Disaster Relief to States and Cities Is Both Right and Good: Part 1 of 2

Posted in: Tax and Economics

Having witnessed decades of shocking cynicism on the part of Republicans, I sometimes think that I can no longer be shocked when they become even more cynical. Senator Mitch McConnell’s decision to label federal aid to states and cities “blue-state bailouts,” however, took cynicism to a new level.

I should state up front that I did not expect to write this column. This is not because what I say here is uninteresting or unimportant, but rather because it is so surprising that Donald Trump and the Republicans have continued to shoot themselves in their collective foot by refusing to provide disaster relief even to the states that they need for purely partisan purposes.

Thus, after I published my most recent column a month ago, if someone had asked me whether aid to states and cities would still be a live question today, I would have predicted that the issue would already have been resolved. Republicans have too much to lose. I assumed back then that by mid-May there would simply be nothing left to say about this important issue.

But again, the cynicism of McConnell and his party has not lost its ability to surprise.

As it turns out, in fact, there is now so much to say about sub-federal relief that this has become a two-part column. In Part 1 today, I will look at the economic terrain and the lack of arguments by Republicans who oppose federal revenue sharing with states and cities. Next week’s Part 2 will explain and endorse a proposal to sidestep Congress and have the Federal Reserve save the states and cities (and all of us) from disaster.

The Economic Background

In my decades as an economist, I have as a matter of course looked at thousands of graphs, tables, and so on. Like many economists, I have studied extreme situations like the Great Depression, the “panics” of the nineteenth and early twentieth centuries, the German hyperinflation in the pre-Hitler era, and so on. But most of the time, we look at data and expect them to fall into a predictable range. We know what unusually good news looks like, what is ho-hum, and what very bad news looks like.

That has all changed. Nothing could have prepared me to look at the economic data from the current disaster, because it is so extraordinary. To use just one example, news organizations have understandably been reporting on the weekly filings for unemployment insurance claims, correctly describing them as record-setting.

But it is especially interesting when jaded cynics like economists say “wow,” and this unfortunately is a “WOW!!” moment. Readers who click on this link will see a graph showing the weekly unemployment claims data through March 21, as part of a column titled: “A record 3.3 million Americans have filed unemployment claims. What does that look like?”

To a layperson, the graph might be confusing. There is a line that looks like an EKG readout, but at the right end of the graph it suddenly becomes a vertical line. Indeed, the vertical line looks as if it might actually be the vertical axis. To anyone, therefore, that graph looks weird.

To an economist, however, that graph looks not just weird but somehow wrong. If a student or colleague had ever sent me such a graph in the past, I would have immediately assumed that they had made a data-entry error or that their graphing software had become glitchy. Graphs of economic data simply do not look like that.

And it is not merely a visual phenomenon. The highest weekly total for unemployment claims during the recent Great Recession was 665,000 in March 2009, and the pre-pandemic all-time high was 695,000 in October 1982. This means that the 3.3 million claims in the March 21 report was almost five times higher than the worst week ever. Five times higher.

From that date, things have only gotten worse. Every weekly report since March 21 has shown more than three million claims, with the March 28 and April 4 reports reflecting more than six and a half million new claims each week. The numbers have trended down slightly since then, but even when they drop below two million, they will still be almost triple the pre-pandemic worst weeks’ filings, and even that will only be because there are not enough people left to lay off. (That is not literally true, of course, because thankfully 80 percent of the workforce is still employed, but most of those remaining cannot or will not be fired.)

My point is that these are not merely big numbers. They are unimaginably big, beyond anything that even the most contrarian economist would have been willing to venture if asked to predict the worst-case scenario in an economic cataclysm.

Because of this, I have written columns here on Verdict and on Dorf on Law arguing that we need to do more than we ever thought necessary to save the economy. People are understandably confused by the idea that running huge deficits is a good and important thing, but that is the only thing that will prevent this shocking downturn from becoming even deeper and lasting for years.

Desperate times call for desperate measures, and these are truly desperate times.

The States and Cities Are Essential to Surviving This Crisis

State and local governments combined to employ more than 16 million Americans in 2018, or roughly one in ten workers. Those include firefighters, teachers, police, trash collectors, utility workers, health departments, and so on who keep the country humming without much fanfare—and often in spite of hostility from the people they serve. (Try being a “meter maid” for a day.)

These are, of course, also among the most essential employees out there. Beyond not wanting to add millions to the already historic numbers or people who have lost their jobs—which would be disastrous not only for those state and local employees themselves but also for the private businesses that rely on those government workers to buy groceries, pay rent, and so on—we should not want these workers in particular to be told to stop doing their important work.

Even so, states are already cutting back Medicaid payments (because that program is largely state-funded) even in the midst of a public health crisis. If it reaches the point where they have to cut even more spending and lay off employees, public safety will be further endangered.

This is why it is so odd that McConnell and Trump have turned this situation into a partisan showdown, convincing Republicans to oppose helping states and cities that are in crisis. Trump is in trouble politically even in Texas and Florida (my new home state, and nominally Trump’s domicile as well), but he insists on acting as if he is sticking it only to states like New York and Illinois that will not vote for him in 2020. What are the Republicans thinking?

Republicans and the Political Uses of Anti-Deficit Outrage

As I noted in my most recent Verdict column, the Republicans have long been willing to cynically foment fear-mongering about the federal deficit and debt. Even though they are complete hypocrites in happily increasing deficits when it suits them, they are happiest when they can oppose “government spending,” and because they are against taxes of all kinds, pretending to be against deficits is their way of hacking away at government at all levels.

But surely, one might say, this truly once-in-a-century moment should allow Republicans—who, again, have a great deal to lose politically if they continue to allow states and cities to suffer—to make an exception. One can be against big government but, say, be in favor of having NASA destroy a meteor that is hurtling toward Earth, right?

