Aiding States to Stimulate the National Economy

As Congress debates a stimulus to the economy in the wake of the housing bust, many economists are urging federal leaders to make aid to state governments a core part of the package. While direct tax rebates for individuals can help, it will not do much for the economy if states are forced to cut back on critical spending on public works, health care, and education at the same time. As Nobel prize-winning economist Joseph Stiglitz, who was also chair of the President's Council of Economic Advisors in the 1990s, wrote this week in the New York Times:

The federal government should also provide some assistance to states and localities, which are already beginning to feel the pinch, as property values have fallen. Typically, they respond by cutting spending, and this acts as an automatic destabilizer.

What should go into that stimulus package for states? A few key components include spending on repairing our infrastructure, retrofitting buildings for energy savings, and funding SCHIP and Medicaid to cover families facing rising health costs.

  • Transit and Infrastructure: A new bipartisan coalition of state and local officials, led by Republican Governor Arnold Schwarzennegger, independent New York City Mayor Michael Bloomberg and Democratic Pennsylvania Governor Edward Rendell called for new spending on repairing infrastructure-- and see it as a critical part of any stimulus to put people back to work and begin addressing the estimated $1.6 trillion of infrastructure spending needed across the country.  Similarly, Mark H. Ayers, President of the Building & Construction Trades Department, AFL-CIO, urged spending on infrastructure needs in order to spur growth and job creation since "the economic activity and the jobs directly created by this spending have a beneficial ripple effect as contractors purchase materials and employees spend their salaries."
  • Retrofitting Buildings: Tax credits for home insulation and for state programs to assist retrofitting buildings should be a key program, especially as Americans increasingly see money that could be creating jobs at home going overseas to pay skyrocketting oil costs. As Dean Baker, co-director of the Center for Economic and Policy Research (CEPR), argues, such a green stimulus "would be the quickest green way to pump money in the economy. The collapse of the housing sector has put hundreds of thousands of construction workers out of work and made contractors desperate for business." A program to encourage building retrofits would reemploy exactly the people facing some of the largest job layoffs and transfer money now going to overseas oil producers into businesses at home.
  • SCHIP and Medicaid:  This last week, the US Congress Joint Economic Committee issued a report that indicated a recession would undermine federal and state budgets as more people become eligible for federal assistance through Medicaid and SCHIP. With an estimated 1.1 million additional children needing Medicaid or SCHIP during recessions, organizations like First Focus have called for a Child-Friendly Economic Stimulus Plan, that includes increased funding for SCHIP and Medicaid. 

These are a few key programs that state leaders and advocates should be demanding be part of any economic stimulus passed by the federal government this year.

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