Structuring Federal Aid To States As An Automatic (and Autonomous) Stabilizer

Executive Summary

  • The federal government should provide support to state governments during economic downturns in the form of block stabilization grants that serve to replace lost tax revenue. This would contrast from the current state of play, in which state governments cut spending and raise taxes in recession to preserve balanced budgets. The net effect of such grants would be shorter recessions, more job creation, and more stable funding for vital public services. The federal government has done this before through the Treasury Department’s Office of Revenue Sharing.
  • Our proposal utilizes a trigger-based formula for timing and allocation. Sensitivity to economic indicators ensures our proposal is timely, targeted and scalable. Use of state-level data helps protect against state- and regional-level economic shocks within the federal structure of the U.S. government in a geographically equitable manner. Legislators can “set it and forget it” instead of spending time and political capital on state fiscal relief for every crisis. The COVID-19 crisis has only further revealed the urgency and importance of stabilizing state budgets to prevent economic and public health catastrophe.

Why This Proposal

Source: Bureau of Economic Analysis (BEA) (Amarnath, Feygin)
Source: Bureau of Labor Statistics (Amarnath, Feygin)
Source: Census Bureau

The Proposal

Timing

  • In the version using national-level data, stabilization payments begin when the monthly national unemployment rate rises half a percent above its three-month moving average.
  • In the version using state-level data, stabilization payments to a given state begin when the monthly unemployment level in that state rises 0.75 percentage points above its three-month moving average. We use a higher trigger for state-level unemployment rates because state-level unemployment rates are more volatile.

Administrative Structure

Allocation

Some Precedents

Conclusion

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We write, crunch #’s, and tweet about the labor market and economic policy.

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