But how? Unlike the feds, states can't simply print money, and all but one of them (Vermont) are constitutionally required to balance their operating budgets. Lacking the national tools of monetary policy and fiscal stimulus — such as token, one-time payments for families and a business-loan program mired in controversy and lack of oversight — what can a state do?
Well, actually, a lot.
Over 20 years ago, I was advising California's then-lieutenant governor, Gray Davis, during his successful run for governor. His political strategists grew concerned at projections of a possible dramatic downturn in the state's economy before the election and asked me to put together what they called an "economic Dunkirk plan": what California could do to turn around an economy facing potential disaster, just as Winston Churchill snatched survival from the jaws of defeat at Dunkirk in 1940. Just as all states, and all Americans, must do now.
I had long forgotten about that plan — fortunately, no recession occurred in the fall of 1998, so my plan disappeared into the depths of my computer's hard drive. But the subject came up recently in conversation with an adviser to a current governor, so I dug it out again (it was written so long ago that it required converting from WordPerfect) and found that it still provides a reasonable framework for how states can stimulate their economies, along with several additional ideas or refinements that I'd toss in nowadays.
These require rethinking in many ways the role and functioning of government, but that is something that COVID-19 is already forcing us to do and which we will need to do more of in the future.
The main thing to understand about economic stimulus of any kind is that it basically just involves borrowing money from the future, when you hopefully won't need it as much because things will be better, and spending it today, when you do need it. Borrowing money today and investing it to generate returns tomorrow is something state governments actually do every day (as opposed to the federal government, which borrows money from the future and spends it largely on yesterday and today).
If you're looking to make investments today that might pay dividends tomorrow, the four goals I laid out 22 years ago for Davis are still good guides today:
- Keep the state's businesses in business so that employment, output and government revenues are maintained.
- Mimic the types of fiscal and monetary stimulus generally implemented at the national level to bolster economic activity.
- Help families hard-pressed by recession maintain household spending and investment to dampen the recessionary spiral and reduce economic pain.
- Reduce state government expenditures in other areas to help fund the necessary tax reductions and spending increases.
I had recommended to Davis a Kentucky program under which firms certified to be in financial trouble received a credit on their income taxes for each worker they employed. A more recent variant allows businesses to deduct their payroll tax payments from their other taxes, effectively achieving the same result. Awarding tax credits solely for existing jobs and for maintaining payroll, up to a certain cap per position, is much better than supposed "job creation" programs that simply reward firms for being in certain favored industries or allow them to claim taxpayer subsidies in return for mere promises. It would be great to make such a change in priorities permanent, but it at least should be implemented for the time being, when the need is job retention.
Governments increasingly will need to think entrepreneurially. States could use various mechanisms to leverage both public- and private-sector dollars, linking entrepreneurs who already have generated jobs to equity capital or directing their public-pension plans to target a small portion of their investment funds to small businesses. In any event, given the legal and increasingly practical restraints on their budgets, it will be essential that state and local governments figure out how to get other investors to put up the cash.
How? First off, through expanded loan-guarantee programs, which most states already operate. (An alternative I've always liked is loss-reserve programs, which create a joint public-private reserve fund to cover losses on loans under the program.) Such programs encourage banks to loan more money at lower interest rates, and no public funds are expended unless a business fails and defaults. These should be targeted to ongoing businesses to maintain existing jobs; the fact that these businesses were surviving before the pandemic hit makes them less likely to fail now.
More broadly, households, not just businesses, need liquidity in this crisis. States can help families in a variety of ways: When Pennsylvania suffered dramatic employment losses in the early 1980s as the steel industry collapsed, for example, the state enacted a Homeowners' Emergency Mortgage Assistance Program that covered the mortgages of workers who were suddenly unemployed on the condition that the money be paid back over a 10-year period at no or low interest. Thousands of Pennsylvanians enrolled, none of them lost their homes, and the program enjoyed a virtually zero percent default rate. Similar efforts could help the temporarily unemployed maintain health insurance or younger Americans reschedule college debt payments.
All these beneficiaries are good bets, with low default rates. Combining these approaches with another existing concept, income-contingent repayment programs — whereby beneficiaries of loans today pay them back based on how well they do financially in the future — could catalyze in the longer term an ecology of mutual investment, in which we as a society take a stake in each other's futures.
All of this adds up to a different conception of the public sector as a market actor — sometimes cooperating with the private sector, sometimes competing with it — to create both better government and better markets. For instance, California Gov. Gavin Newsom's recent proposal that his state begin producing its own generic drugs could be expanded into other areas such as health insurance, as well as those I've already touched on. States could, in fact, function much like private companies and instill needed competition, rather than simply old-fashioned regulation, into the marketplace.
Of course, governments can't be run entirely like businesses. States are judged by not just bottom-line results but also on non-financial outcomes important to society. But they can still act creatively, aggressively and responsibly financially. In fact, if they don't right now, who will?
Governing's opinion columns reflect the views of their authors and not necessarily those of Governing's editors or management.
