The Case For Unrestricted Revenue Sharing

Christina Romer offers her New Year’s wishes for fiscal policy:

The payroll tax cut for workers and employers and the extended unemployment insurance that President Obama proposed last September would help put people back to work.

But even better would be measures that increase employment today, while also leaving us with something of lasting value. Because many people worry about increasing the role of the federal government, why not give substantial federal funds to state and local governments for public investment? Tell them that the money has to be used for either physical infrastructure like roads, bridges and airports, or for human infrastructure like education, job training and scientific research. Then let the states, cities and towns figure out what would work best for their citizens.

To me, one of the main lessons of empirical research into the American Recovery and Reinvestment Act has been that it’s much more difficult to impose real conditionality on state governments than the law’s authors realized. Money is fungible, and you can’t really change that. If you impose extra rules, that mostly just increases the amount of time and effort that agencies put into finding ways to exploit loopholes and undermine your intentions. If I were proposing a version of the Romer Plan, I would accept that inevitable reality and let it work for me. Say that unconditional debt-financed grants are going to be made to state and local governments, and that if Scott Walker wants to use his money for tax cuts rather than infrastructure investments that’s up to him. Given the strong GOP tilt of most state governments after the 2010 midterms, you’d wind up getting a pretty right-wing version of stimulus but I think this is unavoidable in practice and in political terms simplicity helps.