Monday, November 21, 2011

The Conservative Case for State & Local Automatic Stabilizers

From the Sunday NYT story about North Las Vegas:
When North Las Vegas started to draw up plans for the new City Hall some five years ago, cash flow was no problem...During the good times, the city created parks filled with features that would make even the wealthiest towns envious — a life-size stegosaurus in one, fully lighted tennis courts in another. It created recreation centers with top-of-the-line equipment and built new libraries in rapidly expanding corners of the community. And it drew up plans for City Hall, with a wellness center where bureaucrats could work out between their civic tasks.
Of course: when times are good, governments are going to find it almost impossible to put money aside for a rainy day. After all, no one in Vegas thought the good times were going to end.

If, however, local and state governments were automatically given extra funding during hard times and were required to repay it when they were flush, then they would avoid overspending when it was possible, in favor of a more even approach. Which, of course, is exactly what good economic policy would recommend. But beside from that, it seems to me that conservatives should be particularly against the boom-and-bust cycle in state and local governments, precisely because it is (I would guess) likely to lead to more spending in the long run. After all, there are much stronger constituencies in favor of keeping existing programs than there are for starting new ones. So a government that expands rapidly during good times is unlikely to really retrench as much during recessions.

The strongest reason for some sort of long-term budget neutral automatic stabilizers for state and local governments (LTBNASSLG? Someone needs to come up with a clever short-hand way to refer to this) is the same as the reason for unemployment insurance or FDIC or any of the other depression-proofing that were built-in as part of the New Deal or later adaptations: it's simply good economic practice. But even if conservatives don't believe the Keynesian idea that governments should run deficits during recessions and make it up during booms, they should still, in my view, support a scheme that as they see it should depress the growth of state and local governments.


  1. From a conservative point of view, this is a very bad idea because it allows state and local governments to borrow on the Federal government’s credit card (What could possibly go wrong!). Even if this scheme works as intended, it will hurt GDP growth, which is exactly what the CBO expects as a result of the stimulus:

    If states want to pursue a “more even approach” to spending, they already can. Massachusetts, for example, has a “rainy day fund.”

  2. Of course: when times are good, governments are going to find it almost impossible to put money aside for a rainy day.

    This is a false statement.

    Many, many governments establish rainy day funds.

    Many, many government not only establish rainy day funds, but they also budget and spend responsibly. They even turn out a yearly budget, as remarkable as that might sound to some.

    And those responsible governments have nice, healthy bond ratings as a result. And right ow, they can refinance existing debt, and use the residual to save even more, and use their robust bonding power to leverage additional capital spending... they've earned that option by their responsible governance.

    About 1/3 of the states have TRIPLE AAA credit ratings, last I checked. The stupid states, with irresponsible spending and no rainy day funds... well they're likely hurting, no doubt. But no sense in smart states pumping cash into stupid states. They'll just get stupider, as we know, and on somebody else's dime.

    And no, there is no conservative case for this nonsense. The stupid governments who fail in their jobs shouldn't prosper at the expense of those governments who are smart.

  3. If you lowered the funding levels during good times,so that the automatic stabilizers resulted on keeping the average level of government spending similar (rather than adding a higher level of entitlement), then yes I imagine you could get conservative support for this concept.

  4. The federal government cannot "lower the funding levels" of state and local governments, during good times or any other times. The case study would be occurring in the PIIGS right now, fyi. You can't force people not to be stupid. But you can definitely make them stupider.

    So yes, you'd have to "imagine" conservative support for this concept, because in the imagination is the only place you'd ever see that support.

  5. I know this thread's stale, but:

    Without changing it's effect, JB's proposal could be easily rephrased as federal block grants to the states, plus a corresponding cut in state taxes. The grant amount would be either fixed or tied inversely to the economy/state tax revenue.

    So, Couves: It's not giving the states any new borrowing ability; it's actually tying their hands. They would have their spending power rationed out by the feds according to the stabilizer formula. If they want to spend more than the allotment they have to raise revenue or borrow on their own.

    A state with nine A's in its credit rating is not to be trusted!


Note: Only a member of this blog may post a comment.

Who links to my website?