Washington is wrapping a massive “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 by the states. Why is that – and how will it work?
The “why” is straightforward. Under our system of federalism, Washington must work 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 job.
How it will work is more complicated. It will take some time before we can see how well the plan has met its objectives. The process will yield important lessons about how the federal-state relationship can be used to produce the desired results, useful the next time our economy needs a stimulus.
To see how deeply the states are woven 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 program – 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. All of this would be at the expense of the federal government, but all of it 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 aims to head off state actions that would directly undermine the federal policy of pump-priming. Unless cash-strapped states get a helpful dose of federal dollars, they will cut spending, lay off workers and increase taxes – partially negating the aims of the federal stimulus. Second, the package relies on states to distribute much of the money for public-works projects to provide jobs quickly.
So how well will the federal-state relationship deliver on this jump-starting?
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 $53.6 billion in education aid and $87 billion in Medicaid aid for the states – $140.6 billion in fiscal relief, but 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.
Also worth watching are 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.
And where will the states be once the stimulus package has run its course? Will they be spending at rates they can’t sustain on their own? Will they face political pressures to continue funding programs from which the federal government will withdraw? If they stop the spending, or raise taxes to cover 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 also strengthen initiatives that are geared less toward an immediate economic impact and more toward 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.
David J. Wright is director of Urban and Metropolitan Studies at the Nelson A. Rockefeller Institute of Government, the public-policy think tank of the State University of New York, in Albany. David Shaffer is a senior fellow at the Institute. www.rockinst.org.
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