Will states need a second stimulus package?

The recession, the states, and economic stimulus

The U.S. economy is headed into a recession. The only uncertainties are how severe this recession will be and how long it will last. Congress and the president have negotiated a $150 billion stimulus package containing tax rebates for individuals and families as well as bonus depreciation and expensing for businesses.

However, the current package does not address the key challenges states face during a recession, nor does it recognize the role states can play in reversing the downward spiral. Because of balanced budget requirements in 49 states — and projected state budget shortfalls of $46 billion over the next two years — states are starting to cut spending. This pro-cyclical action will make the downturn longer and more severe. In addition, states typically continue to feel the impact of a downturn even after it has ended.

If the current package is enacted and fails to do the trick, a second stimulus package — one that includes state countercyclical funding to neutralize pro-cyclical action by states — will be needed.

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A second package

If the economy continues to weaken, Congress is likely to consider a second package that would include enhanced benefits for high-risk populations and state countercyclical funds. To maximize its effectiveness, such a package would need to include extended unemployment benefits for those individuals who have lost their jobs in the downturn. It also would need to include additional food stamp funds for low-income individuals.

State countercyclical funds would also be a critical component of any subsequent stimulus packages. The nation’s governors have put forth just such a proposal. Their proposal includes $6 billion in additional federal money for Medicaid, the health-care program for low-income individuals, and $6 billion in a flexible block grant. The additional Medicaid funding is critical, as the rolls will begin to swell once unemployment begins to increase. The block grant also is crucial because it allows states to postpone cuts in elementary and secondary education, higher education and other health-care programs. In addition, it allows states to use some of the funds to help individual homeowners avoid default as well as to initiate or sustain some construction projects—such as for schools, highways and bridge repair—that can generate jobs. A similar $20 billion package was enacted in 2003, so there is precedent.

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