The Stimulus Next Time

The assistance from Washington is full of compromises that undercut its effectiveness. There is a better way.
by | May 13, 2009

Throughout the country, states and local communities are beginning to implement the stimulus programs passed by Congress earlier this year. and public administrators at all levels of government are making heroic efforts to get the money out quickly. Heroic efforts are indeed in order, as substantial challenges were built into the stimulus programs at their birth.

Like so many public policy decisions, the stimulus legislation served as a veritable magnet for other interests and agendas. Since policy action is so difficult in Washington, it is not unusual to see broad legislative vehicles become freighted with unrelated objectives and programs. In pushing the stimulus, this administration encountered pent-up demand for a wide range of policy initiatives in infrastructure, energy and other public programs. While these programs are often noble in their own time and place, the vast number of programs and competing objectives attached to the stimulus may undercut its primary purpose -- to stimulate the economy, and quickly.

Let's review the compromises that the current stimulus included:

o The other agendas laid on top of the pure stimulus will complicate expeditious spending of funds. Long-term investments in broadband, high-speed rail and health information technology, for instance, will require extensive development that will not have economic impact for several years at least. Some of the regulations included, such as Buy America and Davis-Bacon, may increase the costs of each new job, thereby reducing the total number of jobs that may be created.

o Rather than provide assistance through a single major grant, Congress chose to carve it up among a daunting range of categorical programs to appease various interest groups, agencies and congressional committees. Each program has separate rules and procedures which can add to costs and prompt delays. Education stabilization funds, for instance, have complex maintenance-of-effort and education program requirements that will require time-consuming negotiations among states, stakeholders and federal officials.

o These numerous programs increase the administrative, monitoring and auditing costs associated with the stimulus. To further complicate matters, federal officials have asserted the right to review state plans not only for legal compliance but also for prudence in order to avoid possible gaffes and publicly embarrassing choices. The Department of Transportation, for instance, has added another layer of review to state highway grant decisions.

o Targeting is hindered when significant shares of funds are allocated through existing program formulas, many of which have never succeeded in directing funds to the hardest-pressed states and communities. Additional targeting was included for the enhanced federal Medicaid funding, but some analysts have found that overall stimulus funding is no different among states with higher or lower unemployment rates.

o Transparency is the watchword of the stimulus program -- more information on spending will be available on public Web sites than ever before. The complex web of responsibility, however, threatens to undermine real transparency by limiting the public's ability to understand who is responsible for what. As with most intergovernmental programs, sharing authority among public officials obfuscates blame and credit for results.

Using categorical grant programs makes sense when state and federal goals are not aligned, such that incentives and restrictions are necessary to compel states to adopt national goals and priorities. When it comes to creating new jobs or avoiding job elimination, however, state and federal governments are on the same page. Accordingly, the use of narrow funding programs, besides dragging out implementation and reducing targeting, is also unnecessary. States are just as capable as the federal government, if not moreso, of deciding how to create and save jobs in their own backyards.

A simpler, more expeditious alternative would be a targeted, general-purpose fiscal grant to state and local governments. This approach has several advantages over the current categorical stimulus program:

o Administrative costs would be significantly lower. Federal oversight would still be required to ascertain the impact of states' decisions, but the major federal compliance audits would not be necessary.

o Stimulus funds would have a more rapid impact due to the announcement effect. Rather than waiting for detailed federal guidelines and specific agency allocations, a general-purpose program would be understood well enough from the legislation to enable state and local governments to plan for receipt of these funds and defer their own cuts in the process.

o Money could be better targeted to states and communities according to their level of need.

o States could develop packages of initiatives that are tailored to suit their own unique economies and priorities, rather than adopting federal priorities and requirements that may not constitute a good fit.

o Accountability would be clarified, as there would be one single level of government bearing the lion's share of blame or credit.

The current stimulus package does provide a laboratory of sorts for testing the efficacy of this approach. Congress provided nearly $90 billion for a "back door" version of general fiscal assistance -- reducing the states' Medicaid matching shares. While states cannot reduce Medicaid benefits, they can use the freed-up matching funds to prevent cuts elsewhere in their budgets or to defer planned tax increases. Measuring the fiscal impact of this provision will call for a different accountability approach than for other recovery programs, which require states to track the specific uses of the money. The Medicaid reduction will require a broad evaluation of how states' overall fiscal posture changed, and what this meant for their economies. The results of this evaluation may demonstrate the potential benefits of applying a general fiscal assistance approach to a stimulus package as a whole.

I have no illusions that Washington will be receptive to such an approach. Revenue sharing met an untimely death once before at the hands of the federalist president, Ronald Reagan. Simply put, national officials want to claim the credit for federal programs over their state and local counterparts, many of whom may become political rivals in the future. It's also more convenient for major interest groups to have national programs, as opposed to tracking and lobbying in each of the 50 states. Even media has become more nationalized, particularly as local newspapers shut down across the country. This explains why the United States is one of the only federal systems in the world without a general-purpose fiscal assistance program, though it remains a vital strategy for the federal toolbox, one that merits more consideration the next time we need to jump-start the economy.

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