Tax Cuts "for the Rich" Vs. Debt Reduction for the States - The American Spectator | USA News and Politics
Tax Cuts “for the Rich” Vs. Debt Reduction for the States

John Taylor and John F. Cogan write, in a Wall Street Journal op-ed titled “The Obama Stimulus Impact? Zero”:

So where did ARRA’s state and local grant money go? While some of it increased transfer payments to individuals in the form of welfare and Medicaid, the major part was simply used to reduce borrowing. As ARRA grants increased, net borrowing by state and local governments decreased. In the third quarter of 2010, for example, state and local governments received $132 billion in stimulus grants at an annual rate. In that quarter they borrowed $136 billion less at an annualized rate than they had in the fourth quarter of 2008, even though their revenues from all other sources were only $76 billion higher.

The bottom-line is the federal government borrowed funds from the public, transferred these funds to state and local governments, who then used the funds mainly to reduce borrowing from the public. The net impact on aggregate economic activity is zero, regardless of the magnitude of the government purchases multiplier.

In other ways the article almost seems to be an argument for more stimulus, because the authors are saying that there hasn’t been an overall uptick in spending. On the question of transfers to the states, though, Taylor and Cogan are casting doubt on one of the administration’s most frequently repeated arguments on the stimulus and the top Bush tax cut — that tax cuts for earners in the highest bracket are stimulative because they will be used for saving, and not spending. Yet now it seems that the same is true for transfers to state and local governments: they used the stimulus funds to replace debt, not initiate new spending.

So will Democrats now regard transfers to state and local governments as poor stimulus? Doubtful — state and local workers lean heavily Democratic, after all. 

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