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

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Will Republicans continue to block federal disaster relief to America’s states and cities? It makes no sense, but having chosen to frame it as a partisan battle, Donald Trump and his enablers appear determined to do nothing to stop a completely avoidable crisis in the states. Indeed, they seem positively eager to blunder into a mistake that will make our existing public health and economic situations even more catastrophic.

In Part 1 of this two-part series of columns, I dissected the arguments from Trump, Senate Majority Leader Mitch McConnell, and other Republicans who have said that federal aid to sub-federal governments amounts to “blue-state bailouts.” These Republicans claim that states led by Democratic governors have overspent in the past and are now looking for a handout from the rest of the country to paper over their previous bad decisions.

This is nonsense on multiple levels, in particular because it is possible—actually it is easy—to do no more than put states back into the fiscal position that they would have been in had there been no pandemic. Whatever bad decisions that any state did or did not make are easily separable from the effects of the current crisis, which reduces states’ revenues and increases their expenses for health care and other public necessities.

Here in Part 2, I return first to McConnell’s claim that the reason Democratic-led states are in trouble is that they are providing excessively generous pensions to retirees who worked for state and local governments. I will then describe an important workaround, first described by Professor Darien Shanske of the University of California at Davis, that would allow the Federal Reserve to give assistance to states and cities without interference from Republicans in the Senate or the White House.

Punishing One’s Own Troops: How Could a Crisis of This Magnitude Not Call for All Hands on Deck?

Let us think for a moment about the argument that McConnell and his allies are making. They say in essence that blue states and cities are poorly run, so it would set a bad precedent to give them money. How else will they ever learn to be fiscally provident, like the virtuous and spartan red states?

Trump likes to talk about being a wartime president and forcing Americans to be “warriors,” so let us think about this in the context of a military metaphor. Typically, training of new soldiers, sailors, and so on is designed to toughen up the soft and weak recruits into a “lean, mean, fighting machine.”

In normal times, such an approach makes sense, because the military can be selective about who serves. Having weak links in the ranks is a bad idea, and washing people out is necessary. Coddling weakness, the thinking goes, merely encourages more weakness and endangers everyone else.

Even in normal times, of course, that approach sometimes needs to be tweaked. In the last decade or so, the U.S. military had to loosen its requirements regarding obesity and other physical standards, simply because there were too few young Americans who could meet the older standards.

And when there is a real crisis, it becomes compellingly necessary to press even the marginal potential soldiers into service. Do we say, “Hey, you can’t do as many pushups as the rest of us, so you can’t help us repel the oncoming assault from thousands of enemy soldiers”? Of course not. As former Defense Secretary Donald Rumsfeld infamously said (in a very bad context): “You go to war with the Army you have—not the Army you might wish you have.”

The McConnell approach to relief to states and cities essentially assumes that we are in normal times and that there are no unintended consequences from a program of toughening people up. The problem is that cutting off the states and cities and leaving them to suffer for their supposed irresponsibility will hurt everyone in every state and city, because when states cut services and lay off workers, that has direct impacts and ripple effects that harm us all, everywhere in the country—a country that already has Depression-level unemployment and is getting worse every day.

Moreover, the presumption that the Republican-led states are the equivalent of the Navy SEALs, Army Rangers, and Green Berets is silly. It is more accurate to think of them as the unqualified, sickly officers (often children) who were put in charge of European armies throughout much of history because they were aristocrats.

It is not, in other words, chiseled GI Joe types looking in dismay at “worthless and weak” recruits so much as it is self-deluded blowhards yelling at the help to work harder. Or, to put it in current terms, it is Donald Trump and Jared Kushner telling defenseless people to suck it up and get back to work in the face of a deadly virus.

Indeed, this is the best way to think about New York governor Andrew Cuomo’s retort to McConnell, in which Cuomo pointed out that the blue states have been bailing out red states forever. It is annoying to tell other people to buck up and try harder, but it is especially creepy to do so when one is among the lucky few who is already being coddled by the very people being blamed.

The Unspoken Agenda: Union Bashing

So why is McConnell leading the charge to block aid to states and cities, especially given that his party’s electoral prospects will become significantly worse if their pseudo-tough-love approach makes the health crisis worse and the economy weaker?

Why, in particular, take this stand when it is so obvious that the red states are not the models of perseverance and virtue that McConnell pretends them to be? And finally, why would Republicans do this when their “brand” is all about empowering states against imagined federal overreach?

The answer, to a surprising degree, is in Republicans’ hatred for labor unions. In Part 1, I noted that McConnell’s venomous attitude toward pensions for former public employees was an expression of his open hostility to middle-class workers. This is especially true because the deal that has always accompanied working in the public sector is for workers to receive relatively low salaries compared to what they could earn in the private sector but to balance that with better benefits, including pension benefits. The deal is: less compensation now, more compensation later. McConnell hates the second half of that deal.

But it is not simply that public employees have been given relatively large pensions. It is that they secured those pensions through collective bargaining. That is, even as Republicans have largely won their decades-long war against labor unions in the private sector (allowing most private companies to quickly drop their pension plans), the public sector is the one remaining stronghold of workers’ power.

