President Donald Trump’s refusal to provide federal aid to states hit hard by the economic crisis sparked by the coronavirus pandemic would cost the country 4 million jobs, according to an analysis by Moody’s Analytics.
Negotiations over the next phase of coronavirus relief have stalled as Trump attempts to circumvent Congress with unworkable and legally dubious executive orders that fall far short of the aid that would be included in any Congressional proposal. Though House Democrats already approved a $3 trillion relief bill including an extension on federal unemployment benefits and $1 trillion in aid to states and cities whose tax revenues evaporated amid coronavirus lockdowns, Trump and Senate Republicans have balked at both provisions.
“We’re not going to give a trillion dollars for state and local,” Treasury Secretary Steven Mnuchin told CNBC on Monday. “That’s just not a reasonable approach.”
Senate Majority Leader Mitch McConnell, R-Ky., who accused Democrats of seeking “blue state bailouts” even though his own homestate badly needs federal assistance, accused Democrats of seeking a “trillion-dollar slush fund.”
The number wasn’t dreamed up by House Democrats. Half of the aid is for the states, and was the number requested by the National Governors Association, which was then led by Republican Maryland Gov. Larry Hogan, and backed by independent economists. The left-leaning Center for Budget and Policy Priorities estimated last month that states face a $555 billion budget shortfall between 2020 and 2022 as a result of dramatically reduced tax revenue, and that figure does not even include the shortfalls facing cities and municipalities. Nearly every city with a population of over 50,000 is facing a budget shortfall this year.
Without federal aid, states will be forced to drastically slash government jobs, which include police, hospital workers, teachers, firefighters, and emergency responders. For all of Trump and McConnell’s warnings about Democrats seeking to “defund the police,” the Republican refusal to help cash-strapped states and cities would quite literally defund the police, and other key services.
Several analyses also show that the Republican refusal to aid states and cities would do even more damage. Dan White, the head of fiscal policy research for Moody’s Analytics, told the Wall Street Journal that without federal aid, the budget shortfall facing governments would shrink the economy by 3% and cost the country more than 4 million jobs.
The warnings have alarmed some red-state Republicans, who have urged party leaders to back off their position.
“I understand concerns about spending, but the cost of doing nothing is worse,” Sen. Bill Cassidy, R-La., told the Journal. “The United States cannot fully recover economically if local communities cannot provide basic services, allowing commerce to flow.”
State and local governments spent about $2.3 trillion last year, roughly 11% of the national GDP, and employ 13% of all workers in the US. Unlike the federal government, states are required to balance their budgets each year, meaning they cannot take on any longterm debt.
“Not supporting state and local governments is kind of shooting yourself in the foot,” Louise Sheiner, the policy director at the Hutchins Center on Fiscal and Monetary Policy at the Brookings Institution, told the outlet.
Another analysis by the left-leaning Economic Policy Institute (EPI) predicted that the cost of inaction is even greater, threatening to cost the country 5.3 million jobs.
“Reductions in this spending will in turn significantly slow recovery from the current economic crisis. This is not an abstract concern—the historically slow recovery in state and local spending following the Great Recession by itself delayed a recovery in unemployment to pre-crisis levels by four full years,” wrote Josh Bivens, EPI’s research director, and David Cooper, the group’s senior economic analyst.
The EPI analysis estimated that inaction on federal aid to states and cities would result in $430 billion less spending by the end of this year and $570 billion less spending by the end of 2021. Given the “ripple effect” those cuts would have on the overall economy, the gross domestic product would shrink by about $800 billion, or 3.7%, by the end of next year.
The analysis showed that a reduction to the Democrats’ $1 trillion proposal would cost millions of jobs as well. Reducing the state and local aid number to $500 billion would cost approximately 2.6 million jobs, according to EPI, and cutting the number to $300 billion would result in 3.7 million job losses.
“We should note that a job shortfall of 3.7 million would exceed the entire employment losses seen in the recessions of the early 1990s and early 2000s,” Bivens and Cooper wrote. “In short, $300 billion in aid to state and local governments would not even move the economy’s health to the level it sat at during recent recessions—and this is 18 months from now.”
The economists noted that the extent of the economic crisis remains unclear. Indeed, states and municipalities may ultimately not need the full $1 trillion, which could be addressed by making the aid contingent on economic conditions.
The analyses are ultimately limited because they are based on current economic conditions, but these may be further exacerbated in the coming weeks. Trump’s executive order on unemployment would require states to provide a large chunk of additional funding even as they face massive budget cuts. The order, which would temporarily reduce the benefit from $600 per week to $400 per week before it inevitably runs out in a matter of weeks, would result in 1.7 million jobs lost if the cut is extended, according to another EPI analysis. The push to reopen schools requires numerous safety upgrades and large amounts of personal protective equipment, further straining budgets.
Senate Republicans have argued that the most important thing is encouraging businesses to reopen and encouraging workers to return, even as coronavirus deaths hit a record high this week and there are six times as many people unemployed as there are job openings.
Republicans’ opposition to a full extension of the unemployment aid and assistance to states and local governments undercuts their hope for a revitalized economy.
“The extra $600 weekly payment by itself added $840 billion at an annualized rate to U.S. personal income in May. If it goes to zero, we’ll end up a year from now with about 5 million fewer jobs than we’d have if we kept this money flowing,” Bivens said. On the state and local aid side, anything less than $1 trillion would further damage the economy, he said. “In short, whether or not the economy is severely depressed a year from now – even if the virus is well-managed (big “if”) – depends entirely on what Senate Republicans decide to do with the UI [unemployment insurance] benefits and [state and local] aid.”
The other big unknown in determining how much economic aid is needed is how long the health crisis will last. Trump has pushed to block additional funding for testing, tracing, and the Centers for Disease Control in the next phase of aid, and the looming eviction cliff could result in a spike in homelessness, which could leave millions more vulnerable to infection.
“As bad as Senate Republicans are being, Trump admin is worse – wanting to even throttle back spending on virus management,” Bivens said. “Managing the virus is the most important precondition for fixing the economy, and you can’t sweep this under the rug by stopping testing – people really will notice mass death and overrun hospitals.”