Brian M. Riedl: Stimulus Bill Should Not Bail Out States

Brian M. Riedl says it is a bad idea for Congress to bail out what he terms “irresponsible states” in the stimulus bill:

…Congress already sends $467 billion a year to state and local government–up 29 percent after inflation since 2000. This is well beyond what is needed to reimburse states for federal mandates (and Washington has imposed few new unfunded mandates on the states since 1996). The feds continue to give heavy subsidies to state health, education, and transportation programs. But apparently that is not enough.States depend on volatile tax sources such as income taxes, so common sense suggests building rainy day funds during booms to cushion the inevitable recessions. And yet states keep responding to temporary revenue surges with permanent new spending programs. Between 1994 and 2001, states flush with new revenues shunned rainy day funds and instead expanded their general fund budgets by 6.2 percent a year.

All booms eventually end, and these free-spending states left themselves totally unprepared for the 2002-2003 economic slowdown. Yet instead of sufficiently paring back their bloated budgets, the states demanded–and received–a $30 billion bailout from Washington in 2003.

Bailing out someone who has behaved irresponsibly encourages future misbehavior. And that is just what happened: After the 2003 bailout, states went right back to spending–with annual budget hikes averaging 7.2 percent over the next four years.(Some also built up their rainy day funds, but not enough.)…

There’s a good bit more here.

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