Twenty-five years ago, President Ronald Reagan angered many Democrats with a broad effort to eliminate red tape and allow states discretion over federal grants. He called it the New Federalism. A half-century earlier, President Franklin Roosevelt angered many Republicans by using federal dollars to put millions back to work through a variety of programs that became known as the New Deal.
Although we think of these two presidents and their initiatives as ideological opposites, there is no law of nature (or of economics) that prevents us from combining their ideas to help address the faltering economy today. A Reagan-Roosevelt approach — a sort of decentralized recovery that sends money directly to the states — has the best chance of putting people back to work and making America stronger.
The alternatives are not likely to succeed. With job growth faltering at home and the outlook darkening for America’s trading partners in Asia and Europe, Congress will need to heed the advice of Federal Reserve Chairman Ben Bernanke to consider another round of stimulus spending — but Washington gridlock may doom such efforts.
So why not reroute the traffic away from Washington? Instead of more top-down stimulus with another emphasis on “shovel-ready” jobs or Washington pet projects, President Obama should appeal directly to the nation’s 50 governors by proposing a direct grant to each state to spend as it sees fit.
A state-directed recovery initiative would be the quickest, easiest way to reduce unemployment and get the economy moving again. Congress would simply distribute money to the states, based on population and with no strings attached. Each state could use these funds however it chooses, whether by cutting taxes on small business and families, or by investing in education or infrastructure. This is far simpler than the Obama administration’s proposed American Jobs Act — which, despite many attractive features, reads like a laundry list of federally inspired programs.
The economic logic is compelling. The federal government can borrow money at historically low interest rates, meaning that almost anything we spend it on — infrastructure, schools, scientific research — will produce a positive return. The catch is that much of this money needs to be spent at the state and local level. States maintain infrastructure and spend more than a third of their tax dollars on education. But they are obliged to balance their budgets. Moreover, they lack access to the rock-bottom interest rates available to the U.S. Treasury.
The states have been hammered relentlessly during the Great Recession. The decline in state tax revenue since 2008 is the steepest on record. States continue to struggle with the housing crisis, which is still causing misery in Nevada, Arizona, Florida and elsewhere. While the federal government has spent trillions on the wars in Iraq and Afghanistan and the number of federal employees has continued to climb, state and local governments have been forced to lay off half a million teachers, police officers and others, as well as reduce basic services such as public transit. Many states have unemployment rates above 9 percent. At the same time, population growth means that they must provide schooling for 350,000 more kids than before the recession began.
Meanwhile, we are missing one of the biggest opportunities in more than 50 years to rebuild the nation’s infrastructure and keep American industries competitive. Our roads, bridges, electricity grid, and water and sewage systems are suffering from years of underinvestment. According to a new study by Edward Alden of the Council on Foreign Relations, titled “Road to Nowhere: Federal Transportation Infrastructure Policy,” the United States has fallen from having the fifth best transportation infrastructure in the world in 2002 to the 24th best today. The highway miles we drive have doubled in the past 30 years, but the total mileage of highways has barely risen — resulting in the traffic congestion so familiar to anyone behind the wheel.
Unfortunately, some members of Congress don’t want to improve the economy before November, and others are bogged down in the minutiae of crafting a jobs bill that appeals to specific interest groups. In the current political climate, Congress is not going to enact a new stimulus bill unless its members face overwhelming pressure from people back home. Our proposal would harness lawmakers’ one common desire: to help their constituents deal with local economic circumstances.
This initiative would allow states to use the money for whatever would most benefit the local economy — whether building roads, cutting taxes or reducing fees. The only requirement would be that each governor accept responsibility for the prudent administration of the funds and agree to hire an independent auditor to report on how the dollars were used. During the 2009 stimulus battles, some Republican governors declined to take the federal money. Our plan would allow wide flexibility in how the funds are spent, making it less likely that the gift would be turned down. But if any states chose not to participate or failed to meet a deadline for the rapid use of the funds, its stimulus dollars would be put back into the pot and divvied up among those that did.
Would delegating spending authority to the states ensure that 100 percent of the dollars were used wisely? Probably not. Some states would find ways to waste the money on bridges to nowhere or inefficient subsidies to businesses. But the alternatives — top-down federal spending or another round of monetary easing by the Fed — are either political nonstarters or likely to be far less effective.
With millions of Americans unemployed and a taxes-and-spending battle looming at the end of the year, Congress needs to take action before the federal budget becomes convulsed with fighting among special interest groups. In the teeth of the Great Depression, 1932 marked the first time a young Ronald Reagan voted for FDR. That same year, Justice Louis Brandeis called the states our “laboratories of democracy.” Today, in that spirit of bipartisanship, it is time to let the states be our laboratories of recovery.
Linda J. Bilmes, a former assistant secretary of commerce, and Shelby Chodos, a former managing director of Commonwealth Capital Partners, teach public finance at Harvard’s John F. Kennedy School of Government.