Swapping the Stimulus

Will local substitutions boost the spend -- or drain it?
March 19, 2009
Girard Miller
By Girard Miller  |  columnist
Girard Miller is the Public Money columnist for GOVERNING and a senior strategist at the PFM Group.

The federal stimulus money has begun trickling down from Washington to the states, and now to local governments. Out in California, a few of the localities are reportedly trading their stimulus money. Is this evidence of local government ingenuity and efficiency, or yet another sign of gamesmanship in a federal boondoggle?

Los Angeles metropolitan voters approved a tax increase last November to fund transit projects, so there was local money available for a variety of projects. Smaller municipalities have certain allocations to these funds for road projects, and they have now found a way to trade off these local projects in exchange for local shares of the stimulus funds. I'm not sure it's what Congress intended, and the jury is still out as to whether the net result is an acceleration of spending and the best use of federal moneys.

We will soon see whether this idea catches on elsewhere, as it's impossible for public agencies to trade their "stimulus rights" secretly, and the federal program promises to be transparent. Given the mandate to spend this money quickly, there won't be much more time for such deals to get worked out within the federal timetables. So I don't know whether this idea will spread nationally.

What this does prove is that federal grant money is fungible, and that there is clearly a substitution effect. Money that was going to get spent anyway now gets tagged as federal spending so that local officials can undertake another project that would not necessarily have qualified for federal dollars. The key question is whether this is an additive substitution, or a replacement effect. If the net result is more total spending, then the intent of the stimulus bill is achieved. On the other hand, if municipalities find a way to avoid spending local dollars on a project that now gets federal or state funding, then the swap system would defeat the intent of the stimulus program.

Public-finance economists may find this development of interest. It resembles the inverse of the "cap and trade" concept now under consideration for trading pollution rights. Here we are dealing with social goods, not social bads, but the notion of transferable rights and exchange features will catch the attention of researchers who can eventually tell us whether this activity is ultimately more efficient than a bureaucrat making all decisions. I doubt this will result in a Nobel prize in economics, but there is nonetheless a practical lesson in governmental finance to be learned from this behavior.

At the end of the day, this local trading by smaller municipalities is a drop in the $787 billion stimulus bucket. But it's a trend we should monitor closely to see if the law of unintended consequences leads to benefits or abuses in infrastructure stimulus efforts.