This post is about Mitch McConnell’s suggestion that states facing budget shortfalls because of the pandemic should declare bankruptcy rather than receive federal funds. Mitch actually called relief funds for states “blue state bailouts,” even though red states need funds, too. This inspired Rep. Peter King of New York to call McConnell “the Marie Antoinette of the Senate.”
My impression is that it’s broadly, but not universally, believed that a state couldn’t declare bankruptcy even if it tried. But let’s look at some background to see what’s going on here.
Something Paul Krugman wrote on April 16:
… But the special loan program for small businesses has already been exhausted. State and city governments are reporting drastic losses in revenue and soaring expenses. And the Postal Service is on the edge of bankruptcy.
So we need another large relief package, targeted at these gaps. Where would the money come from? Just borrow it. Right now, the economy is awash in excess savings with nowhere to go. The interest rate on inflation-protected federal bonds is minus 0.56 percent; in effect, investors are willing to pay our government to make use of their money. Financing economic relief just isn’t a problem.
Yet at the moment further relief legislation is stalled. And let’s be clear: Republicans are responsible for the impasse.
Basically, Krugman is saying that if we want to save the bleeping economy and not slide into depression, the feds should just crank out the money to keep us all afloat until the pandemic is no longer threatening us. This is not the time to be cheap.
Congress is still struggling with a new relief package. Here’s the most recent news —
The House prepared Thursday to pass a bipartisan $484 billion spending package that would restart a small-business loan program that was swamped by demand during the coronavirus pandemic and allocate more money for health-care providers and virus testing.
Once approved, lawmakers would send the legislation to President Trump for his signature, following Senate passage earlier this week.
One thing not in the bill is money for states and cities. Senate Democrats tried to get $150 billion for states and cities added to the package, but Republicans wouldn’t allow it.
From the New York Times, April 15:
States provide most of America’s public health, education and policing services, and a lot of its highways, mass transit systems and waterworks. Now, sales taxes — the biggest source of revenue for most states — have fallen off a cliff as business activity grinds to a halt and consumers stay home.
Personal income taxes, usually states’ second-biggest revenue source, started falling in March, when millions lost their paychecks and tax withholdings stopped. April usually brings a big slug of income-tax money, but this year the filing deadlines have been postponed until July.
“This is going to be horrific for state and local finances,” said Donald J. Boyd, the head of Boyd Research, an economics and fiscal consulting firm, whose clients include states and the federal government.
I am no economist, but I understand that if states are forced to cut services and lay off employees this will not just cause inconveniences; it will prolong whatever recession, or depression, we will face going forward. And it will hurt the economies of red states as well as blue ones.
But somehow relief for states has become a partisan issue. And that’s insane. Eric Levitz wrote for New York magazine (April 15),
Political coverage of negotiations on Capitol Hill in recent weeks has consistently framed aid to states and municipalities as a concession to Democrats. And by all appearances, this is an accurate description of the legislative dynamics. But it’s difficult to understand why. Neither the pandemic nor its economic consequences have been confined to blue states. In fact, the collapse of global demand for oil is hammering deep-red petro-states. Oklahoma’s budget was written around the presumption of $55-a-barrel oil, which is more than double crude’s going rate these days. The Texas Taxpayers and Research Association, meanwhile, has estimated that every dollar shaved off the price of oil knocks $85 million in revenue out of the Lone Star State’s coffers.
Beyond the fact that Republican-leaning states are hurting for aid about as much as blue ones are, the president’s party has a profound political interest in mitigating the economic impact of an election-year recession. This is ostensibly why Republicans promoted mailing checks directly to low-income and middle-class households: to prop up consumer demand and prevent economic decline from feeding on itself. And yet, if states are forced to lay off public workers, cut social benefits for constituents, and cancel planned investments in public goods, then they will deepen the recession.
See also The case for a massive federal aid package for states and cities by Dylan Matthews at Vox.
Why are congressional Republicans taking this position? Levitz attributes this to long-held GOP “small government” ideology, and maybe that’s it. Kevin Drum thinks Mitch McConnell is also seizing an opportunity to crush public sector unions and take their pensions.
