Macroeconomic Impact of State Governments

State governments tend to pump money into the economy when times are good and suck money out of the economy when times are bad. As the Washington Post reports, we see that happening today.

As of April, more than 40 states had instituted some kind of spending freeze or modest across-the-board cut, according to a survey by the National Conference of State Legislatures (NCLS). About 29 states cut spending on higher education, 22 cut Medicaid funds, 25 cut their corrections budgets and 10 laid off some workers.

When the stock market was near its peak, In January of 2000, I wrote this warning about macroeconomic consequences of a stock market crash, and I talked about state government spending as an issue. In a subsequent essay, I specifically recommended that if my fears about the market and the economy were borne out then the Federal government should enact a $280 billion revenue-sharing plan for the states. It is time to consider that recommendation.

Discussion Question. Does it make sense that state governments are not allowed to run deficits, but the Federal government is allowed to run a deficit?