Stimulus and Recession Leads To Shifts in State And Federal Relationship

Since World War II the Federal government has slowly been sending more and more money to the states. These funds are not for specific Federal projects but to aid in various programs that the state’s manage and also use their own funds for. With the Stimulus Bill and the effects of the Recession on state tax revenues the Federal government has now become the largest source of funds for the states.

There are two issues with this shift in how local and state governments are funded. The first is why some states have refused pieces of the stimulus funds. They are only for one or two years and the programs that they start will have to be continued with other revenue. The second is that the localities may become dependent on the Federal funds for continuing the same level of service. This will also undermine the ability of the states to choose how they want to spend their money. California has already seen a dictate tied to the Stimulus funds and contracts with their workers that may have been caused by the union involved. Accepting the Federal coin means accepting there rules.

There are further problems with this change in state funding. The states will not have to make an effort to raise their taxes or cut spending as the reliance on the national to provide the money shifts that tax burden.. Continence of this spending may require a substantial expansion of that budget to continue the aid. With the current level of spending and the borrowing that entails it may become impossible to continue it.

The Federal and state governments are seeing major declines in tax revenue. In April there was a deficit at the Federal level for the first time in a quarter century. This means that they must borrow money or print it to use to pay for all of these things. At some point the available money for the government to borrow will become limited or dry up entirely. That means more will have to be printed or there will have to be massive cuts in spending with a very significant effect on the overall economy. The concern is that inflation will have to occur eventually.

If the current situation continues with the states and cities relying on Federal largesse to make up the shortfalls they are facing there will be a transfer of power to the national government. It may be this is necessary to fix the structural issues the economy and financial system is facing. America, though, has fifty states with fifty different approaches to government. What works in California may not work in Alabama. The near term effect of these policies will be interesting.