The U.S. intergovernmental grant system generally reflects an appropriate division of labor among different levels of government. However, federal grants do a poor job responding to divergent regional economic and fiscal fortunes. In particular, federal grants are not as responsive as they could be to regional effects of economic shocks or recessions.
In this policy proposal, Tracy Gordon documents the need for a system of federal grants that is better targeted to economic need and more responsive to national or regional economic downturns. To accomplish this dual goal, she proposes adjusting the mechanisms at work in several large grant programs related to Medicaid, federal highway funding, and infrastructure spending. Gordon calls for fixing programs’ matching formulas to be more reflective of economic need. She also proposes making certain programs’ funding operate as an automatic stabilizer based on state-level triggers. Lastly, Gordon considers creating a countercyclical rainy day fund for states.