Failing To Help State & Local Governments Will Turn This Recession Into An Extended Depression

Donald Trump is trying to force states to reopen right now, even though the pandemic has yet to be controlled. But congressional Republicans don't seem to understand that their delaying is working against an economic recovery. They don't want to pass the House stimulus bill, part of which would bail out state and local governments -- who have had to spend to control the virus while having their revenue stream cut dramatically because of it. Majority Leader McConnell has even said the states should declare bankruptcy.

Our recovery will not magically happen just because Trump and Republicans want it to happen. If the states are not bailed out, the cuts they will have to make will hurt the economy -- costing more jobs and turning the recession into a much longer depression.

Here's part of how Josh Bivens at the Economic Policy Institute puts it:

Congress is currently debating a new relief and recover package—the HEROES Act—that would deliver significant amounts of fiscal aid to state and local governments—more than $1 trillion over the next two years, all told. This is a very welcome proposal. The incredibly steep recession we’re currently in is guaranteed to torpedo state and local governments’ ability to collect revenues. Further, nearly all of these governments are tightly constrained—both by law as well as by genuine economic constraints—from taking on large amounts of debt to maintain spending in the face of this downward shock to their revenues. The result will be intense pressure for large cutbacks in public spending by state and local governments in coming years. Such cutbacks would be absolutely devastating to the cause of restarting the economy and allowing people to find jobs, even if the virus has completely abated.

We know how devastating these cutbacks would be because we have lived through the mistake of allowing them to drag on growth in the quite recent past. State and local governments became relentless anti-stimulus machinesduring most of the recovery from the Great Recession of 2008–2009. This post highlights a couple of findings from that period that should inform policymakers’ decisions this time around.

• Growth in state and local spending was far slower during the recovery following the Great Recession than in any other post–World War II business cycle on record.
• This state and local spending austerity dragged heavily on growth during that time. If this spending had instead followed the trajectory it established following the recovery from the similarly steep recession of the early 1980s, pre-recession unemployment rates could have been achieved by early 2013 rather than 2017. In short, this austerity delayed recovery by over four years.
• Recent justifications for denying aid to state and local governments sometimes rest on claims that this spending has been profligate in recent years. This is absolutely not so—growth in state and local spending has been historically slow for nearly two decades. Given the importance of what this spending focuses on (education, health care, public order), this decades-long disinvestment should be reversed, not accelerated due to an unforeseen economic crisis.
• If federal aid is passed that is sufficient to close the enormous revenue shortfalls the economic crisis will cause for state and local governments, it will create or save roughly 5–6 million jobs by the end of 2021. Without this aid, we will remain at least that far away from a full economic recovery by then.

Public spending austerity was a catastrophe for recovery and growth following the Great Recession of 2008–2009. During the official recession from January 2008 to June 2009, policymakers instituted significant fiscal recovery efforts, including the American Recovery and Reinvestment Act that was passed in early 2009. However, one year after the recession’s official end, the unemployment rate was at 9.4%, and fully two years after it was still at 9.1%. The lesson here is simple: The criteria for whether or not the economy needs continued fiscal support is not “is it in official recession or not?” Instead, it is “is the economy at full employment or not?”

The spending austerity in the 2010s was the entire reason why it took a full decade to return to pre-crisis unemployment rates following the onset of the Great Recession. It is why millions of Americans struggled—through no fault of their own—to find work and it is a key reason why wages for tens of millions of Americans barely kept pace with price inflation over this time, as labor markets remained too soft to give workers the bargaining power they needed to demand better-paying jobs.