Washington’s failure today to provide prompt state budget aid is a three-pronged massive mistake: for battling the virus, for providing essential services, and for limiting economic damage.
Maryland's Republican Governor Larry Hogan, chair of the National Governors Association and ... [+]
As bad economic news continues to accumulate, with economists now predicting nearly 20 million lost jobs and near-Depression levels of unemployment, Congress has just approved hundreds of billions more for small business, but without significant funding for state and local governments. But if we want progress in public health, provision of essential services, and a boost to the failing economy, we must get more money to them—fast.
Among governors, this isn’t a partisan issue. Maryland’s Republican governor Larry Hogan and New York Democrat Andrew Cuomo are the “dynamic duo” heading the National Governors Association, and they are united in calling for up to $500 billion for states. Although there’s no commitment to that amount, President Trump now favors something for states, saying “That will probably be our next negotiation, but I’m in favor of it.”
But failing to approve state funding today is a major mistake. Immediate funding for states would provide a trifecta of benefits: progress against the virus, supporting essential government services, and slowing the recession.
For public health, states and cities are the ones fighting the virus. Increased state funding is essential, from emergency rooms to protecting frontline workers to virus testing. But states are running out of money and forced to bid against each other for essential equipment, because the federal government has abdicated its necessary leadership role.
Other essential services—police, elder and child care, education, transportation and sanitation— also are threatened because of budget crises due to falling tax revenues. And the country needs massive increases in testing, funded and supported by the federal government, if we are to safely reopen the economy. Maine’s independent Senator Angus King has called the federal testing failure a “dereliction of duty.”
But state and local governments don’t just provide essential services. They are big employers. In February, before the virus started to hit the economy, state and local governments directly employed over 19 million people, 13 percent of the nation’s employment.
And they indirectly employ millions more—in education, in health care, and by funding a vast array of nonprofit organizations which provide not only essential services but also jobs, ranging from social services to childcare to job training. They also give contracts to millions of small and large business who sell them goods and services, from information technology to toilet paper (when they can find it!) to filling potholes to medical equipment and services.
This makes state and local government a huge industry in our economy. In 2018, they spent around $2.8 trillion—around 14% of GDP. This is a bigger share of GDP than airlines or restaurants, although we often don’t think of these governments as an industry in need of assistance. But if their spending slumps, it will put a major drag on the economy, because states (unlike the federal government) can’t run deficits. Economist Paul Krugman likens the state role in downturns to “50 Herbert Hoovers,” cutting spending and jobs just when the economy most needs them.
So state and local governments are our first defense in public health. They provide public services essential to daily life and a reopened economy. And they are a big share of GDP. Why then aren’t Congress and the Trump Administration sending them more money? New Jersey Governor Phil Murphy expressed the frustration felt by many governors, saying that the lack of federal aid means states “will be going into this fight with one hand tied behind our back.”
One problem is federalism and how it affects Congressional spending. Although states like New Jersey and New York have the most virus cases and the biggest immediate public health needs, the power of smaller states (especially in the Senate) means aid goes disproportionately to them, even when they need it less. The initial $100 billion allocated to states for health care uses outdated formulas, resulting in states like Nebraska and Minnesota (which so far have light caseloads) getting over $300,000 per COVID case while hard-hit states like New York and New Jersey only get around $12,000 per case.
Second, some pundits are speculating that states with Democratic governors are in worse fiscal shape than Republican-led ones, so any withholding of aid will hurt Democrats more, allowing Trump to blame them for policy failures. But pre-COVID data showed that many states, led by Democrats and Republicans alike, were in reasonable fiscal shape (as measured by their rainy-day funds) and that fiscal pressures weren’t obviously tied to only one party.
Despite bipartisan gubernatorial support for getting more money to their states, some analysts speculate that the Administration’s desire to rapidly reopen the economy works against more state aid. Politico claims that Administration officials “believe if Congress keeps cutting checks for state and local governments, they will be disincentivized to open up their economies.” It is true that many Republican governors are more enthusiastic than Democratic ones about reopening their economies.
Even though today’s legislation did not include significant state and local aid, there is optimistic talk about including it in a future bill. But that could be offset by growing exhaustion in Congress for enacting multibillion dollar spending packages without tax increases or offsetting spending cuts, so there’s no guarantee it will happen.
For now, states must go it alone. This means increased risks to all of us from the virus, threats to essential public services, and a greater possibility of a much deeper recession. Washington’s failure to provide prompt state budget aid is a three-pronged massive mistake.
