Nobody can argue that the states and their subdivisions are facing a fiscal double whammy. The COVID-19 pandemic response has forced vast numbers of Americans to stay home, stop working and stop spending. The almost instantaneous loss of income- and sales-tax revenues is truly unprecedented.
At the same time, the nation’s social-services system is mostly administered locally. State and local spending for welfare benefits, unemployment insurance, Medicaid and other safety-net programs increases automatically in recessions. That’s why economists distinguish between the counter-cyclical dynamic of the federal budget, which offsets recessions, and the inherently pro-cyclical nature of state and local budget cutbacks, which only throw salt on the economy’s wounds. In the Great Depression of the 1930s, the retrenchment of state and local governments offset all of FDR’s New Deal spending programs. Overall, government stimulus to the economy back then was a zero.
Since then, however, the federal government’s share of the economy has expanded dramatically, so the math no longer works the same. But almost every political economist would agree that in times like these federal assistance must include aid to states as part of the public sector’s fiscal firefighting. What Congress must grapple with is “how much is enough?” and “how much is too much?”
That’s where opinions will differ. It’s not just a matter of ideology and partisan politics, although those surely will come into play. A huge obstacle to logical legislation is that nobody can tell us how long this pandemic will last, how long people will be required to stay home, how long there will be massive unemployment, and when consumers will resume spending beyond their grocery stores and Amazon.
Two days before the governors’ $500 billion press release, I tried to size up one part of the breadbox, the revenue shortfall, in a Governing column that focused on avoiding state and local government layoffs. The important metric that I presented in that analysis stands today: The total revenue from state and local government sales and income taxes before this pandemic was running at about $1 trillion annually. Hence, it makes no sense to fiscal conservatives that the federal government should be expected to fork over half of a full year’s cyclical tax revenue to the states when we do not expect the entire economy to be shut all the way down to half-throttle for 12 months.
My guesstimate at the time, when GDP was running about 30 percent below trend, was that the national revenue shortfall for the states and localities would run somewhere between $100 billion and $250 billion, depending on the length and depth of the pandemic recession. What that column did not discuss was the other whammy: the spending surge that is now required of the states and counties in particular. As with the revenue shortfall, the size and duration of the counter-cyclical spending now automatically required of this half of the federalist system cannot be predicted accurately, but we will soon have some data points once the states start reporting the numbers on unemployment, Medicaid and welfare claims.
The point here is not to dispute the NGA, which has far better data than I ever will, but to suggest that a congressional authorization and appropriation should be structured to secure the votes of fiscal conservatives. After my prior column was posted, a reader emailed me. He is a “chamber of commerce” county commissioner who thinks that states and local governments must tighten their belts at the same time as private citizens. He predicts an anti-government backlash if we “socialize everything” at the local-government level.
Whether or not one agrees with that premise, political pragmatism requires that congressional Democrats and that the NGA and other public-sector associations lobbying the Hill acknowledge that sentiment. Accordingly, I encourage the advocates for counter-cyclical assistance to the states (and through them, to their local governments and other subdivisions) to:
- Present hard empirical data on the need to congressional-committee staffs as soon as possible. This includes both tax shortfalls and the increased volumes and costs of social services and public assistance. The double whammy must be quantified with the most recent monthly data as it becomes available. The financial professional associations are geared up to help, right now.
- Request authorization for a full year’s worth of federal aid, but include a release mechanism that shoots out a smaller number (such as $150 billion) quickly to avoid public-sector layoffs but rations out the remainder on a monthly or quarterly basis using hard data on GDP, safety-net expenditures and revenue shortfalls as trigger points.
- Acknowledge that if somehow the economy gets back on its feet as quickly as the White House asserts, the consequence would be controversial “windfall” intergovernmental-aid payments of more than is actually necessary. That political black eye would last for a generation.
Governing's opinion columns reflect the views of their authors and not necessarily those of Governing editors or management.
