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BPEA Article

An Econometric Examination of the New Federalism


PRESIDENT REAGAN unveiled a set of proposals in February 1982 for fundamentally altering U.S. federal-state fiscal relations. He first proposed a massive program "swap" whereby the federal government would take over sole responsibility for the large and rapidly growing medicaid program and the states would assume sole responsibility for the main U. S. income support programs-food stamps and aid to families with dependent children (AFDC). He also proposed various ways to loosen strings heretofore accompanying categorical grants-many grants would be converted from categorical to block-grant form (continuing a trend begun a decade earlier in the Nixon administration), and many categorical and block grants would then be placed in a trust fund, the financial responsibility for which would eventually revert to state governments. Finally, he proposed rather sharp cutbacks in all forms of intergovernmental aid, cutbacks that would normally be front page news but in fact were upstaged by the more fundamental structural proposals.


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