02/06/2009 05:12 am ET | Updated May 25, 2011

State Money: Obama Set To Battle GOP

Following a series of meetings with lawmakers on Monday, President-elect Barack Obama has seemingly bolstered even further his chance of passing a massive economic stimulus package shortly after taking office.

Republicans in the Senate have raised concerns about hasty passage of a bill that contains sizable domestic spending. But the Obama team largely pacified these concerns on Sunday, when they said that the stimulus would include a heavy portion of tax cuts for the middle class and would not likely pass the president's desk during his first days in office.

Now, following Monday's meetings, Republicans in Washington have found a new cause: limiting the amount of federal cash sent to ailing states.

Over the past few days, Senate Minority Leader Mitch McConnell has pushed the idea that any money given to states facing budget shortfalls be in the form of loans rather than grants. It is a softening of the previous GOP stance that no money should be given to the states at all. But it still puts the party at odds with the incoming administration.

Here's why. Economists in touch with the transition team argue that if job creation or job loss prevention is the ultimate goal of the next president, state aid must be one of the chief vehicles. Without meeting their budgets, states and localities will have to cut payrolls sharply. Policeman, teachers, social workers and other employees will see their jobs slashed. According to the Center on Budget and Policy Priorities, "At least 44 states faced or are facing shortfalls in their budgets for this and/or next year." This past week, meanwhile, a group of Democratic governors urged Obama to pass a $1 trillion stimulus -- far larger than that which has been anticipated -- to help stem the fiscal bleeding.

Hoping to split the difference between state needs and budgetary prudence, GOP officials have looked to loans over grants. But even here, Democrats are likely to object.

"Republicans feel they can't stand in the way of assistance to their own states, but want to limit the credit Obama gets from them," explained Robert Shapiro, formerly the undersecretary of commerce in the Clinton administration and currently the head of Sonecon, LLC, an economic consulting firm. "Loans have to be paid back with interest, which would force states to make even larger and more sustained cutbacks later."

Shapiro suggested that the GOP was trying to impose a mandate it doesn't have. "Conservatives, having lost the argument to cut back government at the national level -- under a conservative Republican president and Congress, no less -- now want to use the federal government to drive long-term cutbacks in state and local government. For these conservatives, elections have no consequences -- unless, of course, they win them!"

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