Break Washington’s Stimulus Deadlock And Help City And State Budgets

As Congress returns from its August recess, Republicans remain opposed to a new large economic stimulus package.  In particular, they don’t see the need for aid to city and state budgets, and observers say this is “the largest stumbling block in talks between Democrats and the White House.”  But budget aid is necessary to speed the economic recovery and fight off the Covid recession, and further delays will only hurt the economy.

Non-federal government spending is a major economic sector—about 19% of GDP in 2017.  That’s bigger than sectors like wholesale trade, construction, or hotels and restaurants.   And their combined workforces represent over 13% of all people employed in the nation, more than all manufacturing employees or retail workers. 

But states and cities, unlike the federal government, are required to balance their budgets.  Since raising taxes in a recession is bad both economically and politically, they are coping by reducing spending.  That includes not only direct layoffs, but also reduced contracting and spending.  

Less government spending in turn feeds a negative economic spiral, driven by lost government worker incomes and reduced purchases of private goods and services.  So lower government spending adds up to large direct and indirect job losses.  In June, the Economic Policy Institute estimated that “without aid to state and local governments, 5.3 million workers will likely lose their jobs by the end of 2021.”

We are seeing government revenue declines across the nation.  Most state fiscal years ended on June 30, and their overall budget declines for that fiscal year averaged about 10%.  But for the current fiscal year that began July 1, the Center on Budget and Policy Priorities (CBPP) estimates further average budget reductions of around 20%, double those from last fiscal year.  All revenue sources are falling—sales and income taxes, revenues from oil, gas and energy, property taxes.

We are in danger of repeating the errors of the 2008 “Great Recession,” where falling non-federal spending caused lost output and growth along with damage to essential services ranging from public safety to elder services to education. The Pew Trusts called the post-2008 period for states the “lost decade”, where hundreds of billions in lost revenue meant reduced education spending from kindergarten through college, postponed or cancelled infrastructure repairs and construction, and other losses.

For example, reductions in education spending produced permanent losses in libraries, sports programs, health support services—and teaching.  CBPP’s Nicholas Johnson notes that “when COVID-19 hit, K-12 schools employed 77,000 fewer teachers and other workers even though they were teaching 2 million more children” than before the Great Recession.  Our current budget cuts threaten even greater harm.

Economists of all political persuasions endorse more aid.  In August, the Economic Policy Institute hosted a bipartisan forum where two former chairs of the President’s Council of Economic Advisers—Glenn Hubbard who served under George W. Bush and Jason Furman who worked for Barack Obama—called for more aid to be passed immediately.

So why is there opposition?  More particularly, why are Republicans opposing it?  After all, House Democrats passed a large aid package in mid-May—the HEROES Act—with around $1 trillion for state and local budget assistance.  And House Speaker Nancy. Pelosi (D-CA) has indicated she would reluctantly accept a lower figure.

Some Republicans may think the economy is turning around and further aid isn’t necessary.  But the two main barriers seem to be the overall price tag, and the belief that aid will go disproportionately to Democratic governors and mayors—what Senate Majority Leader Mitch McConnell (R-KY) called earlier this year “blue state bailouts.” 

As columnist Allan Sloane pointed out at the time, McConnell’s home state of Kentucky routinely gets billions more in federal aid than it pays in taxes.  And state budget problems caused by Covid are found in all states, both red and blue ones.

Republicans this week plan to offer a so-called “skinny” stimulus bill with about $500 billion in total new spending.  But as Forbes’ Sarah Hansen reports, it doesn’t include any new state and local funding and may not even get a majority of Republicans to support it, much less any Democrats.

So whether the “skinny” stimulus it is a serious counterproposal that will launch negotiations or just an exercise in face-saving for Republicans remains to be seen. But further delays in authorizing new spending make “skinny” proposals seem more like political cover—hey, I voted for something— than actual economic assistance.

Every passing day lessens the chance that new spending will have any impact on the economy prior to the election.  Some forms of spending, like stimulus checks to households or increased unemployment payments for those already receiving benefits, could get into people’s pockets quickly. To provide any real help to the economy, a significant stimulus must be enacted right away.