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States and Fiscal Crisis

By Matthew Yglesias on February 22, 2011 at 1:21 pm

"States and Fiscal Crisis"

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David Brooks notes, accurately, that “States with public sector unions tend to run into fiscal crises”. This is true because “states with public sector unions” are a sub-set of “states” and in the United States of America “states tend to run into fiscal crises.”

This is a problem that would be well-worth addressing. The biggest area of problematic federal policy in this regard concerns Medicaid which creates large financial incentives for states to undertake commitments that won’t be sustainable in recessions. A big think new idea that could help in this regard would be for the federal government to “tax” state government spending, creating a bailout fund that could be released during recessions with disbursements strictly proportional to payments rendered. A structural issue voters ought to think about is that term limits for governors and state legislators exacerbate the bad incentives behind boom/bust budgeting.

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