POLITICO is reporting this week that Congress is struggling now over what to do next to support the economy. It observes this is demonstrating that “evidence isn’t everything in Washington.”
The report notes that “Congress is once again debating stimulus for a crushed economy as governors are once again confronted with gigantic budget shortfalls."
POLITICO thinks that memories of 2009 have faded, and the politics have been “scrambled” under the President Donald Trump's administration, but that “state aid” was used successfully in an earlier recession.
POLITICO points out that in January 2009 tax revenues were collapsing and state budgets were hemorrhaging. The new Obama administration was “terrified” that without a massive infusion of cash, governors would tip the recession into a full-blown depression by laying off employees and cutting needed services. A large infusion of direct aid to states was discussed.
However, the politics of that 2009 approach were “dismal” POLITICO says. Some leaders were already opposing any stimulusâ??and even Democrats who supported the new president's approach weren’t excited to help Republican governors balance their budgets.
The reason, POLITICO says, is that most “politicians enjoy spending money more than they enjoy giving it to other politicians to spend.” And since the direct state aid approach was “untried,” the proposal was seen as “more hunch-based than evidence-based.”
Ultimately, the Congress approved $140 billion in state aidâ??only two-thirds of the administration’s original request but far more than any previous stimulus.
Still, POLITICO sees evidence that the state bailouts worked. It points to “at least a dozen post-recession studies that found state fiscal aid gave a significant boost to the economy.” POLITICO adds that several studies concluded that “more state aid would have produced a stronger recovery.”
Now, a similar fight is underway. Democratic leaders have made state aid a top priority and $150 billion has already been provided for state, local and tribal governments in the CARES Act that Congress passed in March. The next battle is over the additional $915 billion in the HEROES Act that the House passed in May.
Republican leaders accepted the fiscal relief in the March bill but they kept it out of the last round of stimulus that Congress enacted in April. The also have declared the HEROES Act dead on arrival. Though they’re no longer denouncing stimulus as socialism, as they did in the past, they’ve begun attacking state aid as a “blue-state bailout.”
POLITICO says that most voters tell pollsters that they want Congress to help states avoid layoffs of teachers, police officers and public health workers. Still, key leaders like Senate Majority Leader Mitch McConnell and other influential Republicans are trying to “reframe state aid as Big Government Democratic welfare spending.”
“There wasn’t a lot of evidence that state aid would be a good stimulus in 2009, but now there’s a lot of data, and it all adds up to juice for the economy,” Moody’s chief economist Mark Zandi says. “It’s baffling that this is getting caught up in politics. If states don’t get the support they need soon, they’ll eliminate millions of jobs and cut spending at the worst possible time.”
The coronavirus is ravaging state budgets even faster than the Great Recession did, drying up revenue from sales taxes and income taxes while ratcheting up demand for health and unemployment benefits. And, as Senator Mitt Romney, R-Utah, pointed out earlier this month, “Blue states aren’t the only ones who are getting screwed.” The Republican governors of Texas, Georgia and Ohio have also directed state agencies to prepare draconian spending cuts to close massive budget gaps, he noted.
POLITICO notes that “fiscal experts” say the assertions that irresponsible states brought these problems on themselves with unbalanced budgets and out-of-control spending has little basis in reality. Unlike the federal government, which was running a trillion-dollar deficit even before the pandemic, every state except Vermont is required by law to balance its budget every year. State finances were unusually healthy before the crisis hit; overall, they had reserved 7.6% of their budgets in rainy day funds, up from 5% before the Great Recession.
But now, governors of both parties are pivoting to austerity and more public employees are applying for unemployment benefits, meaning fewer state and local services in a time of need and fewer dollars circulating in the economy as it begins to reopen. Federal Reserve Chairman Jerome Powell, who has approved a plan to buy up to $500 billion worth of state and local government bonds to help ease their money problems, recently suggested that direct federal aid to states also “deserves a careful look,” which in Fed-speak qualifies as a desperate plea for congressional action.
So, we will see. The state aid fight is intense, increasingly bitter and likely to be prolonged. It involves high stakes and clearly should be watched closely by producers as the election season progresses, Washington Insider believes.
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