Republicans have been targeting the pensions of state workers forever. For the most part, these pensions are protected because they’re part of union contracts, but that just makes them even more attractive targets: If you can gut pensions, then not only will you reduce state spending, but you can crush the unions at the same time. Legally, though, the only way to do this is as part of a bankruptcy restructuring.
So as far as McConnell is concerned, COVID-19 has an upside: by wrecking state finances, it will force them into bankruptcy. And that means Republicans can get their revenge on public sector unions, who are big supporters of Democrats. What’s not to like?
Regarding pensions, there is an argument that starving the states for funds would hurt more blue states than red ones. According to an article in Forbes,
… what the Senator failed to mention is that his Commonwealth of Kentucky does not issue general obligation bonds. He also neglected to mention its bottom-level ranking in state public pension funding, 50th in the nation. If state bankruptcy is permitted, Kentucky has no outstanding state general obligation debt that would be negatively impacted, but it would presumably allow the state to renegotiate the terms the pension that tens of thousands of Kentucky pensioners rely on. It is unlikely their payments would increase.
Mitch might also think that hurting some states might help Republicans keep the Senate.
Of the top ten underfunded state public pensions, five states are straight Democrat controlled in both the statehouses and have majorities in federal representation: New Jersey, Illinois, Connecticut, Rhode Island and Hawaii. Each face budget pressures and have either raised taxes or contemplated raising taxes to deal with budget deficits. Some recently had Republican governors that lost to Democrats, suggesting the electorate is not opposed to Republican rule. A local Republican push in those states to file for bankruptcy over raising taxes might be well received. Well received enough to flip those states over to Senator McConnell’s side of the aisle.
Now, how might this backfire? While it’s true that the worst of the pandemic has, for the most part, slammed blue urban areas the hardest, notably New York City. McConnell may not have gotten the memo that the virus is moving in to red states now.
A new analysis from demographer William Frey finds that coronavirus is now spreading into whiter and more Republican-leaning areas of the country. Despite initially being concentrated in blue and urban areas, it has slowly extended into new parts of the Midwest and the south, into outer suburbs and small metropolitan areas, and into parts of the country carried by Trump.
Some people are clinging to a perception that the pandemic is mostly a blue state — and urban — problem, and perhaps McConnell assumes his position will be popular in Trump Country.
The organizers of the anti-lockdown protests have worked to create the impression of a groundswell of populist rage at elites shutting down the economy in parts of the country far less impacted by the virus, to protect heavily impacted areas.
Those elites, of course, are mostly Democratic governors, relying on scientists who shouldn’t be trusted. As Tucker Carlson put it, the idea that quarantines are necessary to save lives is “a lie,” because “there is no scientific record to consult.”
Tucker Carlson wouldn’t know a scientific record if it bit his ass.
At times these political-geographic fault lines have been made explicit. The New York Times recently observed that in Michigan, protesters from rural areas are “nearly all white,” with some “hoisting Trump signs and Confederate flags,” even as the vast majority of those afflicted and dying are “concentrated in heavily black and Democratic Detroit.”
Trump himself crudely nodded to this when he mused about quarantining off East Coast blue states, as if to protect virtuous Red America — often described as “Real America” by his propagandists — from infestation by an export from diseased Blue America.
As Ed Kilgore noted, Trump and his followers are relying on such sentiments to fuel the anti-lockdown protests, by blaming “social and economic restraints that are still in effect in much of the country on cities, many of them heavily black, where the coronavirus has been most destructive.”
However, there is all kinds of polling saying that most Americans support the pandemic restrictions and are concerned they will be lifted too soon. And if the poorer red states start getting slammed with more sick people than they can handle, you can bet they are going to be begging for federal relief dollars.
I will give Andrew Cuomo the last word.
Cuomo took McConnell to task in a Thursday press conference, first laying out why he finds state and local government funding to be so important, and then decrying McConnell’s “obsessive political bias and anger.” …
… Cuomo then brought up some cold hard numbers. While New York state contributes billions more dollars to the federal government than it gets in return, McConnell’s state of Kentucky relies on billions of dollars of federal funding each year, prompting Cuomo to ask, “Sen. McConnell, who’s getting bailed out here?”
Maybe that issue of red states being parasites on the blue states can be addressed by a future Democratic-controled Congress…
