Most state governments in the United States operate under constitution

Most state governments in the United States operate under constitutional provisions that severely restrict expenditures financed by borrowing.

Suppose this were to change, so that state governments’ access to credit markets was no different from the federal government. What consequences would you predict for the nation’s aggregate debt burden?

ANSWER

The aggregate debt burden would probably increase, but not by much, and would be distributed more efficiently. The discipline of credit markets (cost of borrowing) would encourage all state governments to borrow and spend wisely. This discipline is lacking with federal grants in aid, and somewhat lacking for the U.S. Treasury, because of the presumed zero risk of default. Decentralization of entitlement spending would allow streamlining of the federal budget and reduced federal borrowing.