When recessions hit, states and municipalities always suffer revenue losses and often resort to layoffs that exacerbate the economic downturn. To offset that fiscal drag, Congress has sensibly sent federal dollars to the states. During the COVID-19 pandemic, for example, Congress appropriated $350 billion in CARES Act aid to states and localities, followed later by the massive infrastructure spending in what was wistfully called the Inflation Reduction Act. But critics are now pointing to that countercyclical largesse as part of the inflation problem that continues to alienate households and voters.
It’s such an easy argument for free-marketers and budget hawks to make: that intergovernmental aid doesn’t goose the economy in time and fuels inflation when the economy rebounds. And there are now-proven alternative ways to distribute federal “helicopter money” to quickly inject federal fiscal stimulus directly into voting consumers’ pockets without spending taxpayer money after it’s no longer timely to spur an economic recovery. So, the argument goes, why risk sluggish, untimely inflationary outlays? If state and local officials fail to devise strategies to counter that argument before the next recession, they will have only themselves to blame for getting the short straw.
This issue is what political scientists and public finance economists call the “policy-implementation lag.” Now that politicians have learned that it’s quicker and easier to infuse federal cash into a flailing economy by sending payments directly to households as they did with the 2020 CARES Act and the 2021 American Rescue Plan, governors and mayors will have a much tougher job in pleading for fiscal intergovernmental hand-me-downs whenever the next business-cycle recession arises.
Although the federal infrastructure funding included in the Inflation Reduction Act was not primarily designed to be countercyclical, it’s the kind of public works spending that policy wonks would associate with Keynesian-New Deal-style injections of government money into a weak economy. The sluggish rollout of that program may be a tribute to careful and diligent policy implementation, but as a countercyclical fiscal injection it’s arguably a timing failure, given that money is being spent well after the economy recovered from the COVID-19 recession. Although that tardiness in implementation may prove fortuitous if America’s consumption-based economy falters in coming months, that would be dumb luck and nothing more.
Almost five decades ago I was working as a city finance director in Michigan when the Carter administration tried to offset an economic slump with countercyclical aid to states and municipalities. It didn’t take long for me to see that the lengthy process — securing congressional approval, formulating federal regulations, establishing criteria for awarding grants, getting localities to submit proposals, making awards selectively on their merits, and then bidding out the contracts — was doomed from the start if the goal was to inject federal money into the economy while it was still in a slump. Instead, too many of the projects belatedly came onstream just in time to further fuel inflation, foreshadowing the nation’s recent experience.
To that end, the national policy and professional associations representing states, localities and the public finance community now need to work quickly with academic researchers to identify the weakest links in the chain of intergovernmental fiscal stimulus. Just as engineers in a manufacturing process devote countless hours to improving speed and efficiency, our public policy and finance experts must do the same to reduce the policy implementation lag and thereby undergird the political case for top-down intergovernmental countercyclical aid each time the economy is sinking.
New Ground Rules
Beginning with Congress itself, the logical place to start is with the language used in authorizing legislation. Even if there is no recession in sight, the first order of business in 2025 should be a statutory provision for federal agencies to establish standby regulatory authority to fast-track certain countercyclical grant awards to states immediately following a congressional appropriation.
Likewise, the standing authorization for fast-track awards should include a rainy-day fund requirement: Recipients should have to establish, maintain and deploy a recession reserve fund of their own in a realistic proportion to federal aid to encourage prudent financial management and eliminate perverse fiscal incentives for spendthrift local politicians to expect federal bailouts every time. Lobbyists call this kind of legislation “laying track.”
Such ground rules would send clear signals to state and local officials, avoiding “moral hazard” by rewarding sound financial management and accelerating intergovernmental response times during a recession. Congress should help those who help themselves.
When a recession does arise that justifies a new round of aid to states and municipalities, Congress should establish explicit fast-track timetables and termination provisions that reduce the process delays and claw back federal funds once the economy has clearly kicked back into gear. Even the sharpest critics of intergovernmental aid should support these process improvements and guardrails.
When states are awarded federal funds by formula as replacement offsets of recession-shrunk income and sales taxes, they should be required to correspondingly pass along to localities the same percentage of state tax revenues that they historically or statutorily allocate downstream, and not use the federal funds to cut state taxes or pad their own payrolls. This provision will make the entire process equitable, swifter, simpler and more predictable. It should become a standard feature in all countercyclical intergovernmental aid bills.
Process Accelerators
Another gear that needs less gum in the works is the grant approval process. A significant portion of federal aid to states can be awarded by formula under block grants that extract Washington bureaucrats from the approval maze. This provision will always be disliked by Beltway politicians who want to put their thumbs on the scales in making awards, but if the goal is to quickly inject money into the economy, then it’s smarter to let governors make quick, use-it-or-lose-it decisions according to reasonable federal rules of the road.
This is especially true for allocating money to the localities, including some large-city carve-outs in light of the inevitable political friction between some center cities and their rural-dominated state capitols. Here, the “Big 7” policy organizations can play a key role in working out a few first principles to streamline the approval process from top to bottom.
To reduce the time lag in submitting and approving discretionary grant awards, it’s now likely that artificial intelligence systems can cut the processing time measurably. State and local officials could be provided a nationally standardized AI tool that enables them to quickly compile an application and receive a preliminary, apolitical and objective rating to help them understand what they must do to improve their odds of eventual approval — or that their ideas are simply doomed to fail from the outset and not worth pursuing further.
Likewise, an AI tool could help evaluators at the federal and state level make quicker decisions, while helping to flesh out the critical path points and most likely economic impacts. Similarly, the bidding process for capital projects could be hastened by using AI templates to formulate specifications and requirements and to review documents and contractor proposals. The public finance and public works professional communities can play a pivotal role in the design and oversight of such AI tools, without waiting for a bill to clear Congress.
The standby federal regulatory authority suggested earlier should include a requirement that proposed countercyclical construction projects already be on file at the state or local level, with enough preliminary engineering work and governing-body and regulatory approvals completed to commence a bidding process within, say, 45 days of grant awards. Again, these work papers could be ingested in an AI-assisted application form and grant-award processing system.
A New Cutoff Valve
Finally, the entire system needs a timekeeper rule, with a neutral, nonpartisan ombudsman designated to turn off the faucet once it becomes empirically evident that the economy has mended enough to regain its mojo — the point at which spending additional federal money is more likely to fuel inflation than to combat unemployment.
Federal funding for expanded unemployment insurance and workforce continuation is far easier to curtail in this scenario than construction projects, if done properly: Never again should we see TV ads for belated, disingenuous “paycheck protection” applications. And there is no reason that public works project proposals should not include an explicit backup plan for local funding in the event the project gets delayed and federal commitments are withdrawn.
For every suggestion offered here, there will be arguments that it cannot be done or that it’s a solution looking for a problem. That’s where some credible academic research and professional-association recommendations can be immensely helpful. Otherwise, we’re just back to pork-barrel politics with mounting pushback from political cranks and fiscal super-hawks when the next recession takes hold.
Governing's opinion columns reflect the views of their authors and not necessarily those of Governing's editors or management.
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