Just Say No to State & Local Bailouts
By David Henderson
Why is the HEROES bailout so much greater than the states’ losses? Simple: State governments would likely use a large part of the bailout money to make up for shortfalls in their funds for state government pensions. In April, Illinois Senate Democrats, for example, asked Congress for a bailout of over $40 billion, $10 billion of which would go the state pension fund. A famous Illinois politician, Rahm Emmanuel, famously said “You never want a serious crisis to go to waste.” His fellow Illinois Democrats’ motto could be “Never let a crisis go to waste when you can use it to subsidize waste.”
This is from my latest Hoover article, “Just Say No to State & Local Bailouts,” Defining Ideas, June 3.
Governor Newsom, in a May 17 interview with CNN’s Jake Tapper, asserted that the $54 billion budget deficit the state government is facing “is a direct result of the impact from the coronavirus pandemic and not because of existing financial troubles.” Close but no cigar. There are three problems with this statement.
First, in claiming that California’s government would have a $54 billion deficit, Newsom contradicted the California’s Legislative Analyst’s Office (LAO). That office, which has a stronger incentive to tell the truth than the governor has, estimates that the budget deficit will be a much more manageable $18 billion to $31 billion. The $18 billion estimate is based on a U-shaped recession, with the recovery starting this summer. In case you think that’s too optimistic, the LAO’s U-shape assumes that economic activity stays “below pre-recession levels well into 2021.” The $31 billion estimate assumes an L-shaped recession, with the economy in recession well into 2021 and gradual recovery not beginning until the second half of 2021. Now that’spessimistic! In 2019, California’s gross state product was $3.2 trillion. Of course, it will be lower this year. But I point that out to note that the pessimistic $31 billion deficit is only about one percent of last year’s gross state product.
Second, although much of the budget deficit is due to the pandemic, a large part is also due to Newsom’s extreme lockdown, which he began on March 19. In attributing the deficit to the Covid-19 disease, Newsom, like many politicians and pundits, failed to distinguish between the voluntary social distancing measures that people undertook before the lockdown and the lockdown itself. Those voluntary measures certainly reduced economic activity, with the decline in spending on restaurants and bars being one of the main ways that happened. But the Newsom lockdown went much further, causing a closure of many retail outlets that people would have still been inclined to patronize, albeit with social distancing. In short, part of the economy’s decline is on Newsom.
If you want to know the third reason, read the whole article.
Thanks to Eileen Norcross of the Mercatus Center at George Mason University for a helpful conversation and for providing some good links to state data on budgets.