How to stave off a recession with a plan even a 5-year-old could understand

It's all about sharing

Sharing money with local government can help stave off a recession.
(Image credit: iStock)

America is on recession watch. Job growth dropped from 2014 to 2015, and again from 2015 to 2016. The rate of new hires has plateaued. In the past, the latter signal has heralded a recession within the next year or so.

My colleague Ryan Cooper notes that both Congress and the Federal Reserve appear paralyzed in the face of this possibility. So allow me to offer a potentially recession-preventing policy suggestion that both liberals and conservatives could theoretically love: revenue sharing.

Revenue sharing is stupidly straightforward. It employs a core lesson that every child is taught: sharing.

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Essentially, the federal government sends a regular stream of money to state and local governments, to spend as they see fit. The program's overhead is quite low, and there are virtually no strings attached. This program was passed under Richard Nixon in 1972, and operated for 14 years until it was killed by Ronald Reagan in 1986. It paid out $85 billion over the course of its life, sending checks as big as $41.9 million to New York City and as little as $201 to other small towns. "Revenue-sharing paid for teachers in Manhattan and streetlights in Buffalo, provided snowplows for Adirondack villages and built the community hall and ice rink in New Hartford," wrote James Cannon in The New York Times in 1986.

Why bother with revenue sharing? Because the money has far greater value in the hands of state and local governments.

The federal government has enormous latitude to deficit spend without fear of default. The Federal Reserve can create limitless money to buy federal government debt. And because it remits the interest paid on those bonds right back to the Treasury Department, the federal spending funded by that debt is basically a freebie.

State and local governments, by contrast, do not have these powers. They can't just print a bunch of money or run up tremendous deficits without risk. All but one of the states have constitutional amendments requiring their budgets to remain balanced. And even when they do borrow, they do not have the Fed's backing, so they must constantly worry about the threat of losing their good credit standing and ultimately the possibility of default. When a recession hits, states must cut spending as their tax revenue falls.

That's a huge problem, because it makes recessions worse.

Revenue sharing, then, might better be described as sharing the federal government's unique power to borrow. It gives states and municipalities some financial breathing room to make sure they don't cut spending during recessions.

Giving states and municipalities a monthly infusion of federal cash based on the size of their population might make sense, with extra per-person spending for places with high poverty rates or low median incomes. And the program should be designed to naturally expand its spending during economic downturns — maybe index it to the local unemployment rate, or other indicators of economic health.

Now, for liberals to agree to any of this, you quite obviously could not (and should not) replace any other federal spending with the revenue sharing. The program would need to be added atop current spending. Given the rancorous divisions in Congress, that would, I admit, be exceedingly hard. The original revenue sharing under Nixon began as a $5 billion-a-year program, and we'd probably be lucky to get that. But it would be something, and hopefully set the stage for an expansion of the program over time.

In exchange for tolerating higher federal spending, conservatives would get the localism they often call for. State and local communities themselves would decide how the money is spent. "The oversight requirements were simple," as Cannon pointed out. "Every community had to hold public hearings on how the money would be spent; there could be no discrimination in its use; public audits would show how it had been spent." And that was it.

Revenue sharing would be in keeping with the principle of subsidiarity that Republican House Speaker Paul Ryan often points to. The federal government provides the monetary power, but local communities decide how to use it.

"Elected officials were given resources and authority and held accountable at the next election for what they had done," Cannon concluded. "It was government at its finest." And it could be again.

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