Perverse Incentives of Economic "Stimulus"

Mercatus on Policy Series, No. 66, January 2010

4 Pages Posted: 26 Mar 2020

See all articles by Daniel M. Rothschild

Daniel M. Rothschild

affiliation not provided to SSRN

Emily Hamilton

George Mason University - Mercatus Center

Date Written: March 26, 2020

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.

Keywords: bailouts; federalism; federal government; economic stimulus; perverse incentives; American Recovery and Reinvestment Act (ARRA); fiscal policy

JEL Classification: E62; H60; H81

Suggested Citation

Rothschild, Daniel M. and Hamilton, Emily, Perverse Incentives of Economic "Stimulus" (March 26, 2020). Mercatus on Policy Series, No. 66, January 2010, Available at SSRN: https://ssrn.com/abstract=3561693 or http://dx.doi.org/10.2139/ssrn.3561693

Daniel M. Rothschild (Contact Author)

affiliation not provided to SSRN

No Address Available

Emily Hamilton

George Mason University - Mercatus Center ( email )

3434 Washington Blvd., 4th Floor
Arlington, VA 22201
United States

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