The Other “S&L Crisis”: A Policy Window for Reform?

The “Other ‘S&L Crisis’” refers to the dire circumstances state and local governments (S&Ls) are currently experiencing. Some of the problems are recent and beyond the control of these governments, but some of the challenges stem from policies they pursued in the past. Two examples are the commitment to provide post-retirement benefits to public employees without having funded those liabilities, and the widespread use of tax abatements to lure industry. The latter practice has had several unintended consequences, including inequitable taxation, underinvestment in infrastructure, and forgone tax revenues. Of the measures available for dealing with the current crisis—including doing nothing—this paper argues that providing federal funds to state and local governments to fund programs to assist people in need and to build infrastructure is a promising option.