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The COVID-19 crisis has two faces — a health disaster, and an unprecedented contraction of economic activity. More than ever, Mainers’ and all Americans’ fate depends on excellent leadership and good policy, economic as well as public health, at all levels of government. With public health experts warning that we may be at least a year away from being able to fully reopen our economy, just how bad this crisis becomes, and especially, how long it lasts, depends on quick and wise actions by Congress and President Donald Trump. One glaring omission thus far is a lack of adequate federal assistance to help state and local governments cope with the crisis.
The planned shutdown of much of our economy to prevent millions of U.S. COVID-19 deaths has created an epic economic crisis matched only by the early years of the Great Depression. Businesses have laid off masses of workers (nearing 80,000 already in Maine, and more than 26 million nationally), many are shuttering their businesses temporarily, and some already are going out of business.
[Our COVID-19 tracker contains the most recent information on Maine cases by county]
Also, Maine state government and municipalities are already deeply in the red, as tax revenues plummet and safety net, medical, and public health expenditures spike upward. The Center for Budget and Policy Priorities expects total state and local shortfalls after aid in the first three packages, including $2.2 trillion CARES Act, to be at least $360 billion in the coming fiscal year, before considering the additional new emergency expenditures needed to meet the COVID-19 crisis. States can anticipate losing one fourth of their locally derived revenues in fiscal 2020-2021, meaning Maine would lose $1 billion and even more considering current losses and losses that may continue after June 2021. Maine’s “rainy day” fund of about $250 million will be overmatched by the likely course of the recession. At best, this fund is a very short-term bridge to a longer-term solution that should rely heavily on federal aid, with modest budget cuts and new revenue filling in any remaining gap.
Our governors, forced to lead on both health and economic mitigation, are clear on what is needed. Maryland Gov. Larry Hogan, a Republican, and New York Gov. Andrew Cuomo, a Democrat, chair and vice chair of the National Governors Association, issued a statement recently asking Congress to include $500 billion in its next crisis funding bill.
This bipartisan request reflects a harsh reality familiar to macroeconomists — that without fiscal help from the federal government, states and municipalities will be forced to add to the economic pain. Plummeting tax revenues alone are creating huge state and local deficits. Moreover, state constitutions generally mandate balanced budgets.
Essential state and local services would have to be cut to handle the red ink, which would require Maine and its cities and towns to lay off thousands of teachers, first responders, and others. This in fact happened after the last recession; with only modest federal aid, state and local job losses hit 750,000 by summer 2013. These cuts can be mitigated through state and local tax increases, but such revenues also put a drag on the economy and by themselves can’t make up lost revenues. The loss of hundreds of thousands of public sector jobs nationally will further deepen the recession, likely pushing national unemployment rates to 20 percent or higher, and even worse, prolonging these high rates of unemployment.
The only entity that has the resources and legal latitude to prevent this dismal scenario is the federal government. Unlike towns and states, the U.S. government has a unique legal and practical ability to borrow trillions of dollars at a time when large global wealth holders, awash in capital but with nowhere to currently safely invest, are effectively paying the federal government to hold their monies.
Over the past two weeks, Congress struggled to come to an agreement to replenish the Paycheck Protection Plan — the program for forgivable loans to small businesses that already ran through its initial $350 billion allotment. Congressional leaders have agreed upon a bill that includes new PPP funding, along with aid for hospitals and a national testing strategy.
While many see Congresses’ struggle to come to agreement as evidence of the usual partisan squabbling, there is more to the eye. Democratic congressional leaders have fought to add hundreds of billions in aid to states and localities. Republicans led by Sen. Mitch McConnell have balked at such funding. In fact, McConnell is bucking both governors and even Trump in signaling disinterest in including this aid in the next rescue package that is already on the table. On Wednesday, he even stated a shocking preference to see states and cities going bankrupt rather than agreeing to any funding for them.
If congressional Republicans succeed in continuing to block such funding, expect a long and deeper recession, and severe pain right here in Maine. We need to ask all members of our congressional delegation to champion federal state and local aid. To not do so is simply economic malpractice.
Michael Hillard is a professor of economics at the University of Southern Maine.