The economy’s
double-edged sword 

With depressed tax revenues from lower income and sales tax collections, cities and states are between a rock and a hard place when it comes to balancing their budgets in a COVID-impacted landscape.

July 15, 2020

Modern economies like the U.S. possess myriad connections both internally within the domestic economy and externally within the context of the global economy. Though often overlooked because some of those connections prove difficult to see and they are typically beneficial, they present a particularly acute problem during current the current crisis with those connections potentially producing negative consequences.

Funding for states and municipalities presents one particularly important example. Depressed tax revenues (via lower income tax and sales tax revenue) creates problems because states and municipalities often cannot borrow and deficit finance – they must balance their budget. The federal government can borrow, deficit finance, and provide support to state and local governments, but that has turned contentious among federal lawmakers.

If those jurisdictions that cannot borrow fail to obtain support from the federal government, it will create a cascade of negative consequences. Those jurisdictions will cut spending in order to balance their budgets. Almost certainly that will result in cutbacks to school funding (e.g. staff, resources, cleaning supplies) at a time when the reopening of public schools remains highly uncertain. States and municipalities have already laid off roughly 1.5 million workers, including some in education. That number will increase without federal government support. Reducing funding will almost certainly make any effort to open public schools (from the primary level to the tertiary level) even more difficult.

Increasingly, the role schools play not just as centers of education but also as de facto childcare centers for working parents is becoming more apparent and important. In 2018, roughly 41 million U.S. workers aged 18 to 64 (32% of all workers) cared for at least one child under the age of 18. Of these, nearly 34 million (26% of all workers) cared for at least one child under the age of 14. Parents of younger children more heavily rely on school for childcare as well as education. Without schools reopening, many workers (typically mothers) will either leave their jobs, reduce their hours (and consequently their incomes), or switch to less involved jobs that typically offer lower wages. Many other parents will continue working as usual, but at a lower level of productivity. All those impediments present a drag on the economy.

Any infrastructure plan could also face jeopardy without federal government support. Infrastructure projects are often undertaken and paid for (at least partially) at the state or municipal level. No national “Department of Infrastructure” exists. Of note, funding for large projects often comes from both the local level and the national level. Even if the federal government allocates funds for its typical portion of large infrastructure projects, that would likely prove insufficient if it does not support local funding efforts.  Greater than 700 cities have already stopped plans to improve roadways, buy new equipment, and complete upgrades to water systems and other vital infrastructure. They almost certainly will not undertake any new, large projects without federal government support. That postponed or foregone work will reduce employment and create another drag on the economy. 

The good news – this mechanism works both ways. If the federal government provides funding to state and local governments it would support employment, education, infrastructure, and ultimately the overall economy.