Negotiators seeking to strike a deal on a stalled coronavirus relief bill risk additional economic bruising unless they come to agreement on providing fiscal aid to state and local governments, which remains the largest stumbling block in talks between Democrats and the White House.
Republicans insist that $150 billion in additional aid will be enough to help state and local governments fill in their budgetary shortfall, and have railed against what they call a "blue state bailout" for governments they say were already fiscally irresponsible before the pandemic.
Democrats, meanwhile, are pushing for $900 billion in aid — a figure Republicans call outlandish — saying that without it the country faces a longer and weaker comeback. Some economists say scant federal aid to state and local governments in 2009 hampered the last recovery.
How the government ultimately responds to the partisan impasse — or fails to respond — will be critical for the economy, and could have significant implications for November’s election.
Without federal aid, states could resort to cutting back employment and services in education, transportation, infrastructure and other key fields.
“The actions state governments take affect the lives of Americans in huge ways,” said Josh Goodman of the Pew Charitable Trusts’ state fiscal health project.
“When they’re in difficult budget positions, they’re either cutting services when people can least afford it or raising taxes when people can least afford it.”
The disagreement on state and local aid is holding up a broader package that would, among other things, renew expanded unemployment payments that expired in July, provide funds for reopening schools, revive a successful loan program for small businesses, and bolster the public health response.
Experts also say that topping up state and local funds will be crucial to the country's recovery following the pandemic, and the longer Congress takes to reinstate those programs the deeper the economic scars will be.
Justin Theal, Goodman’s partner at Pew, said the Great Recession should serve as a warning.
“One of the hallmarks of the recovery from the Great Recession was how long it took for states and local budgets to recover. It was slower than the previous four downturns,” he said.
When state budgets are slow to recover, they can hold back the broader recovery by laying off workers, cutting services and raising taxes.
“While the federal government is attempting to stimulate the economy, states are forced to take steps that slow down the economy,” he said.
Charles Evans, president of the Federal Reserve Bank of Chicago, highlighted the risk in a July interview.
“As you look at the economic outlook, there are some negative scenarios, and the ones that are most pessimistic involve not supporting state and local governments,” he said.
An analysis from the left-leaning Center on Budget and Policy Priorities (CBPP) estimated that through August, the country has lost 1.1 million public jobs on the state and local level, representing nearly 10 percent of all job losses across the country.
About 60 percent of those state and local public jobs were linked to education, ranging from elementary school bus drivers all the way to university administrators.
“They’re in a really unprecedented fiscal crisis, worse than the Great Recession,” said Wesley Tharpe, deputy director of state policy research at CBPP.
The public sector layoffs, he says, have already eclipsed the 750,000 seen in the recession following the 2008 financial crisis. With many state legislatures expected to make tough budget decisions when they return to session in January, he says, time is of the essence.
“Those amended budgets could be a critical inflection point for harmful spending reductions,” he said.
On Capitol Hill, there is little disagreement that more stimulus is necessary, but the gulf on the scale of the spending is vast, with Democrats calling for more robust investments in state and local governments and Republicans accusing them of playing fast and loose with the nation’s finances.
“Unlike Speaker Pelosi, the American people know we can’t throw around a trillion dollars here and a trillion dollars there,” House Minority Leader Kevin McCarthy (R-Calif.) told The Hill, referring to Speaker Nancy Pelosi (D-Calif.).
This year’s deficit is already on track to reach $3.3 trillion — more than double the largest deficit on record, which occurred during the last recession.
By next year, the nation’s debt burden will exceed the size of its entire annual economic output.
Mark Meadows, the fiscally hawkish White House chief of staff who with Treasury Secretary Steven Mnuchin has led negotiations with Democrats, said state and local governments were short only $275 billion, and said that loosening rules on a previously allocated $150 billion and adding another $150 billion would suffice.
"The Speaker is still at $915 billion, which is just not a number that's based on reality, and certainly not a number that's based on lost revenues for state and local governments," he told CNBC this week.
But Democrats dismiss the GOP figure out of hand.
They note that 75 percent of the previously allocated funds have already been spent or allocated, and say states face much larger gaps.
The CBPP estimates that through 2022, states alone would need $555 billion. Democrats say that local governments need another $345 billion on top of that.
“The White House and Senate Republicans have made clear that they still do not comprehend the scale of this disaster or the urgent needs of our communities and the American people,” Pelosi said Friday.
“House Democrats have come to the negotiating table willing to compromise, and we will continue reaching out until we achieve a fair agreement that meets the needs of all Americans,” she added.
An agreement between Pelosi and Mnuchin to pass a clean spending bill to avoid a shutdown has eased nerves that the measure might be tied to the COVID-19 bill, whose fate remains uncertain.
Stan Veuger, a resident scholar at the right-leaning American Enterprise Institute, said some of the higher estimates are overblown.
“I think the Democratic number is just way high,” he said.
For one, the estimates have not incorporated recent data showing the economy recovering at a faster pace than once expected. Unemployment in August fell to 8.4 percent, though it had been predicted to remain in double digits through the end of the year.
Veuger also said that states have amassed a combined $75 billion in rainy day funds that should be used, and that the federal government has already stepped in with $50 billion in matching Medicaid funds over four years.
A major question is the timeline of support. The CBPP puts state revenue losses for the current fiscal year at $290 billion. A potential path forward could be to deal with the coming year first instead of worrying about a longer timeline.
“Given how uncertain everything is, I don’t think we have to plan that far ahead. I would say do the coming year first,” Veuger said.
But he conceded that there is more risk in underfunding state and local governments and potentially hampering the economic recovery than overspending, which would add to the debt imperceptibly.