Out of Control Policy Blog

Using the Stimulus to Pay Off State Debt?

South Carolina Governor Mark Sanford, the most outspoken critic of the stimulus, had an op-ed in the Wall Street Journal on Friday making the argument that if the Federal government was going to increase its debt by passing billions to the states then at the very least the states should be able to use that money to pay down their own debt, not increase liabilities:

"If South Carolina could use stimulus money to pay down debt, in two years we will be able to spend, cut taxes or invest even if the federal government can no longer provide more money -- not a remote possibility. In fact, paying debt related to education would free up over $162 million in debt service in the first two years and save roughly $125 million in interest payments over the next 13 years -- just as paying off a family's mortgage early frees up money for other uses."

He also made and apt comparison of the states to struggling businesses:

"Also, spending stimulus money will delay needed state restructuring. General Motors recently found itself in a similar spot. It needs to be restructured if it is to prosper, but a federal bailout enabled it to put off hard decisions. Likewise, taking federal stimulus money will only postpone changes essential to South Carolina's prosperity. Though well-intended, it forestalls hard choices we must make."

At the height of the economic boom, most Wall Street firms were acting like the good times would never end. Banks over leveraged themselves and did not adequately prepare for the inevitable downturn. But they weren’t alone. State governments, benefiting from the boom with higher tax receipts, also began spending irresponsibly. The deficits states are facing today are not only because of the economy downturn, but the result of years of mismanaged risk—just as has plagued the financial industry.

The stimulus is a bad idea. It'll increase our debt (already approaching our GDP), increase the deficit (nearly $2 trillion for the next fiscal year of Obama's budget), increase state spending at a time when they should be cutting back, and increase the Federal government's role in our daily lives. And its only a drop in the bucket of the $12 trillion or so we've spent in the past 15 months to "fight" the recession. So anyway that states can find to turn this wasteful, harmful spending into something marginally beneficial, in a sense a hedge on the overall harm, then they should be allowed to pursue that. 

Governor Sanford asked President Obama for permission to use discretionary stimulus money to pay down debt. The President said no.


Anthony Randazzo is Director of Economic Research


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Comments to "Using the Stimulus to Pay Off State Debt?":

Ways To Pay Off Debt | April 21, 2009, 9:23pm | #

Thank you very much for your post. I believe this is very sound advice. I am going to have to sit down with my wife over the weekend and review all of our options. Thanks again for the post!



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