According to Nicole Gelinas of City Journal, the size of federal spending is about to consume debt markets, crowding out municipal debt. In the third quarter of 2008, federal government debt increased 39 percent , “the largest quarterly growth rate recorded” according to the Federal Reserve.
This, in effect, shoves non-federal bonds off the table by oversaturating the market.
Gelinas also posits that if the stimulus stifles recovery, localities will face default – really bad news, because municipal debt doesn’t have a federal guarantee. If municipalities seek one, they might not get it. The federal government is deeply overcommitted.
The federal stimulus meant to bail out Main Street is moving more like a budgetary virus, robbing cities of their ability to maneuver and chart the best fiscal course during rough times.
As the American Recovery and Reinvestment Act (aka the Stimulus Bill) moved out of the House of Representatives yesterday, Eileen Norcross and Frederic Sautet released a new paper questioning the long-term ramifications of this package on states’ budgets.
While federal grants may provide temporary relief for state budgets, the size and scope of the proposed spending will worsen already-distorted state and local fiscal practices while creating perverse incentives inducing greater public spending with scarce state funds. By fracturing the link between those who benefit (local constituencies) and those who pay (federal taxpayers), ARRA reduces government accountability on all levels and ultimately erodes local control over policy by imposing federal solutions on local problems.
Instead of attempting a short-term fix of amplifying the grant system through an emergency stimulus package, the federal government should work to make state and local governments accountable for their own spending decisions. This means reducing states’ and localities’ reliance on federal funding for local priorities and allowing local activities to be addressed by the appropriate mechanisms: state and local governments and the private and philanthropic sectors.
Also of interest, the Wall Street Journal has a breakdown by state on each of four proposed spending categories: aid to states, school and college modernization, job training, and transportation and infrastructure.
Finally, Nicole Gelinas has some analysis of last-minute changes to the House-approved package as they relate to state and local infrastructure investment.