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An Idea Whose Time has Returned: Anti-Recession Fiscal Assistance for State and Local Governments

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Abstract:

In times of economic weakness, behavior that is prudent for individuals can be damaging for the economy. Rising unemployment and falling consumer confidence encourage people to pull in their belts -- to spend less and save more.

The same is true for state and local governments. A slowing economy will reduce tax revenues and increase expenses. State and local budgets are often subject to fiscal constraints aimed at balancing budgets, and during economic slowdowns there is increased pressure to raise taxes and cut spending, sometimes under the mandate of state law (Regan 1995).

These kinds of balanced budget requirements and other tax and expenditure limitations reduce economic growth and employment at a time when the nation can ill-afford such losses. A timely, substantial dose of federal aid can offset these effects.

This paper discusses some of the trade-offs associated with unrestricted federal aid and illustrates how such a program could work. It is not intended as a definitive proposal, since technical issues remain in the design of such a program that are beyond this report's scope. Historical experience with the General Revenue Sharing program provides some insight into these technical and political issues.