State governments: Canaries in the depths of the economic mine

Outside editorial

Posted: Monday, December 24, 2001

This editorial appeared in Wednesday's Washington Post:

In the economic stimulus debate between the parties, one of the most important issues was unfortunately among the least discussed. The question was the fiscal health of the states and its effect on the services they provide, particularly to lower-income people, who tend to be among the principal victims of recessions. Medicaid, the costliest of those services, is at the center of the issue.

State governments are among the most faithful barometers of the health of the economy. They flourish in booms, suffer in downturns. This one is no exception. All states are required by law or tradition to balance their budgets. When revenues decline along with economic activity, they have no choice but to raise taxes or cut spending, and almost always choose the latter. The perverse effect of the lower spending is to exacerbate the downturn from which the states are struggling to escape, and much of the burden tends to fall on vulnerable populations.

In the current fiscal year, the National Governors Association says the 50 states together face a shortfall of $40 billion to $50 billion. That's half the size of the stimulus the feds were contemplating. In recessions, the two levels of government tend to work at cross-purposes. Many states have said they plan to solve the budget problem partly by cutting Medicaid. The pressure to do so is all the greater because in recessions the Medicaid rolls tend to rise.

To ease the pressure, congressional Democrats proposed as part of their stimulus package to provide the states with a modest, temporary increase in federal aid, using Medicaid as the vehicle. It's an easy thing to do because the feds already pay a share of Medicaid costs, and the increased spending might bolster the economy and help potential victims of the recession, both in the same stroke. But the idea got nowhere. The governors naturally supported it, but opponents expressed the fear that it would lead to lasting expansion of an already costly entitlement - and the governors don't come to the Medicaid table with clean hands.

The states have in fact for years been using a series of scams to rip off the program, artificially inflating their costs in order to qualify for increased federal matching funds that they then convert to general aid and use for health care or not, as they please. Virginia Gov. James Gilmore wants to use such a scheme to help cover the cost of his car-tax repeal. The rip-offs have cost the federal government billions. Successive administrations - Bush I, Clinton and now Bush II - have struggled to stop them. The often sanctimonious governors have in that sense poisoned the well from which they now seek to drink. The idea of stepped-up aid is nonetheless a good one and deserves to be revived if the stimulus debate resumes next year. Aid to, and through, the states should arguably be a larger part of the government's counter-cyclical arsenal than it is, and Medicaid offers a socially valuable way of providing it.

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