The Latest Unhealthy Stimulus Compromise

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Medicaid spending is shared by the states and the federal government. But when times get tough, the federal government (which can borrow and print money) pays a higher share. That's why six out of ten early spending dollars in the Recovery Act went to Medicaid so the states could spend their precious cash on teachers, firefighters and other public workers.

That Medicaid crutch is scheduled to expire at the end of this year, which could force states to spend more on Medicaid in 2011 and less on other stuff, like services and jobs. Democrats want to extend the Recovery Act's Medicaid assistance through June 2011, but Republicans want this bill to have a smaller impact on the deficit. So, Democrats are proposing a pretty simple deal. Keep the Medicaid crutch, but shave it by 15% in the first quarter of 2011 and an additional 35% in the second three months to wean states off federal support.

The instinct to wean is understandable, but the timing is troublesome. Take New Jersey, where Gov. Chris Christie has proposed to cut $11 billion (that's 25%!) of the state budget for its fiscal year 2011, which begins in two weeks. The states are looking to the federal government to determine how much money they'll need to allocate toward Medicaid and education. If cut our new Medicaid crutch in half, the states' Medicaid burden grows and in a zero-sum budget, that means something else goes.

As Robert Greenstein of the Center on Budget and Policy Priorities wrote:

Without the extended Medicaid funding, Pennsylvania plans to cut funding for domestic violence prevention in half, eliminate all state funds for addressing substance abuse and homelessness, cut funding for child welfare by one-quarter, and cut payments to private hospitals, nursing homes, and doctors across the state -- among other steps.
We've got a long term deficit to trim after we mop up the recession. But first things first: we've still got mopping to do.
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Derek Thompson is a senior editor at The Atlantic, where he writes about economics, labor markets, and the entertainment business.

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