This issue arose in 2018’s Janus v. AFSCME case, in which the Supreme Court’s five conservatives (including an especially enthusiastic Anthony Kennedy in his final term) reversed a decades-long precedent and disallowed requirements that all workers pay “agency fees” to cover a union’s activities that specifically helped the workers. In other words, no one was being forced to pay to support the unions’ political activities but only to cover the costs of representing and protecting workers’ interests (including securing better pensions).

Janus was a huge win for the conservative movement, because the result is to undermine unions in general, making them less likely to survive. It was a political hit job carried out by the extreme conservative majority on the Supreme Court.

When McConnell attacks some states for having committed to providing employees with a dignified retirement, therefore, he is not attacking the federalist idea that states are superior to the federal government. He is saying that some states are providing those benefits because of successful representation by unions, and those unions’ political arms are largely opposed to McConnell and his colleagues. Attacking state employees is a Republican imperative, it seems.

It is not, in other words, the typical “states’ rights” rhetoric that we are hearing from Republicans: feds bad, states good. It is simply a hurt-your-enemies-when-you-can approach: unions bad, cutting states’ budgets good.

The Way Out: The Fed to the Rescue

As I have noted above, all of the reasons that McConnell, Trump, and other Republicans have offered to try to bleed out state and local governments should—and indeed probably will—ultimately yield to reality. After all the talk about having spent too much money already and putting a “pause” on further disaster relief, my guess is that there is still better than a 50-50 chance that Republicans in Washington will grudgingly bail out their own governors and will have to help all states and cities to do so.

Even so, 50-50 is far below a certainty, and it should have happened already. While we wait to see whether, when, and how the Republicans capitulate, what other options are there?

It turns out that there is one powerful agency of government that was designed to be independent of political interference and—unlike, say, the Justice Department—continues to be run competently and with a largely non-ideological agenda. That agency is the Federal Reserve, the central bank of the United States. The Fed has already cut interest rates essentially to zero, and (as it did during the Great Recession a decade ago) it is continuing to try to come up with extraordinary measures to meet these extraordinary times.

Darien Shanske, a professor specializing in tax law at UC Davis, laid out a plan in an April 20 essay on Medium: “The Fed Can and Should Help States and Localities Right Now.” Professor Shanske notes that the Fed is already lending the necessary money to the states (roughly $500 billion in total at this point), but unfortunately that money will come due in two years—and anyone who thinks that the states will be able to repay that money two years from now is living in a fantasy land (my words, not Shanske’s). The loan program might stretch out the state’s budget cuts, which is a good thing, but two years is not nearly good enough.

Shanske points out that Section 13 of the Federal Reserve Act allows the Fed to lend money to states for any amount of time, but the Secretary of the Treasury must approve such loans. Trump’s man at Treasury, Steve Mnuchin, has in no way shown any willingness to stand up to his boss in favor of what is right.

Luckily, there is a Plan B. Under Section 14 of the Act, “the Fed can commit to re-purchasing these notes every six months for twenty years. … Further, the Fed can warn that, once the crisis is over, it will permit only steadily declining principal to be carried over so as to create a kind of amortization schedule.” Shanske even helpfully notes: “The Fed can also devise rules so that the notes only fund operating deficits and not, for example, long-term pension liabilities.” Are you listening, Mitch McConnell? No, surely not.

Shanske adds that, “[i]deally, the federal government will eventually do the right thing and forgive the loans.” One hopes that, once confronted with a fait accompli, a future Congress would understand the importance of forgiving the loans, but even if that never happens, we would still be much better off to spread this out over twenty years rather than only two.

Shanske finishes his essay by describing various ways in which states would be able to take advantage of such a program even if borrowing from the Fed were to be deemed an operating deficit, which most states are prohibited from running. Those details are, as he notes, very important in making the plan work. For current purposes, however, let me say simply that he is surely right that this can be done.

But would the Fed do this? After all, even with the legal independence that the Fed enjoys, its ability to be apolitical is limited by politics itself. If it overreaches, an angry Congress and President could clip its wings. For now, however, there is no danger that the Democratic-led House of Representatives would collaborate with Trump and McConnell to punish the Fed; and if the Fed’s actions help to calm the economy, any future changes in who is running Congress will not necessarily lead to retribution against the Fed.

Even if the Fed can do this, would the people who actually make decisions at the Fed want to do it? The good news is that Fed Chairman Jerome Powell made news on May 13 when he:

gave a dire warning Wednesday that the U.S. economy could become stuck in a painful multiyear recession if Congress and the White House do not authorize more aid to address the coronavirus pandemic’s economic fallout. ‘Additional fiscal support could be costly but worth it if it helps avoid long-term economic damage and leaves us with a stronger recovery,’ Powell said. … Even with all the spending to date, Powell said more was needed because the economic impact has been so severe and hit some households particularly hard.

In other words, there are people in a position to do the right thing who know that we need to move quickly and decisively to head off an even worse crisis. I hope that they will heed Professor Shanske’s advice and do an end-run around the obstructionist bloc led by McConnell and Trump.

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