Perverse Incentives of Economic "Stimulus"

Abstract

The federal government widely promoted the American Recovery and Reinvestment Act (ARRA), more commonly called the “stimulus package,” as a means to help states balance their budgets for the 2010 fiscal year amid decreasing tax revenues. The ARRA allocated $140 billion to help states’ budgets from mid-2009 through 2011.1 Despite this infusion of funding from the federal government, states still face economic hardship. At least 41 states and the District of Columbia have reduced public services, and 30 states have raised taxes. As of this writing, at least 42 states still face unresolved budget shortfalls. The disappointing results of the ARRA have led state and federal policy makers to call for more federal aid to states. This obscures the larger problem behind the states’ deficits and will lead to negative long-run consequences. Federal aid provides short-term relief to states that are struggling to remain solvent, but does nothing to address the systemic causes of states’ shortfalls: wasteful spending within bloated state bureaucracies. States are well advised to look very skeptically at targeted funds offered by Washington and instead focus on balancing their own budgets.