Disaster Relief to States and Cities Is Both Right and Good (a Dorf on Law classic)
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.
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.
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.