Trump Orders an Anti-Stimulus Plan for Struggling States

(Bloomberg Opinion) -- President Donald Trump and his advisers have said repeatedly that they don’t want to “bail out” some U.S. states. It seems they’re willing to risk inflicting lasting damage on all 50 of them — and, by extension, the entire American economy — to prove their commitment to this cause.

As part of the president’s orders during the weekend to provide economic relief without Congress, he called for additional unemployment payments to restart at $400 a week, down from the previous $600. That sounds mostly fine on its face, given that this insurance most likely cushioned the economy from an even bigger decline in the past few months. But that headline figure includes $100 that states would have to contribute themselves.

Now, $100 a person per week might not sound like much at first. But it’s hard to overstate the difference between that money coming from the federal government versus the states, which are projected to face combined budget shortfalls of about $555 billion through 2022. As the first few months of the coronavirus crisis demonstrated, an all-hands-on-deck effort by Congress, the Treasury Department and the Federal Reserve can yield powerful results. Since February, as lawmakers enacted sweeping relief measures, the size of the U.S. Treasury market has swelled by more than $3 trillion, the Fed’s balance sheet has grown by roughly the same amount, and yet benchmark yields remain near record lows.

As much as Congress likes to play politics with the federal budget, in reality there’s no urgency to balance revenue and expenses. The U.S. controls issuance of dollars (or, as it says across the top of each physical bill, “Federal Reserve Note”) and always has a buyer of last resort for its securities in the central bank, which is still purchasing $80 billion of Treasuries a month. States and municipalities don’t have the same luxury. Much like an American household, each dollar they spend must come from somewhere. That means either reduced public services, higher tax rates or both.

In that sense, making governors kick in extra money from their own coffers for unemployment insurance is basically the opposite of economic stimulus. Unlike the kabuki theater of federal budget negotiations, state budgets aren’t a political plaything.  

Treasury Secretary Steven Mnuchin, at least outwardly, doesn’t seem to grasp this. He said Monday that the added unemployment benefits wouldn’t cost states a dime, presumably suggesting that governors could cobble together what money remains from the last round of federal aid to make the payments. That quite obviously misses the zero-sum aspect of state finances and is nothing short of a gut punch to the 1.1 million state and city employees who have lost their jobs since March. Meanwhile, he suggested there’s “some limit” to what the federal government can borrow during this crisis. While that might be true, in practice there’s scant evidence that the U.S. is anywhere close to brushing up against that ceiling.

This weekend’s action might just be a ploy to bring Democratic leaders down from their demand for $1 trillion in state aid, which Mnuchin called “absurd.” But it’s nonetheless a dangerous game. Before Covid-19 shuttered the American economy, states’ financial reserves reached a record, with the Pew Charitable Trusts noting in March that “policy makers in many states have used the current economic expansion to replenish and enlarge their rainy day funds to prepare for the next inevitable downturn.” Connecticut, for instance, surpassed its pre-financial crisis savings mark for the first time last year. By and large, state officials have made the tough choices, yet those weren’t enough to offset the unprecedented economic contraction in recent months.

As U.S. lawmakers look to put together a last-minute compromise on a relief package, they ought to think of state and local government budgets like those of households and companies, rather than the federal government’s. If the goal is to invigorate the American economy, starving states of funds for political grandstanding will more likely cause the country to bleed out. 

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Brian Chappatta is a Bloomberg Opinion columnist covering debt markets. He previously covered bonds for Bloomberg News. He is also a CFA charterholder.

©2020 Bloomberg L.P.