In a bad state : responding to state and local budget crises

"Scholars writing about how the federal government should respond to state and local fiscal stress fall into roughly two camps. One group argues that federal bailouts create excessive moral hazard. Another group argues that federal aid is instead a necessary form of macroeconomic stimulus given the pro-cyclical nature of state budgets. While this debate is important, it is incomplete. This chapter will show that there is another consideration that has often been the dominant concern in federal responses to state and local budget crises: maintaining the ability of states and cities to borrow to build infrastructure and make other investments. It will explain how these three interests - avoiding moral hazard, stimulating the economy during recessions, and preserving state capacity to borrow - interact, laying out a "trilemma" at the core of federal responses to state and local budget crises."