Perhaps not. A recent Washington Post article described the panic setting in among Republicans about the large amounts of spending that they have approved to fight this even larger problem. An aide to former House Speaker John Boehner and failed presidential candidate Jeb Bush put it this way:

Concerns about federal deficits and debts are being swamped by the scale of the crisis right now, but when our economy rebounds, they will return as a serious issue for voters. As we saw after 2008 and 2009, paroxysms of federal spending tend to spawn ferocious blowback.

Let us be clear about what this guy is saying here. The argument is not that we have actually done enough to solve the problem—or even to slow it down significantly—but that at some point when things get better, some voters will be angry that the government spent the money necessary to address the crisis.

As matter of pure prognostication, that is surely correct. Some people will go to their grave insisting that the Great Recession was not so bad and that the 2009-10 stimulus package did nothing to soften its blow, and they will continue to believe so no matter how wrong they are. So yes, there are people who will start screaming about deficits and debt and make political noise whenever they can.

But the Tea Party crowd to which this Republican operative refers was egged on by the Republican Party in the first place. Although it is true that some Republicans were surprised to be pulled under by that movement (former Senator Bob Bennett, former House Majority Leader Eric Cantor, and so on), the Republicans used this ferocity to retake the House in 2010 and the Senate in 2014. If Republicans in a few years want to play footsie with extremists again, they might find another cynical way to exploit faux-populist rage. They certainly have the track record.

More to the point, this is in no way an argument not to engage in more spending today—and it is most definitely not an argument against merely allowing states and cities to hold the line against catastrophic cuts—because doing what is necessary to fix a problem gives these extremists the luxury to carp about the people who actually did the fixing. The only reason people could indulge in anti-government zealotry in 2010 and especially 2014 was because the Obama administration and the Federal Reserve had saved the economy from sliding into a second Great Depression.

If Republicans are resisting more rescue packages because of fear of political repercussions, then, they are seriously misreading their own success stories. And doing nothing now would risk much more serious repercussions than a few people chanting about debt, because we could be looking at years of unrest if states and cities are not able to maintain order and to keep the underpinnings of the economy reasonably strong.

The Bogus “Moral Hazard” Argument Against Assisting States and Cities

The worst argument against assisting states and cities, however, is more specific and actually rather peculiar. Although I agree with the point that New York Governor Andrew Cuomo has made again and again, which is that liberal states systematically “bail out” conservative states by paying the money that the federal government then transfers to red-state citizens and businesses, there is something even more insidious—and ridiculous—in the arguments that McConnell and others have been making.

Republicans claim that liberal states are now looking for a federal bailout to prevent them from facing the consequences of their bad decisions in the past, specifically that a few of those blue states might soon have trouble paying for retired public employees’ pension benefits. Illinois is the poster child of this, even though that state was run by a Republican governor when its problems arose.

That inconvenient fact aside, however, what is McConnell saying? As an initial matter, he seems to be saying that helping out a state will encourage more bad behavior in the future, or what economists call “moral hazard.” That is, just as we do not give a profligate teenager money to cover a foolish decision, states must “learn their lesson” by not being bailed out.

Even a recalcitrant teenager, however, knows the difference between being in a bit of trouble and being in the direst of straits. “Dad, if you don’t replace the money that I blew on candy, then I won’t be able to go on the class trip,” is different from, “Dad, I’m in hock to a loan shark who is threatening to kill me and everyone in the family if I don’t pay.” Even being angry about the teenager’s bad decisions does not mean that the parent should do nothing in the latter situation, because it is possible to tell him convincingly that something this extreme is a one-time-only exception.

But that framing of the question gives McConnell far too much credit. After all, his real complaint seems to be that some middle-class workers have it too good, that is, that teachers and police officers and health care professionals have been promised excessively generous retirement benefits. Why is that bad, especially when state and local employees are paid less than similarly qualified employees in the private sector—and when McConnell had no problem making the biggest relief bill so far a “tax-break bonanza for the rich”? Apparently, middle-class workers are not worthy of McConnell’s consideration.

We Can Make the States and Cities Whole, Full Stop

Finally, however, consider just how wrong it is to try to say that states and cities would be bailed out of these supposedly bad pension decisions. What we know is that every government in the country is collecting much less in revenues than otherwise, because of the terrible economy. We also know that states and cities have much higher expenses due to the pandemic.

State and city governments must forecast their revenues and expenditures each year, because they know that they are legally prohibited from borrowing to cover operating expenses. This means that if State X expected to collect $100 billion in revenues and to spend that $100 billion on the variety of services that states provide, but the pandemic reduces revenues to $70 billion while it increases spending to $125 billion, the state is in a $55 billion hole that it did not anticipate—and that has nothing to do with pensions.

This means that it is possible to structure a relief bill to make up the difference between what each government planned and what actually happened, without affecting any other decisions. If State X’s expenditures included some amount of money for pensions but the pension fund was otherwise in long-term deficit, giving it $55 billion this year does not relieve it of its long-term obligations. All it does is say that State X will be made whole—nothing more and nothing less—by the federal government this year, allowing the state to continue to do what it would otherwise have done if the crisis had never hit. If the state was in long-term trouble before the crisis, it will still be in long-term trouble even after it receives disaster relief.

Federal aid to states and cities, then, is good economics and good politics. It does right by the people (very much including the people who do not work for state or city governments), and it does not reward supposedly irresponsible decisions. The only thing stopping this from happening is pure Republican cynicism.

In Part 2 of this column, I will ask what to do if the Republicans continue to self-destruct and inflict ideologically motivated harm on states, cities, and all Americans. The good news is that this is a problem with a sensible workaround. Stay tuned.

Comments are closed.