Spending and investment by state and local authorities accounts for about 11% of America’s economy –- a significantly larger direct share than the federal government’s. They manage school and health-care systems, and also spend large chunks of their budget on retirement care. They’re a key source of jobs for black Americans and women, who make up a bigger share of the public-sector workforce than the private one.
The Federal Reserve has stepped in with some temporary help by launching an emergency program that can purchase up to $500 billion in short-term municipal debt. Several weeks before Illinois became its first borrower, under a June 2 deal, the Fed backstop had calmed municipal debt markets -- reversing a spike in yields and capping borrowing costs for cities and states.
But in their current dilemma, that’s of limited use. Fed officials themselves have pointed out that Congress is better-placed to help.
“There has not been a significant enough transfer of funds from the federal government, which is able to borrow and doesn’t have to run a balanced budget, to states that do,” Boston Fed President Eric Rosengren said last month. “That will definitely be a significant headwind to the economy getting fully restored.”
Many local administrators are barred by law from running budget deficits by allowing their spending to outstrip revenue. And even where they aren’t, they can’t tap the currency-creating capacity of Congress -- known as the power of the purse -- like the federal government can.
Instead, when times are hard, these authorities are typically forced into the kinds of policies -- like raising taxes or cutting spending -- that make them even harder. In economics jargon, that’s known as pro-cyclical policy, and it’s generally been reckoned a bad idea for many decades now.
‘No Room for Error’
“They act as a multiplier,” is how Ernie Tedeschi puts it. “They exacerbate the downturn, because they have to make cuts at the same time the economy is bad.”
That’s what happened in 2010, when the national economy was starting to display some green shoots, according to Tedeschi, managing director of Evercore ISI and a former Treasury economist.
“State and local governments were essentially working against the recovery because they had to make those cuts,” he says. This year, too, they could deliver “the next big economic shock to hit the U.S.”
In Yonkers, a bedroom community outside New York City, the budget for 2021 foresees cutting as many as 168 jobs in the school system, because hoped-for state funding for education never arrived. And Mayor Mike Spano worries that the city is at risk of having to enact more layoffs if New York State cuts its budget again in a few months.
“Asking us to cut a police officer or a teacher is like asking us which limb to cut off,” says Spano. He’s hopeful that the economy’s gradual reopening will help the city, and that Congress will come through with more aid for states. “There’s no room for error here,” he says. “We’re teetering on the edge of a cliff.”
Back in Plymouth, a couple of hundred miles northeast, the Mayflower II is set to sail next summer instead. The 1620 anniversary celebrations haven’t been cancelled, says Arrighi -- just postponed. But it’s going to be a painful year getting there.
--With assistance from Amanda Albright.
This article was provided by Bloomberg News.