Michael Meeropol: Congress Must Plug The Budget Gap For State And Local Governments | WAMC

Michael Meeropol: Congress Must Plug The Budget Gap For State And Local Governments

May 1, 2020

In a recent Commentary, I argued that the Democrats in Congress needed to stand strong against Republican efforts, led by Kentucky Senator Mitch McConnell, to push through bills that bailed out the giant corporations leaving ordinary people to fend for themselves.   To a certain extent, they were able (by standing strong in the Senate) to force compromises on the last two bills passed. 

But in compromises, each side loses something they wanted.  For the Democrats, what has been lost (as a result of omission from the last two bills) were direct aid to states and localities, a subsidy for the Post Office, and subsidies to make it possible for all states to conduct the November elections by mail.

[It appears that Trump actually threatened to veto any bill that included money for the Post Office, and his opposition to voting by mail (except for himself) is also well known.  On the Post Office see Marty Johnson, “Trump threatened to veto stimulus package if it contained bailout money for USPS: report” The Hill, April 11, 2020.   When it comes to voting by mail, Trump actually said that if there were extensive voting by mail, “… you’d never have a Republican elected in this country again.”   See Aaron Rupar, “Trump isn’t even trying to hide his self-interested reasons for opposing mail-in voting.” Vox, April 8, 2020 available at .]

For today’s commentary, I want to focus on the need to subsidize the shortfall in revenue that states and localities are experiencing as a result of the current economic shutdown.  Because economic activity has taken a dramatic tumble with lots of economic activity shut down (travel, entertainment, non-essential businesses), incomes and employment has declined dramatically.  With declining employment comes declining wages which in many states means declines in income tax revenues.  With declining consumption (less travel, etc.) all states see declines in sales tax revenues.  Meanwhile, with states’ health care facilities stretched to the breaking point and lots of overtime needed for first responders and government employed health care workers, states are experiencing significant budget shortfalls.

All of sudden, McConnell has signaled that he is now very concerned about deficit spending and therefore is not supportive of, in his words, just filling the budget gaps for states and localities.  This is of course the same McConnell who pushed through a 1.2 trillion dollar increase in the National Debt in the form of the massive tax giveaway to the top 1% in 2017.   His version of Marie Antoinette’s “let them eat cake” statement before the French Revolution (we know what happened to her, right?) is that states should avail themselves of bankruptcy protection.

[Just in passing, it might be useful to remember that when Congress passed this tax cut in 2017, despite predictions by the Congressional Budget Office that it would create a massive increase in deficit spending, its supporters claimed that it would pay for itself by stimulating a massive increase in investment which would lead to an equally significant increase in income, which would raise tax revenue even as tax rates were cut.    A recent blog by economist Dean Baker noted that before the economy began to tank in the second quarter, there was no evidence of any surge in investment spending between January 2018 and the end of 2019.  (See Baker, “GDP Shrinks at 4.8 Percent Annual Rate as Pandemic Brings Longest Recovery to End” available at the Center For Economic Policy Research website.)  In fact, nonresidential investment as a percentage of GDP fell from 13.2% before the tax cut was passed to 13.0% in the first quarter of 2020.]

Let’s examine what McConnell is driving at when he suggests states declare bankruptcy.  If a state declares bankruptcy, it no longer has to pay pensions to retired workers, nor does it have to honor the contracts negotiated with currently employed workers.   In other words, states can cut their spending to meet their declining revenues.  (Remember, unlike the federal government, states are forbidden by their constitutions to run deficits to finance current expenditures.  They and their localities can issue bonds for capital projects (road building, etc.) but for expenditures such as paying teachers, police officers, fire fighters, EMTs, sanitation workers, transit workers, etc. they have to generate sufficient revenues.)

Justifying his unwillingness to support federal spending to plug the revenue holes in state budgets, McConnell engaged in a disgusting display of raw political gamesmanship.  He attacked what he called “blue state bailouts.”  It is true that states that routinely vote Democratic for Congress and the Presidency like New York, California, Massachusetts, and Illinois suffered dramatic declines in revenues and were hit with rising expenses as they fought the virus.  As a result, he calculated that such an attack will play very well with Trump voters, not just in his home state of Kentucky but in many states in the heartland --- particularly, he hopes, in the crucial states of Pennsylvania, Michigan and Wisconsin--- as well as potentially battleground states like Georgia, North Carolina and Arizona.

Notice --- when the airlines and other major industries were threatened by significant declines in business, neither McConnell nor any other Republican raised a peep about the big increase in deficit spending needed to keep those companies in business.  Not one word was spoken about suggesting that any of those giant firms, like United Airlines or Boeing use bankruptcy to deal with their declining cash flow.  Instead, it was essential that these companies be subsidized so they wouldn’t lay off thousands of workers.   (Republicans always couch subsidies to big business as a means of helping the “job creators” and protecting the workers from layoffs).  

Well guess what --- if state governments use bankruptcy to stiff their pensioners and workers, the same problem would occur.  Every dollar that is not spent by a state that declared bankruptcy would be a dollar of income not received by some worker or vendor.  The declines  in spending by states on top of the declines in spending in the private sector (the reason 30 million people have applied for unemployment since mid-March) will lead to even more unemployment.

The logic that led to hundreds of billions of dollars of subsidies to giant corporations is the very same logic that dictates similar federal expenditures to keep states and localities whole in this era of serious declines in revenue.   Every dollar spent by the federal government to shore up state government budgets is a dollar received by some state worker or pensioner which can then be spent to buy food, pay the rent, pay the utility bill.

McConnell’s gross political tactic will hopefully be met by staunch unyielding Democratic insistence on significant help for states and localities when the next bill is debated.

[On Tuesday, April 28, the New York Times ran a strong editorial entitled, “The State of the States is Dire.” (p. A 22)  It makes many of the points made here as well as showing readers that there is no such thing as a “blue state bailout” as high tax states like New York and California (which are definitely politically “blue”) send much more money to the federal government than they receive from it.  (Kentucky on the other hand, receives $241 for every $100 it sends to Washington!)   And to show that independent minds think alike, I note that Representative Peter King (a Republican Congressman from New York) accused Mitch McConnell of being the “Marie Antoinette” of the Senate.   I recorded the above commentary before reading that editorial!]

Michael Meeropol is professor emeritus of Economics at Western New England University. He is the author with Howard and Paul Sherman of the recently published second edition of Principles of Macroeconomics: Activist vs. Austerity Policies

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