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March 14, 2013 2:00 PM Here’s Economic Reform We Should Really Be Working On

By Jonathan Bernstein

Glad to see that Matt Yglesias is talking about this one again:

We should beef up automatic stabilizers in the budget by creating some kind of national rainy day fund that automatically releases unrestricted funds to state governments in times of recession. Some elected officials will use the money to avoid pro-cyclical service cuts and furloughs, while others will use it to finance tax cuts and we’ll just live with disagreement about the best way to proceed.

He also wants to make monetary policy work better, but I think he undervalues the ideological resistance to those suggestions (or at any rate, whether he undervalues it or not, I think that strong ideological resistance makes any legislative effort in that area very unlikely to succeed).

However, I continue to believe that countercyclical “automatic stabilizers” for the states should, in principle, be something both sides should be able to cut a deal on. To get Republican buy-in, what’s necessary is for those funds to be transfer-neutral in the long run. But if that’s the case, with money flowing out of state budgets during good times, I really don’t see why conservatives should oppose it in principle. After all, no one really believes that states should massively build up programs during good times and then slash them during bad times, but the incentives contained in state revenue flows make that a likely result. It’s also easy to imagine the interest-group coalition that would support this kind of thing, and harder to see exactly which influential interest groups would have a strong incentive to oppose it.

In general, I’m much more willing than Yglesias is to leave things in the hands of legislatures. But I think this is the big missing piece of the New Deal regime of moderating the effects of business cycles via automatic government action.

[Originally posted at A plain blog about politics]

Jonathan Bernstein is a political scientist who writes about American politics, especially the presidency, Congress, parties, and elections.

Comments

  • Bobby Goren on March 14, 2013 8:20 PM:

    RE: National Rainy Day Fund

    The problem with such a fund is red (neck) states that are already net moochers on the federal government will use the money to subsidize their self-righteous "conservative" policies. Once again money from more liberal blue states will be used by the red states to compete against them. It's total BS and we shouldn't encourage such bad behavior.

    It would be better to just beef up existing federal safety net programs. If the stimulus had been $1.8 trillion like Christina Romer had wanted (and composed of more spending and fewer tax breaks), we'd be much further along at this point in time. Not only would the state cuts have been swamped by higher federal spending, the cuts themselves would have been smaller as more money circulated into state tax coffers.

    At some point we might even want to consider just letting states like Alabama, Mississippi and South Carolina, just to name a few, subsist as the third-world entities they'd be without federal largess. If they want austerity - then let THEM have it. Anyone who doesn't like living in a banana republic can move.