In his Wall Street Journal column William Galston comes out in support of including relief for state and local governments in future COVID-19 relief packages:
Right now, without emergency relief, millions of Americans face the termination of their unemployment benefits. Small businesses that have exhausted the loans they received through the Paycheck Protection Program will be forced to close. Renters and homeowners who can’t make their monthly payments face eviction. And state and local officials will be compelled to slash support for the public services on which their constituents depend. In these circumstances, assistance to states and localities should not be controversial.
I think that some of his reasoning is specious. For example:
Reduced state and local revenue slowed the recovery from the 2007-09 recession, and the Federal Reserve chairman isn’t alone in fearing that it could happen again.
He’s right that revenue decreased. That’s documented here by the Census Bureau. But the same source also says that spending by state and local governments increased. See also this finding from Brookings:
When government spending increases but taxes decrease in response to a contraction you would expect that to support increased economic activity, i.e. more growth not less. At least that’s what Keynes taught. What happened? My answer is that how the money was spent satisfied political goals rather than economic ones. As President Obama put it, how was he to know there were no “shovel-ready projects”? It was largely used to increase public employee pay and payrolls rather than to promote economic growth and much of it was lost to deadweight loss.
There are conditions under which I could support additional money for state and local governments. For example, dribble the money out over time and make it conditional on freezing public employee pay (in all forms including pension payouts). It would need to be closely monitored and enforced with clawback provisions. Money is fungible. Giving money to state and local governments should not be a strategy for monetizing state and local profligacy to accomplish political objectives. Or to line the pockets of state and local elected officials and their donors.
I think it is pretty well documented that state and local spending was much lower compared with other recoveries throughout the recovery period after 2008.
https://www.epi.org/publication/why-is-recovery-taking-so-long-and-who-is-to-blame/
Steve
It doesn’t document that spending was lower but rather that the population had increased and was continuing to do so.
That link answers everything but one question: why is per capita spending the correct measure? That isn’t what Keynes taught and it doesn’t match up with actual spending priorities during the period 2008-2011. As the Brookings piece documents real expenditures increased sharply. I don’t think that paying more for the same health care, the same education, the same law enforcement, and so on is particularly likely to result in greater economic growth. I also don’t think that we’re likely to get much of a Keynesian multiplier with imports as great as we have. And that’s what other studies have determined.
Also, since you’re typically eager to point out potential biases, the EPI is a more biased organization than either the Census Bureau or Brookings.
Yup, so I dont cite them for analysis, just the numbers. I think you need to have context. Not just absolute numbers but how does it compare with past spending in similar situations and I do think per capita spending is important.
Steve