The $100 Billion Stimulus You Haven't Heard Of

The Senate voted for a new $26 billion state aid bill yesterday, and it could be the last major stimulus bill we see. The Maine Republicans who defected to side with Democrats said they don't expect to vote for another piece of state stimulus again.

The bulk of the bill, $16 billion, goes to shoulder an extra bit of the struggling states' Medicaid burden. This brings the total federal assistance on Medicaid -- through a program called FMAP -- over $100 billion through mid-2011. What the heck is FMAP?

States pay Medicaid for low-income families, and the feds pick up a portion of the tab every year. That portion is called FMAP, or the Federal Medicaid Assistance Percentage. When the recession bit, states couldn't afford their share. So, like a friend who takes the check after his buddy loses his job, the feds told the the states, we'll pay for more Medicaid, so you can keep paying for firefighters and roads. Every state got some assistance, and harder hit states got more. For more on the numbers and state-by-state figures, check out this explanation.

The debate over FMAP is a microcosm of the stimulus controversy. The way I see it, the stimulus wasn't this huge ogre of federal spending that vastly expanded the government. The Recovery Act was basically the Replacement Act. It was about keeping things as close to pre-recession normal as possible.

The tax benefits, more than $200 billion of them, replaced income Americans lost when they got laid off, or needed to pay down their debt. That's one reason why we haven't seen the money spent as quickly as we'd like. The state aid, $140 billion of it so far, replaced lost revenue so states could keep the jobs and health care obligations they promised before the recession. FMAP is the epitome of this replacement, rather than expansion, theme.

There's a reasonable argument against bailing out the states ad infinitum. It's the same argument against bailing out the banks. Rewarding financial irresponsibility with free money encourages financial irresponsibility, and a lot of these states got caught making promises they weren't prepared to pay. That's why lots of moderates are calling for the government to pair state aid with demands that states restructure in the next few years, promise less spending, fewer government jobs, and more efficient governance. A fine idea, that. But in the short term, with the economy tip-toeing the line of deflation and the recovery slowing, it's foolish to hold state jobs ransom for promises from states to slim their payrolls later. Sixty-one senators made a smart vote yesterday.




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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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