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Macro-economists of Right & Left Agree on State/Local Aid

Writer's picture: Tom CochranTom Cochran

Updated: Aug 16, 2020

I attended (remotely of course) a most extraordinary webinar/panel discussion among a broad spectrum of macroeconomic policy gurus who articulated a broad consensus on the need for swift Congressional action delivering federal financial assistance to states and localities, replacing their non-recoverable tax and fee revenue losses. See the recording here.


EPI chief Thea Lee introduced and Washington Post journalist Heather Long moderated the panel which included Glen Hubbard, Gbenga Aljlore, Josh Bivens, Jason Furman, and Mark Zandi. Never in the many years I have been involved in public policy research, analysis and advocacy (or in sub-national public finance banking and advisory practice) have I seen such a degree of consensus across the political spectrum of engaged macro-economists on a significant fiscal policy choice of any kind facing Congress.


Coincidentally, the New York Times finally published another pretty good summary of the State and local fiscal crisis by Jeanna Smialek, Alan Rappeport and Emily Cochrane in which every state finds itself as the Greater Recession takes hold everywhere, and how that crisis will deepen and prolong the economic pain if federal help doesn’t come quickly. If Covid-19 can’t respect red state/blue state distinctions, why should the Greater Recession of 2020., right?

Maybe the Times was goaded into getting this piece put together by the Wall Street Journal’s publication last week of Coronavirus-Hit State Budgets Create a Drag on U.S. Recovery,” by Kate Davidson and David Harrison and maybe by intel that the same Journal duo was working on this: State-Aid Disagreement Proves Big Hurdle for Coronavirus Talks.



All of this consensus among macroeconomists of both major political stripes and by the Fed Chairman leads me back to this question: now it’s clear that we’re at the start of what I have taken to calling the Greater Recession and the goal of federal policy-makers should be to shorten its duration so that its long term impact on growth will be less severe than that of the Great Recession - with the Senate and Executive Branch refusing to negotiate with the House on replacing non-recoverable State and local tax and fee revenue losses, and given the Fed’s twin obligations to facilitate full employment and control inflation, isn’t it time for the Fed to start making forgivable loans to the states and localities per our proposal made in April ? Of course, the answer is unfortunately no, as the lawyers at the Fed have evidently told the Board of Governors that it lacks the legal authority to do that.


Ok, and/but one huge step they might be able to take under existing legal authority would be to make subordinated loans (or buy deeply subordinated State and local bonds) of long duration at extremely low or even 0% interest which are secured solely by the future flow of federal grant assistance replacing non-recoverable state and local revenue shortfalls.

Wouldn’t such a program keep the Fed still within monetary policy territory? And wouldn’t it send the most powerful possible signal to Congress and the Executive branch that this kind of assistance (a la the SMART Act -which has been introduced with bipartisan sponsorship in both houses – or the HEROES Act) is going to have to happen sooner or later?

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