Speaker of the House Nancy Pelosi has suggested dire results if the Democrats can’t get $1 trillion dollars to bail out mostly blue states that have had financial setbacks because of the pandemic.
She called the Republican “skinny bill” on COVID-19 relief “big assault on the well-being of our country” and a “a mini-mouse little proposal.” The Republican bill didn’t pass, and it is unlikely that the Democrats will get that trillion any time soon. (A Democratic Senate would pass the Democrat bill and bail out the states.)
What draconian cuts will affected states have to make?
Eric Boehm of Reason surveys the carnage:
Without that aid on the horizon, some are warning of budgetary catastrophes. The New York Times warned this week of a “dire fiscal crisis” facing some states, declaring in the first paragraph that “Alaska chopped resources for public broadcasting” and that “New York City gutted a nascent composting program that could have kept tons of food waste out of landfills.” Many states have canceled planned pay raises for teachers and other public officials too, the Times notes.
Hey, wait a minute—this doesn’t sound like the end of the world. And Boehm says it is not:
That doesn’t sound like a crisis. It sounds like states are recognizing that falling tax revenue means they will be unable to spend as much as they’d originally planned in the next year or two. In other words, they are doing the important work of budgeting and setting priorities—work that Congress, with its nearly unlimited credit card, refuses to do.
Estimates for the state and local shortfalls vary. An American Enterprise Institute put it at around $240 billion, when state and local governments are combined. These is still a lot of money—though not nearly a trillion. According to Boehm, the situation is serious but not catastrophic:
High unemployment means that state revenue might take a few years to recover, and “many governors and their administrations have directed agencies to develop contingency plans to reduce their budgets, for fiscal year 2021 and/or fiscal year 2022, by as much as 15 or 20 percent,” NASBO reports.
That seems like a prudent thing to do. It is exactly the sort of thing that policy makers should be doing in the face of a public health crisis and economic downturn: reevaluating budgets to prioritize the important things and cutting where possible.
Budget shortfalls can also push state officials to get creative by doing things they probably should have done a while ago. New Mexico and Pennsylvania, for example, are considering legalizing recreational marijuana, so they can tax it to refill their coffers.
“The states face budget challenges, but the situation in most places is not ‘dire,'” writes Chris Edwards, director of tax policy for the Cato Institue, a libertarian think tank. “State officials can solve budget gaps without further federal aid by tapping rainy day funds, freezing hiring and wages, and improving program efficiencies.”
There is little indication, even in the most pessimistic of scenarios, that states need a $1 trillion bailout from the cash-strapped federal government. And a bailout would create a moral hazard, giving states less incentive to address their own budgetary problems in the future.
Deliberately or not, Congress seems to be letting the states figure this out on their own. That’s just fine.
The pandemic has been one of the worst experiences in our history. Maybe some of the suffering can be redeemed if it prods states and localities to get their financial houses in order.