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States in Fiscal Distress

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  • Robert P. Inman
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    Abstract

    The 2007-2010 recession has imposed significant fiscal hardships on state and local governments. The result has been state deficits and the need to increase state taxes, cut spending, and withdraw funds from state rainy day accounts. The primary cause of state budget “gaps” has been the rise in the level of state unemployment. There is no evidence that gaps are related to state political institutions, the state’s prior receipt of federal funding, or possibly favored access to key congressional budget committees. The federal government has responded to these gaps with the passage of the American Recovery and Reinvestment Act (ARRA) of 2009 intended to aid states in fiscal distress and to provide an economic stimulus. As insurance for fiscal distress, ARRA covers at most $.23 of each additional dollar of a state’s budget gap; there is a large per capita payment that goes to all states, independent of the level of state deficits. As targeted assistance for stimulating local economies, ARRA funding is uncorrelated with state unemployment rates. ARRA funding appears to be decided by congressional politics, given the desire to pass a major spending and tax relief package as quickly as possible. States are important “agents” for federal macro-policy, but agents with their own needs and objectives.

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    File URL: http://www.nber.org/papers/w16086.pdf
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    Bibliographic Info

    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 16086.

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    Date of creation: Jun 2010
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    Handle: RePEc:nbr:nberwo:16086

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    1. Haughwout, Andrew F. & Inman, Robert P., 2001. "Fiscal policies in open cities with firms and households," Regional Science and Urban Economics, Elsevier, vol. 31(2-3), pages 147-180, April.
    2. Wildasin, David E., 1989. "Interjurisdictional capital mobility: Fiscal externality and a corrective subsidy," Journal of Urban Economics, Elsevier, vol. 25(2), pages 193-212, March.
    3. David E. Wildasin, 2000. "Labor-Market Integration, Investment in Risky Human Capital, and Fiscal Competition," American Economic Review, American Economic Association, vol. 90(1), pages 73-95, March.
    4. Antonio Rangel, 2002. "How to Protect Future Generations Using Tax Base Restrictions," NBER Working Papers 9179, National Bureau of Economic Research, Inc.
    5. Gilligan, Thomas W & Matsusaka, John G, 1995. "Deviations from Constituent Interests: The Role of Legislative Structure and Political Parties in the States," Economic Inquiry, Western Economic Association International, vol. 33(3), pages 383-401, July.
    6. Thiess Buettner, 2007. "Equalization Transfers and Dynamic Fiscal Adjustment: Results for German Municipalities and a US-German Comparison," Working Papers 2007-07, University of Kentucky, Institute for Federalism and Intergovernmental Relations.
    7. Olivier Jean Blanchard & Lawrence F. Katz, 1992. "Regional Evolutions," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 23(1), pages 1-76.
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    Cited by:
    1. Conley, Timothy G. & Dupor, Bill, 2013. "The American Recovery and Reinvestment Act: Solely a government jobs program?," Journal of Monetary Economics, Elsevier, vol. 60(5), pages 535-549.

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