A Really Bad Idea
by Jeffrey Miron on July 9th, 2010
3 Comments
Christopher Edley, currently dean of UC Berkeley’s law school and formerly an important advisor to Bill Clinton, is concerned that states cannot run their own macroeconomic policies. So he proposes the following:
The best booster shot for this recovery and the next would be to allow states to borrow from the Treasury during recessions. We did this for Wall Street and Detroit, fending off disaster. It’s even more important for states.
The potential for this plan to unleash catastrophic increases in state debt, analogously to what happened with Greece once it joined the Euro zone, should be obvious.
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Robert
I am continually amazed at the sheer hubris and stupidity of those in positions of power. We’re in trouble, that’s for sure.
Jack
Playing devil’s advocate, I would argue that his logic is consistent. If it is good to save the banks and to save the auto big 3 (“fending off disaster”) then it would be good to save state budgets too. If one believes the first two were unquestionably good decisions, it follows the third is sensible too. However, as you explain, this completely ignores issues of wildly increasing debt and its consequences, as well as moral hazard.
Mike G
C’mon, is it too much to assume the Treasury won’t internalize the risk of default by assigning a credit rating to each state in distress and adjusting the interest rate appropriately? Yeah, right.