Time is running out for state and local governments to fill the gap between the revenues they collect and the expenditures they need to make as the COVID-19 pandemic continues.
In Michigan, for example, 31,000 state employees, or nearly two-thirds of the state's government workers, are temporarily laid off through July due to budget shortfalls.
In New Jersey, about half of the 400,000 employees comprising the state and local public-sector workforce face layoffs if additional federal aid isn't forthcoming, according to Gov. Phil Murphy.
"State and local governments desperately need financial support," said Mark Zandi, chief economist at Moody's Analytics, as part of a bipartisan conference call sponsored by the Economic Policy Institute (EPI) on the topic.
Citing data from the Congressional Budget Office, Zandi said the state and local government shortfalls could reach about $500 billion through fiscal 2022, assuming state governments tap their rainy-day funds, which many have, and the federal government continues to pick up direct health costs related to the coronavirus.
If more federal support is not forthcoming and assuming a multiplier of 1.5, U.S. GDP between July 1, 2020, and June 30, 2021 — the next fiscal year for most states — U.S. GDP could be $375 billion lower, according to Zandi. That shrinkage is equivalent to approximately 2% of GDP, which has been the average annual growth of national GDP over the last 10 years. "That's a lot of GDP," Zandi said.
Cut Spending, Raise Taxes or Get More Federal Aid
Zandi also expects that 3 million state and local government jobs will be eliminated over the next 12-18 months on top of the 1 million that have already been lost if there is no additional federal aid for state and local governments.
In that case, states would have to cut spending or raise taxes which would be a "terrible choice," said Josh Bivens, director of research at EPI. He participated in the call along with economist Glenn Hubbard, who served in the administrations of George H. Bush and George W. Bush; Gbenga Ajilore, senior economist at the Center for American Progress; Jason Furman, chair of the Council of Economic Advisers during the Obama administration and professor at the Harvard Kennedy School; and moderator Thea Lee, EPI president.
"This is like fighting a war," said Hubbard. "You borrow to fight it." He views more aid to states as "federal business interruption insurance … [that] is about mitigating the demand shock" from the COVID-19 pandemic and subsequent lockdowns.
There are opportunity costs to not not fighting a war, according to Hubbard, who added that the government should also consider "more automatic stabilizers and more federal spending for public health infrastructure not only within states but across states" along with a broader discussion of state and local accountability.
