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.
Another excerpt:
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.
READER COMMENTS
Thomas Hutcheson
Jun 4 2020 at 2:51pm
OK, don’t “bail out” the states, just make up for the fall in revenues and the extra pandemic expenses. And we do not need to “assume” anything about the recession. Make the transfers ongoing according to a formula linked to the state of thee economy. If the recession is short, they end, if not they are prolonged. Let’s not make the mistake of 2008 relief package which was defined by amount and calendar time, not need.
robc
Jun 5 2020 at 10:42am
Why should the Feds make up the states’ loss of revenue?
How about the states due what families who lost revenue do, and cut expenses?
Or, you know, the states could change their tax to something less inclined to fall dramatically, like a single land tax (I would assume unimproved land values would also fall, but not much)?
Thomas Hutcheson
Jun 7 2020 at 3:54pm
Good idea, but no one has ever been able to make it work. And even if we could disentangle unimproved value from market value, would it be progressive?
nobody.really
Jun 4 2020 at 4:53pm
Not really following this. Yes, bailouts might subsidize waste. But surely that’s true of ANY bailout, not just bailouts to governments. Is Henderson opposing ALL bailouts? If not, then I’d like to see some statement about why state and local governments are less worthy of bailouts than private entities.
David Henderson
Jun 4 2020 at 6:39pm
You ask:
Yes. I thought that was clear from my earlier piece on the March $2.2 trillion bailout.
robc
Jun 5 2020 at 10:43am
Also seems like a libertarianism 101 first principle that wouldn’t need to be stated.
Tom DeMeo
Jun 6 2020 at 9:13am
OK.
In a world where you got what you wanted, with only voluntary social distancing and no bailouts, what do you think would happen to the country’s economy? Do you believe that there was any way to avoid wide scale cascading economic failure?
David Henderson
Jun 6 2020 at 9:40am
I think that the economy would have tanked, but not nearly as much as it did and that we would be well along in a V-shaped recovery by now, with the unemployment rate being under 10%.
Tom DeMeo
Jun 7 2020 at 11:30am
How can you argue that the economy wouldn’t have tanked nearly as much as it did? For that to be true, you would have to argue that the negative effect gap between voluntary and enforced lockdown strategies was much more impactful than several trillion dollars in short term stimulus money was. That is a strange argument, especially considering all of the negative consequences of this massive spending are to be felt later, not now.
Sweden did the voluntary measures, but also injected significant public money into their economy, and even they haven’t had a V shaped recovery.
Thomas Hutcheson
Jun 7 2020 at 3:57pm
If we had Fed policy that targeted NGDP.
Comments are closed.