The cutting of most of the $40 billion in aid to states from the US Senate’s version of the federal fiscal stimulus bill was a triumph of politics over economics. Senators that claimed that this money does not represent stimulus have exposed themselves either to be woefully ignorant of the basic economic concept of stimulus or more concerned about political considerations than the welfare of the nation and its citizens. Either one is inexcusable.
This transfer to states represents the very best type of stimulus. It will fill in for lost state revenue, so it will begin to be spent immediately; it will go to existing programs, so it will be spent effectively; and the spending will go to the most vulnerable populations, the very people who are most adversely affected by the economic downturn. Additionally, much of this money would go to save off cuts in education funding - the very best investment we can make in the future prosperity of the country.
In exchange what did we get? Well, $70 billion spent on fixing the Alternative Minimum Tax for one. The AMT might be a bad thing in need of a fix, but a fix is terrible stimulus. It increases income of relatively well-off families and a good portion of this income can be expected to be saved so won't do much to stimulate the economy.
So at the time states are cutting spending and, in some cases, increasing taxes - very direct and powerful anti-stimulus, the federal government is responding with...an AMT fix that provides only a fraction of an antidote. Amazing. Imagine what spending this $70 billion in block grants to states would achieve?
I am very seriously starting to wonder if this bill will do more harm than good. An ineffective bill that saddles us with a huge debt burden is worse than no bill at all.