that much of the construction money go only to projects that can be started quickly will benefit states with strong inventories of “shovel-ready” projects. But because it can take a year or more to do the planning, permitting and so on to qualify a project as shovel-ready, this provision might end up favoring states lucky enough to have had money last year to get something ready for this year.

Or consider provisions that would condition some of the money for states on their maintaining certain aspects of their education and transportation spending at the level of previous years. It is the states facing the toughest budget problems that are most likely to have to roll back their spending; Florida, for example, already has cut its school-aid budget. Will these provisions cost any states some of their share of the fiscal relief – and if so, by how much?

And where will the states be once the stimulus bill has run its course? Will they be spending at rates they can’t sustain on their own? Will they face political pressures to continue spending programs from which the federal government will withdraw? If they stop the spending, or raise taxes to pay for continuing it, what impact will that have on the recovery?

Long-term growth. Finally, a core objective of the Obama administration has been to use the stimulus package to strengthen initiatives that may not deliver as immediate an economic impact, but that are intended to strengthen the U.S. economy’s long-term competitiveness.

These include efforts to expand broadband Internet access in underserved areas, mostly through grants to the states; the development of a “smart” electric grid, also largely through state programs; expansion of scientific work at research universities (state universities, in many cases); upgrading teacher qualifications (states); and more grants for home insulation and other energy-conservation projects (states again).

Why work through states? Because they’re the ones that can get the job done. How will it work? Let’s pay careful attention.


ABOUT THE ROCKEFELLER INSTITUTE OF GOVERNMENT

The Nelson A. Rockefeller Institute of Government, the public policy research arm of the State University of New York, conducts fiscal and programmatic research on American state and local governments. It works closely with federal, state, and local government agencies nationally and in New York, and draws on the State University’s rich intellectual resources and on networks of public policy academic experts throughout the country.