Adam Smith in the Wealth of Nations argued for limitations on government. In addition to providing for the National Defense and the administration of justice he also argued for the provision of public goods. Public goods referred to transportation as well as basic and applied education. The last in the U.S. model is provided by state and local governments. Public goods such as roads, bridges, education amongst others facilitate commerce and enhance our quality of life.
During this pandemic Senate Majority Leader Mitch McConnell and the Republican Senate have turned that notion on its head by denying meaningful revenue replacement to state and local governments. They cynically argue that federal aid would be squandered away to fix past fiscal mismanagement.
While the CARES Act helped offset costs incurred by state and local governments for fighting COVID-19, kept small businesses and individuals afloat, it also provided close to $600 billion in direct aid to large business and the airlines. I have no quarrel with that. What they are missing however is the critical role state and local governments provide to keep these businesses going. This includes transportation, infrastructure, education and life safety needs such as healthcare, public safety, and water and sewer services.
Several organizations such as the National League of Cities and the National Association of State Budget Officers estimate a lost revenue in excess of $820 billion dollars through 2022. This number grows when accounting for school districts and higher education. The recently passed Senate HEALS ACT provides $105 billion to offset this loss along with some additional yet inadequate funding for education.
Conversely the Heroes Act passed by Congress provides $1.3 trillion in aid to state and local governments. This would cover the $820 billion in revenue losses mentioned above for general state and local governments. It will also provide additional dollars to school districts and higher education.
There have been multiple predictions from economists on what a recovery may look like and when it may happen yet there is no way of knowing. This virus does not read the Wall Street Journal. The curve flattens then heads upwards and then flattens again. In a recent Brooking’s Study, it was estimated that every 1% drop in unemployment leads to a 3% drop in state and local revenues. Given the uncertainty around recovery things may get worse for state and local government.
The state and local government sector constitutes 3% of GDP or $659 billion of $21.54 trillion. Over 1.5 million state and local employees have lost their jobs since the pandemic started. While this may appear comparatively small to the larger economy it understates the impact. As I have posited above along with Adam Smith state and local government services are the lynchpin for commercial growth, related job creation and for providing a decent quality of life for Americans.
While McConnell and the White House play politics with big city mayors, county executives, school children, and blue state governors, Rome continues to burn. According to the International City Managers Association Survey, whose members govern over 80 million Americans, 30% have enacted layoffs and furloughs. In addition to job cuts, there have been spending delays ranging from 16% to 40% on roads, public safety equipment, water and sewer and hazard mitigation.
If the law and order Republicans are opposed to defunding the police, they are sure not helping their cause. According to a survey of 258 Police Chiefs by the Police Executive Research Forum budget cuts will be in the 5% to 10% range. For example, as recently reported in the Washington Examiner, Seattle reduced its force by 100 officers and New York canceled a new recruiting class of 1,100. Racial strife notwithstanding, this is irresponsible in an economy ripe for further social unrest.
States are in the same boat expecting to lose over $200 billion in fiscal year 2021 and will surely burn through rainy day funds. There has been and will be further cuts to education, healthcare and spending on needed infrastructure if aid is not forthcoming.
Mitch McConnell should know better as he started his career as an elected County Executive in Jefferson County Kentucky. I wonder what he would be thinking about his own inaction if he was still in that office. This economic tailspin has nothing to do with state and local mismanagement and using it as an opportunity to politically punish state and local officials borders on cruelty.
This pandemic by every measure is a historically unprecedented event that calls for leadership and action with alacrity. The inability to “provide public goods”, in the words of Adam Smith, hurts our nation including Kentucky, Sen. McConnell.
