How's the U.S. economy doing? The latest news is somewhat better than expected — GDP grew 7.4 percent overall in the third quarter, and is now "only" something like 3.5 percent below where it was before the pandemic struck. Housing is booming along with federal spending, thanks to rock-bottom interest rates and the CARES Act. But consumption is down, along with business investment.
Perhaps most importantly, local government government also shrank by 1.6 percent, after shrinking even more sharply in the previous two quarters. Public servants are being laid off by the hundreds of thousands, and government services are being cut back. This is a pointless and hugely damaging trend that will harm both the American people and the American economy over the short and long terms.
The reason state and city governments are shrinking is because tax revenue is in the toilet, obviously. These bodies generally depend heavily on sales taxes, and with people still not going out and spending as usual, the money isn't rolling in. Meanwhile, transit authorities are facing similar problems because people aren't going out as much, and are afraid to ride the bus or train even when they do. (It's worth nothing that most studies have found a low risk of infection on public transit, so long as capacity is kept fairly low, people wear masks, and stay quiet on board.) What's more, borrowing themselves to cover the bills is difficult or impossible — cities and transit authorities face substantial interest rates, and most states are legally required to balance their budgets.
This is an idiotic state of affairs. Right now, the federal government can borrow at a 10-year interest rate of 0.79 percent, and in the recent past it has seen rates literally less than zero. It could rescue states, cities, transit authorities, and so on with only a small fraction of the money that has been spent on rescuing businesses and individuals so far. This would help the economy and the American people, by keeping public employees in their jobs and spending money elsewhere, and by keeping up the public services that everyone relies on to some degree. Cutting budgets means potholes, garbage piling up, broken water mains, crummy bus service, lost jobs, and worse.
It's also not like states and cities did anything to deserve this crisis. They were smashed by the global pandemic out of nowhere just like everyone else. If they can be rescued, they should be rescued.
Even on grounds of boosting growth, or keeping down the national debt, rescuing local governments is the smart move. Slashing public services to the bone will create long-term damage to the economy, and therefore to the debt-carrying capacity of the American state. It's a matter of elementary accounting — for instance, the Metropolitan Transit Authority, which runs the New York City subway, is facing a budget shortfall of roughly $16 billion over the next four years, mainly because most people have stopped riding the trains. It is asking for $12 billion from the federal government to keep services going. If it doesn't get the money, a recent report estimates that lost service will cause $50 billion in damage to the local economy, and kill 450,000 jobs.
It isn't just Democratic states, either. Wyoming is also facing a quarter-billion dollar budget hole even after making severe cuts in previous months, part of a cash crunch that has walloped state governments in general worse than any time since the Great Depression. Teachers are being laid off across the country — 350,000 of them in September alone. That damage will show up down the road in the form of worse-educated adults, and a smaller economy.
But eating the educational seed corn is just one example of a broader truth that holds good across the country — the whole economy and society is built on a bedrock of government services. Without bus drivers, sanitation workers, DMV clerks, road repair crews, public health nurses, food safety inspectors, and thousands of other vital workers, the United States would not function at all. If those services are impaired, then the whole society will suffer commensurately. All states need help, regardless of their politics, because all of them are in trouble.
Now, there are some secondary considerations when thinking about a state and local rescue. In many areas, particularly infrastructure construction and maintenance, there has been eye-popping cost bloat of late. If Democrats win the upcoming election, it would be wise to try to get a handle on this cost problem as part of any rescue package, if for no other reason than to make the money go further. They would also be wise to fold a rescue into a broad re-building of local and state government capacity, as Alex Pareene suggests at The New Republic.
But the main thing for the moment is to prevent pointless and damaging cuts. Austerity during a depression is practically the dictionary definition of a false economy — failure to spend now will cost us all much more in the end — but absent federal action, it will happen.