It’s Insane That Federal Aid to States Is a Partisan Issue

Life’s a Mitch. Photo: 2020 Getty Images

The U.S. federal government can print its own currency, which also happens to be the world’s reserve currency. This is a handy setup for Uncle Sam in ordinary times. But it’s especially convenient in moments of economic crisis.

When a country can print its own money, its capacity to stimulate economic demand — or provide aid to embattled firms and workers — is constrained only by inflation and/or concerns about lowering the value of its currency and debt in international markets. If you inject too much money into an economy, consumers and businesses could become so cash-rich and eager to spend that their demand for real resources outstrips the supply and a bidding war over scarce goods and commodities ensues. Such profligate money printing can also potentially weaken a nation’s currency relative to others’, sparking capital flight and raising the interest rate a nation must offer to find buyers for its debt.

Today, the United States is blessedly free from either of these constraints. Inflation was already excessively low in the U.S. before the onset of the COVID-19 pandemic. Now, amid a historic plunge in consumer spending and business investment, rising prices are the least of our worries. Beyond the special cases of hand sanitizer, toilet paper, and certain kinds of medical equipment, the supply of goods isn’t a problem. Rather, the challenge is to ensure that business failures, wage cuts, job losses, and asset depreciation don’t durably lower the American consumer’s capacity and willingness to spend. Unlike Italy and other E.U. countries — which lack full authority over their own monetary and fiscal policies — the United States is free to prop up demand by flooding its economy with dollars. What’s more, it can do this without much fear of depreciating its currency or debt in global markets: Since U.S. Treasury bonds are skittish investors’ favorite port in an economic storm, the dollar has grown excessively strong on currency markets — and interest rates on U.S. debt have remained near-zero — even as Congress has approved upwards of $2 trillion in stimulus spending.

All of this means that, unlike less prosperous and powerful countries, the United States shouldn’t have any problem sustaining basic government services for the duration of this crisis.

But the United States is, in fact, having a lot of problems doing that because:

1) America has chosen to delegate a wide array of its core government functions to the states, none of which can print their own currencies or issue internationally coveted bonds.

2) Congressional Republicans refuse to appropriate massive federal aid to state governments.

As a result, the country with more wealth and fewer fiscal constraints than any other on planet Earth won’t necessarily be able to pay its police officers in a couple of months. As the New York Times reports:

States provide most of America’s public health, education and policing services, and a lot of its highways, mass transit systems and waterworks. Now, sales taxes — the biggest source of revenue for most states — have fallen off a cliff as business activity grinds to a halt and consumers stay home.

Personal income taxes, usually states’ second-biggest revenue source, started falling in March, when millions lost their paychecks and tax withholdings stopped. April usually brings a big slug of income-tax money, but this year the filing deadlines have been postponed until July.

“This is going to be horrific for state and local finances,” said Donald J. Boyd, the head of Boyd Research, an economics and fiscal consulting firm, whose clients include states and the federal government…“It will be very hard to pay for people in nursing homes, and to pay teachers to teach kids when school resumes, and to pay police,” Mr. Boyd said, naming three services that are financed in large part by the states and provided by local governments.

Last week, the bipartisan National Governors Association called on Congress to provide states with “unrestricted fiscal support of at least $500 billion” to avert “significant reductions to critically important services all across this country.” In its first major relief package, Congress allocated $150 billion of restricted funds to the states. Last week, Democrats demanded that Congress append another $150 billion in relief funds for states and cities to a bill expanding the size of the small-business bailout program — which is already on the cusp of running out of funds. Senate Republicans rejected this request, ostensibly preferring to withhold aid to small-business owners (a core GOP constituency) than to help states avoid devastating cuts in essential services in the middle of a pandemic.

Which seems rather messed up!

Political coverage of negotiations on Capitol Hill in recent weeks has consistently framed aid to states and municipalities as a concession to Democrats. And by all appearances, this is an accurate description of the legislative dynamics. But it’s difficult to understand why. Neither the pandemic nor its economic consequences have been confined to blue states. In fact, the collapse of global demand for oil is hammering deep-red petro-states. Oklahoma’s budget was written around the presumption of $55-a-barrel oil, which is more than double crude’s going rate these days. The Texas Taxpayers and Research Association, meanwhile, has estimated that every dollar shaved off the price of oil knocks $85 million in revenue out of the Lone Star State’s coffers.

Beyond the fact that Republican-leaning states are hurting for aid about as much as blue ones are, the president’s party has a profound political interest in mitigating the economic impact of an election-year recession. This is ostensibly why Republicans promoted mailing checks directly to low-income and middle-class households: to prop up consumer demand and prevent economic decline from feeding on itself. And yet, if states are forced to lay off public workers, cut social benefits for constituents, and cancel planned investments in public goods, then they will deepen the recession.

Why, then, have Republicans not only opposed allocating sufficient aid to states but been willing to undermine small businesses in the name of blocking such aid?

One answer is that movement conservatives have long prided themselves on snuffing out state-level experiments with social democracy. In the 1970s, the Ford administration famously refused to provide aid to New York City during its fiscal crisis, opting instead to teach the Big Apple a hard lesson about the perils of free public college and expansive social services (never mind that the city’s fiscal challenges were inextricable from patterns of racial inequity and deindustrialization, for which federal policymakers bore much responsibility). And choking off the fiscal capacity of liberal states has been a Republican pastime in the decades since.

Although a highly defensible policy on the merits, Republicans’ decision to place a cap on the state and local tax deduction in 2017 was likely motivated in part by a desire to constrain blue states’ redistributive policies: It’s less politically difficult to fund social programs by raising taxes on the rich when your rich constituents know they can put those new taxes on Uncle Sam’s tab.

In Sam Brownback’s Kansas, tea-party Republicans tried to promote their austere vision of government by establishing a “red-state model” whose economic successes the rest of the nation would be eager to emulate. Instead, their vision proved so spectacularly unappealing, the deep-red Sunflower State elected a Democrat governor in 2018.

It seems possible, then, that the GOP’s “small government” true believers hope to accomplish through fiscal sabotage what they couldn’t through popular consent: After all, voters don’t need to like the red-state model if a threadbare safety net and emaciated public sector are all their states can afford.

This could certainly be wrong. I’m not privy to Mitch McConnell’s inner monologue. But when I search my own brain for “charitable explanations for why the Republican Party is preventing the United States from using its exorbitant privilege to sustain basic government services in the middle of a pandemic,” I come up empty.

It’s Insane That Federal Aid to States Is a Partisan Issue