Friday, July 9, 2010

Leverage Problems: State Budget Edition

So, FLG has been going on and on about how the problems of this financial crisis, and really all financial crises, derive from leverage. Consequently, FLG thinks this idea on Reihan's blog is terrible:
Congress should pass legislation that would allow a state to simply get an “advance” on these future federal dollars expected from entitlement programs. The advance could then be used for regional stimulus, to continue state services and to hasten our recovery.

The Treasury Department, which writes the checks to the states, could be assured of repayment (with interest) by simply cutting the federal matching rate by the needed amount over, say, five years. Of course, when Treasury eventually collected what it was owed, the state would have to cut spending or find new revenue sources. But that would happen after the recession, when both tasks would likely prove easier economically and politically.

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