The Way Out Through State and Local Aid: Bipartisan group of economists breaks down why local governments need aid now

If a bipartisan group of the nation’s top economists were trapped in an elevator with Republican members of Congress, what would they tell them about the need for state and local aid?

Towns across the country are already hemorrhaging red ink, and substantial federal aid is needed now in order to derail the worsening economic shock brought on by the pandemic.

That was the consensus among economists the Economic Policy Institute brought together recently to discuss the urgent need for state and local aid.

The panel included:

  • Gbenga Ajilore, Senior Economist, Center for American Progress
  • Glenn Hubbard, Dean Emeritus and Russell L. Carson Professor of Finance and Economics, Columbia University
  • Jason Furman, Professor of the Practice of Economic Policy, Harvard Kennedy School and Harvard University Economics Department
  • Josh Bivens, Director of Research, Economic Policy Institute
  • Mark Zandi, Chief Economist, Moody’s Analytics

Heather Long, Economics Correspondent at the Washington Post, was the moderator and she asked each economist: “If you had 30 seconds in an elevator with a Republican lawmaker to try to convince them why we need state and local aid now, what would you say?”

Here’s what they said.

Gbenga Ajilore’s elevator pitch: “I’m going to start with a meme. I’m going to say that the best time to pass state and local aid was three months ago, when we saw millions of jobs being lost. The second-best time is right now. And the reason why is that there was $150 billion given to states, $30 billion given to localities, in the CARES Act, but a lot of that was restricted.

“And the other thing was that rural areas were left out of it. The $30 billion only went to places that have 500,000 people or more. And so for rural areas, we need state and local aid now so that they get the money, especially given what’s coming up in the fall between schools and further cases.”

How important is it to specify what the aid would be used for?

Glenn Hubbard’s elevator pitch: “I actually do spend time with Republican lawmakers, not on an elevator anymore, but on Zoom, about this issue, and I make three points. One, we should have learned from the Great Recession, from the financial crisis, the very large cost of failing to come through enough for state and local governments.

“Second is about payroll. There’s recent research suggesting that every dollar of additional state aid would support at least $0.30 more payroll from state and local workers, including essential workers.

“And the third is, [in order] to get from here to there—meaning to where the economy is going to be after the pandemic—we need to focus on education and training, and a lot of that is done in public universities and community colleges. This is not the time to be cutting support for those organizations. All in, I think support of at least $500 billion in a block grant is needed.”

What if significant aid for states and local governments doesn’t materialize?

Jason Furman’s elevator pitch: “So I would just say listen to Glenn. That’s two seconds. For every dollar we spend on state and local assistance, it adds probably $1.70 to the size of the overall economy. There’s nothing that economists have studied better and more carefully when it comes to fiscal policy multipliers, probably, than state and local assistance.

“And finally, if we want to have an economy, we need to have the best shot at doing the best we can with schools. That’s going to cost money. You don’t spend that money, you don’t have kids in school, you don’t have parents working, you don’t have any of the things that all of us want to have economically and otherwise.”

Should there be restrictions on how the aid is used?

Josh Bivens’ elevator pitch: “We should learn the lesson of what happened after the Great Recession, when state and local governments—once the Recovery Act aid to states ran out—their spending became a tremendous drag on growth, made that recovery take far longer than it should have.

“If you look at the second quarter of this year, sales taxes for state and local governments fell at a 16% annualized rate. We’ve probably seen Medicaid enrollments rise by about five million between February and July. The budget crunch is already happening for state and local governments. They’re making plans for next year about what they’re going to do with their budgets. We should give them aid so part of those plans are not just cutting everything in sight in order to make their budgets balance.”

Why are states facing this crisis, and how much in aid is needed?

Mark Zandi’s elevator pitch: “So after that, I think everyone should be convinced in that elevator. Clearly, the economy is struggling. We have double-digit unemployment. We’re still down 13 million jobs from the pre-pandemic peak. State and local governments are hemorrhaging red ink, and it’s coast to coast, it’s politically ecumenical. Every state, municipality, is struggling and responding by slashing payrolls. We’re down 1.3 million state and local government jobs since February, slashing programs.

“There’s no more effective way to help the economy and to help these states and support these jobs than providing federal government aid to state and local governments. And this is not anything that’s unusual. This is tried and true economic support. This is what we do every time we get into a recession, particularly in one like this one, and it’s pretty much a slam dunk, pretty straightforward kind of economic policy.”

How much aid is needed?