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States in fiscal distress


  • Robert P. Inman


The 2007-10 recession has imposed significant fiscal hardships on state and local governments. The result has been state budget 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 these gaps are related to state political institutions, a 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 to aid states in fiscal distress and provide economic stimulus. Though intended as insurance for fiscal distress, ARRA covers at most $0.23 of each dollar of a state’s recession-induced budget gap. These funds are provided through a large per capita payment to each state, independent of any level of state deficit. AARA was also intended as targeted assistance for stimulating local economies, but its funding is uncorrelated with state unemployment rates. ARRA funding appears to be decided by congressional politics, given Congress’s desire to pass a major spending and tax relief package as quickly as possible. States are important “agents” for federal macroeconomic policy, but agents with their own needs and objectives.

Suggested Citation

  • Robert P. Inman, 2010. "States in fiscal distress," Regional Economic Development, Federal Reserve Bank of St. Louis, issue Oct, pages 65-80.
  • Handle: RePEc:fip:fedlrd:y:2010:i:oct:p:65-80:n:v.6no.1

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    References listed on IDEAS

    1. Robert P. Inman, 2007. "Federalism's Values and the Value of Federalism," CESifo Economic Studies, CESifo, vol. 53(4), pages 522-560, December.
    2. Robert P. Inman, 2008. "The Flypaper Effect," NBER Working Papers 14579, National Bureau of Economic Research, Inc.
    3. Antonio Rangel, 2002. "How to Protect Future Generations Using Tax Base Restrictions," NBER Working Papers 9179, National Bureau of Economic Research, Inc.
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    Cited by:

    1. Feiveson, Laura, 2015. "General revenue sharing and public sector unions," Journal of Public Economics, Elsevier, vol. 125(C), pages 28-45.
    2. Adelino, Manuel & Dinc, I. Serdar, 2014. "Corporate distress and lobbying: Evidence from the Stimulus Act," Journal of Financial Economics, Elsevier, vol. 114(2), pages 256-272.
    3. 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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