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Chicago Fed Letter, No. 265, August 2009
Should the Federal Government Bail Out the States? Lessons from Past Recessions
State government budget woes have been much in the news. Recently, California projected a $21 billion deficit after failing to get voter approval for a series of budget balancing fiscal measures. In January of this year, five prominent Democratic governors suggested that the federal government should commit $1 trillion in aid to the states over the next two years. The rationale for such financial support is that states (which are generally prohibited from running deficits) need the money to maintain key programs, such as Medicaid, unemployment insurance and workforce training, for which demand rises during a recession. Also, this aid might help states avoid enacting spending cuts or tax increases that could deepen or prolong the economic downturn.
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