While Paul Krugman is hardly alone in warning of the counter-stimulative impact of state spending reductions, he has uniquely captured the problem in a phrase: “Fifty Herbert Hoovers.”
Citing several state budget-cutting steps, Krugman notes:

[S]hredding the social safety net at a moment when many more Americans need help isn’t just cruel. It adds to the sense of insecurity that is one important factor driving the economy down.
So why are we doing this to ourselves?
The answer, of course, is that state and local government revenues are plunging along with the economy — and unlike the federal government, lower-level governments can’t borrow their way through the crisis. Partly that’s because these governments, unlike the feds, are subject to balanced-budget rules. But even if they weren’t, running temporary deficits would be difficult. Investors, driven by fear, are refusing to buy anything except federal debt, and those states that can borrow at all are being forced to pay punitive interest rates.

Unsurprisingly, Krugman endorses the idea of including “safety-net” expenditures, infrastructure investments, and expanded educational assistance (all of which could have profound ameliorative effects on state budgets) in the impending stimulus package. He does not, I am pleased to report, endorse no-strings general revenue sharing, which could perversely encourage states to take the very steps he deplores.
But he does go on to raise a really important question that hasn’t been seriously discussed in Washington since the beginning of the Reagan administration: does the current intergovernmental system in this country really make much sense?

As a nation, we don’t believe that our fellow citizens should go without essential health care. Why, then, does a large share of funding for Medicaid come from state governments, which are forced to cut the program precisely when it’s needed most?
An educated population is a national resource. Why, then, is basic education mainly paid for by local governments, which are forced to neglect the next generation every time the economy hits a rough patch?
And why should investments in infrastructure, which will serve the nation for decades, be at the mercy of short-run fluctuations in local budgets?

As a veteran of the New Federalism wars of the early 1980s, I can certainly say that nothing about our system of federal-state-local relations has improved in clarity or rationality since the days when former Gov. Bruce Babbitt spoke of an “intergovernmental omelet of scrambled responsibilities.” As always, necessity is the mother of invention, and perhaps we are due another long-overdue look at how we allocate authority and resources among the different levels of government. This time, I hope progressives will lead, not follow, the debate.