Should COVID-19 Relief Be Given to State and Local Governments?

I have severely mixed feelings about the recommendation of the editors of the Washington Post:

President Biden’s call for $350 billion for state and local governments thus comports with his call for national unity. There are, however, legitimate issues with the proposal, in light of two realities: The first is precisely the widely varying fortunes of the states, whose average revenue loss was 3.3 percent between March and November of 2020, compared with the same period in 2019, according to data provided to us by the Urban Institute. (The states’ revenues through June are projected to fall 10.8 percent short of pre-pandemic plans, according to a December report by the National Association of State Budget Officers.) Eighteen states’ revenues are either flat or up; seven lost 2 percent or less. After updating for revenue through December, California, by far the most populous state, reported a flood of cash from wealthy taxpayers so large that it now has a $34 billion surplus, $22 billion of which will be placed in reserves.

As these admittedly sketchy numbers imply, the second reality is that state revenue loss, though significant, has been smaller than feared in the early days of the pandemic. One reason is that lower-paid workers who generally do not pay income taxes bore the brunt of layoffs, while upper-income citizens kept their paychecks and reaped capital gains in an unexpectedly booming stock market.

Congress should account for these facts, both in determining the ultimate size of the aid package and in establishing a formula for distributing it. Past state and local aid tied to pandemic needs went out in $1.25 billion minimum chunks to each state, with the balance divvied up according to state population. Now we have better information about the various states’ true needs; legislation can and should target aid where it’s most needed, based on states’ coronavirus caseloads and unemployment rates — and their revenue-raising performance. Lawmakers should endeavor as well to guarantee that more funds reach smaller localities; previous pandemic-related legislation only set aside a share of state dollars for cities and counties encompassing a half-million in population or more. The District should get the same share as it would if it were a state.

If Republicans and Democrats want to unite the country and put red-state/blue-state hostility behind them, devising a sufficient, realistically targeted, state and local aid package would be a very good place to start.

for any number of reasons. If only we had institutions that were presently in place and could assess state and local needs!

On the o0ne hand I recognize that some people are suffering. But on the other…

Perhaps among those reasons is heavily colored by my observation of the state and local governments I know best. Here in Illinois in Chicago all public employees have been deemed essential and are among the “upper-income citizens” who’ve kept their paychecks. Even now the members of the Chicago Teachers Union is fighting for its right to be paid not to work (or, perhaps more charitably, to bear enormously reduced workloads—truancy in remote learning here in Chicago is estimated to be around 50%). It’s hard to estimate. In Chicago at least they’re not reporting truancy in remote learning—a blatant fraud of Title 1. In Illinois and Chicago between 20% and 30% of public budgets go to pay the pensions of retired public employees since far too little money was put away for that purpose when there was no pandemic. If a less politically-motivated and more pragmatic approach had been taken by state and local governments during 2020 they might not be scrambling for funds now.

And I just don’t think, as the editors point out, that California needs federal help. But we can assume with a confidence based on experience that any method of allocating funds at the federal level, whether done by Congress or bureaucrats, will be politically motivated and will go to California, New York, Florida, etc. while Illinois gets short shrift.

I should also add that I remain unconvinced by the argument that monetary sovereigns never need to choose among alternatives or set priorities.

All in all I think we’d be better off devoting more money to genuine public goods, i.e. public health programs, than to subsidize the folly of state and local governments. If we subsidize them, they’ll just continue their profligate, irresponsible ways.