Q&A: How Much of a Difference Will the Economic Stimulus Package Make to States? (Economists)

Stateline.org asks economists Raymond C. Scheppach, David Wyss and Jerry Nickelsburg for a quick assessment in the first of a series of questions and answers with policymakers about states and the recession. 

How much of a difference will the
economic stimulus package make to states?

The $40 billion of general subsidy should prevent some cuts, but one problem is that the money is being sent out generally and not targeted to the states with the big problems.

As a result, California’s share won’t do much to help given the size of California’s shortfall, while states with smaller shortfalls will just get a windfall that won’t create much additional spending.

– David Wyss is chief economist, Standard & Poor’s, New York.

The critical test is how much of states’ pro-cyclical actions will be offset by the stimulus act. My “best guess” is that state shortfalls over the 2009-2011 period would be about $250 billion. Balanced budget requirements in 49 states means, if it weren’t for the stimulus package, states would be forced to cut spending or raise taxes and fees by that amount, causing a huge negative impact on the economy and making the downturn longer and deeper. From this perspective, the act already is having a positive impact because many states have built some of these new funds into their budgets with the desired impact of postponing layoffs and service cuts.

The flexible money in the stimulus is close to $100 billion, including $87 billion for Medicaid and $8.8 billion in a state fiscal stabilization fund. In general, these funds can be used to offset planned program cuts and tax increases across the board for states. Given that the $100 billion in flexible funds is about 40 percent of the average shortfall, there will continue to be pressure in most states to consolidate and streamline programs as well as abolish ineffective ones.

The decision making on the part of the states will be the determining factor. In some cases, the transfer from the federal government to state governments will simply substitute borrowing in the Treasuries market for borrowing in the muni markets. In other cases, states will use the funds to postpone cutting programs. In the latter situation the transfers may just serve to push the budget cutting out to the 2009/2010 fiscal year and only have a temporary impact. Thus it is difficult to quantify the efficacy of these transfers.

With respect to transfers to the states for infrastructure, the issue is one of timing. It takes time to complete the planning process for these projects. Those that are ready to go got there because the funding had already been identified. To the extent that credit conditions in the muni markets would delay these, the transfers can accelerate those programs. For the rest, the near-term impact will be minimal.

– Jerry Nickelsburg is a senior economist at UCLA Anderson Forecast, which provides forecasts on the California economy.

Read Wednesday’s answers from interest groups