18 MISC. PUBLICATION 570, U. S. DEPT. OF AGRICULTURE 



of government. This approach would rely on voluntary cooperation, 

 induced chiefly through educational and planning techniques. Several 

 States have already accumulated substantial reserves for. carrying out 

 post-war public spending programs or have reduced their bonded 

 debts during the war. In other States, changes in laws or constitu- 

 tions would be necessary to permit the accumulation of reserves from 

 taxes, or for later spending more than current tax collections. If the 

 States could be brought into agreement to relate the volume of their 

 spending to some index of employment, so that their expenditures 

 would increase as employment declines and decrease as employment 

 rises, a start in the proper direction would have been made. 



A second method of bringing about coordination in Government 

 spending might be by the Federal Government organizing an im- 

 proved market for State, county, and municipal securities — such as 

 has been done in other countries. Many units of State and local gov- 

 ernment have found it impossible, or extremely expensive, to market 

 bonds for public-investment programs, except during periods of 

 general economic prosperity. 11 



A third method might be to revise the present system of Federal 

 aids to State and local governmental units to the end that such aids 

 might be allocated with much greater attention than at present to : 

 (1) The timing of total public expenditures in relation to the amount 

 of unemployment and (2) the needs of the States. If total public 

 expenditures are to serve as a balancing device in the economy, 

 increasing when private expenditures decline and decreasing as pri- 

 vate spending expands, many of the Federal aids to States may have to 

 be based upon different principles from those now prevailing. The 

 size of those aids which result primarily in the inauguration of new 

 public investment, as distinguished from the continuance of existing 

 services, might well be directly related to an index of production or 

 employment, so that they would vary inversely with the general level 

 of economic activity. In adopting such a principle, attention would 

 also have to be given to variations in need among the States. If such 

 grants for public expenditures are to be effective in checking declin- 

 ing employment promptly, they must be planned and blueprinted in 

 advance. This may be particularly important in maintaining em- 

 ployment through the reconversion period. 



A comprehensive approach to the problem of timing and coordin- 

 ating public expenditures would be concerned, of course, with rev- 



11 One suggestion for improving this situation is that an Inter-Governmental Loan 

 Corporation be established : 



The corporation should be authorized to purchase the securities of state and 

 local governments at a rate of interest which would reflect the cost of borrowing 

 to the federal government plus a carrying charge (including in the computation 

 of the charge, probable losses through defaults). This arrangement would put 

 a ceiling on the cost of borrowing to the state and local governments. Such a 

 ceiling would be important in emergency periods when the private capital market 

 is restricted . . . The Inter-Governmental Loan Corporation cannot and should 

 not answer the underlying economic and governmental needs of declining and 

 unstable communities. A long-run solution for their ills must come from different 

 sources, possibly in the form of consolidation, programs of rehabilitation, indus- 

 trialization, and temporary grants for specific purposes. . . . The Inter-Goverh- 

 mental Loan Corporation should make use of the revolving-fund principle. 

 Typically, securities should not be held for prolonged periods. They should be 

 sold to the market as soon as the market can absorb them, thus making room 

 for the purchase of other issues, particularly in an ensuing depression. This pro- 

 cedure would provide a greater incentive for the Corporation to impose standards 

 of fiscal soundness upon local units and would help to check excessively opti- 

 mistic local programs, since the bonds would eventually have to meet the tests 

 of the market. — State and Local Finance in the National Economy, by Alvin II. 

 Hansen and Harvey S. Terloff, pp. 204, 205. 



