Photo by Ehud Neuhaus on Unsplash

The Economic Madness of State Austerity

I’ve been sharing with you the absolute importance of keeping paychecks going to hard working Americans as by far the best way to keep the economy from a total collapse. That includes the 13% of the workforce, some 20 million people, who work for state and local government and the employees of the businesses and non-profits who contract to deliver public services. Sending millions of these working people to join the already swelling ranks of the unemployed will push the economy further into recession. As will cutting public spending for vital financial support and services to people, money that also circulates through the economy. All together, revenues to state and local governments make up 9% of the country’s economy.

Denying states and localities substantial financial relief would be an act of sheer economic madness. But then government-shrinking austerity has always been economic madness, which didn’t stop it from being the dominant public policy for far too long. Fortunately, the deficit hawks have been mostly grounded in the federal response to COVID. But they are trying to rise again by blocking funding to state and local governments. If they succeed, we can kiss any chance of avoiding a COVID depression goodbye.

We have lots of evidence from the 2008 recession that cutting government spending deepened and prolonged the recession. A study by Center for American Progress found that states that cut back spending after 2008 had persistently higher levels of private unemployment than states that did not pull back on spending. By 2011, the economy in the investment strategy states was growing, while GDP growth was still negative in the states that cut back on spending.

As Jessyn Farrell, a former Washington State legislator and now Senior Vice President at Civic Ventures pointed out last week, the impact of austerity lingers for years. “I learned this lesson when I started my first term as a Washington state legislator in 2013, five years after the Great Recession. Our state along with many others was still struggling to make up for the deep spending cuts that were thought to be necessary in the wake of the Great Recession of 2008. … By taking money out of the pockets of our citizens through cutting critical services and laying off state employees, we ended up prolonging unemployment and slowing economic recovery.”

Farrell lays out a number of steps that states can take to minimize austerity measures, including raising taxes on the wealthy, drawing on rainy day funds, and borrowing from a new program set up for COVID by the Fed. But only the federal government can print money.

The biggest question for the next federal COVID stimulus legislation is whether or not to provide hundreds of billions of dollars to state and local governments to make up for their collapsing revenues. At first blush it looks like a partisan issue, with Mitch McConnell saying that the funds shouldn’t be used to make up for lost revenues, while Nancy Pelosi is advocating for up to $800 billion in funding for states and local governments. But not all Republicans are lining up behind their leader. Louisiana Republican Senator Bill Cassidy and New Jersey Democrat Bob Menendez have teamed up to propose $500 billion in relief, the same number proposed by the leaders of the National Governor’s Association, Maryland’s Republican Governor Larry Hogan and New York Democrat Andrew Cuomo.

The COVID economic crisis has put trickle-downers on their heels but they’re not going down without a fight. The stakes are much greater than any ideological battle. The financial futures of tens of millions of families and our nation’s overall economy require rejecting this austerity madness. Keep paychecks coming to the millions of Americans who do the vital work of our state and local governments.

A few pieces I read that resonated with me this week:

“Essential, and No Longer Disposable,” The Atlantic

“The Riveter’s Amy Nelson: For Mother’s Day, let’s give women equal pay,” NBC News

“The Market v the Real Economy,” The Economist

“The Free-Market-Fundamentalist Menace,” American Compass

And here’s another piece I wrote recently about the importance of American workers and worker power:

“To Reboot America, Reboot the Power of Hard-Working Americans,” American Compass

Stay safe and healthy!

David

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