Intervene Now, Fix for Later
I’m sorry I missed this piece from early July. Conservative/Libertarian economist Edward Glaeser, who I’ve always been a big fan of, makes the case that the federal government should send aid to the states. He and I disagree with Rep. Paul Ryan on this issue, but Glaeser proposes a solution that maybe Ryan could compromise and sign onto – I wish I thought of it. It uses the same logic that says we should spend now during the recession and cut spending and reform entitlements later.
Given the current system, federal stimulus aid for states makes sense. There is no better use for public funds than making sure that schools remain strong and streets remain safe. But a system that uses Texas’s taxes to pay for California spending is badly flawed. Just as the International Monetary Fund has made aid conditional upon political reform, federal aid to states should be tied to reforms that would make future federal interventions less necessary.
It is easy to envision state systems that allow more budgetary flexibility during downturns, while still maintaining fiscal discipline. Instead of a strict balanced-budget system, a better rule might require the state government to save significantly when the unemployment rate is below the historical norm and allow borrowing when the unemployment rate is above the historical norm. States can either borrow on the private market, or, as Chris Edley has suggested, the federal government could lend to states during downturns. (my emphasis)