U.S. Sen. Pat Toomey

U.S. Sen. Pat Toomey and U.S. Rep. Lloyd Smucker leads a roundtable discussion with local business leaders to discuss the latest on tax reform. It was hosted in conjunction with the Lancaster Chamber at U.S. Boiler Company on Old Tree Drive in Lancaster on Tuesday, Nov. 21, 2017

One way or another, this is going to cost you.

As cash-starved local and state governments plead for more federal aid, Democrats and Republicans in Washington are fighting over how much — if anything — to give them.

Any new federal spending adds to an already-astronomical debt that, eventually, will come out of your pocket. Any stinginess at the federal level will trickle down to local governments, increasing costs that, eventually, will come out of your pocket.

The historic economic crisis will likely long outlast the viral pandemic that caused it. And the decisions policymakers make now, even before the full scale of the devastation is known, will set the country on a course that could last a decade or more, experts say.

Though state and local governments are often spoken of as if they’re adjacent to the American economy, they constitute an enormous economic sector. Their spending accounts for about 11% of gross domestic product — the total amount of goods and services an economy produces — and they employ one in seven workers. That’s more than any other single industry, according to the Brookings Institution.

Local governments employ about 450,000 people in Pennsylvania, and spend nearly $30 billion a year, according to state and federal data.

Economic recoveries can rise or fall on their spending decisions.

“CBO (the Congressional Budget Office) and others have made the point that ... both spending cuts and tax increases take money out of the economy,” said Barb Rosewicz, who directs The Pew Charitable Trusts’ Fiscal 50 project on state finances.

“When you’re taking money out of an economy in a state, it slows down the recovery,” Rosewicz said. “And if that happens in all states, you slow down the national recovery.”

When an employer as large as a government changes how it operates, the effects cascade through society.

Tax increases reduce the spending power of millions of people. Cutbacks to public budgets put thousands out of work.

Less than a month into this shutdown, the Wolf administration laid off 2,500 state workers and stopped paying another 9,000. That’s more than the population of Elizabethtown.

The economic shock has even fiscal hawks saying now’s the time for the federal government to spend, spend, spend. In part, it’s because it’s the only branch that can; most states are bound by balanced-budget requirements while the feds have no borrowing cap.

“I hate government intervention,” said Rep. Frank Ryan, R-Lebanon. But the consequences of not going big now could be disastrous, he said.

Desperate measures

Since the pandemic began, Congress has approved $2.4 trillion in emergency spending, and authorized the Federal Reserve to lend trillions more in a mad dash to keep the economy from seizing up.

House Democrats propose spending another $3 trillion, including $500 billion in state aid and $350 billion in aid to local governments — amounts the National Governors’ Association said were needed to avert financial calamities.

Senate Majority Leader Mitch McConnell, R-Ky., pronounced the Democrats’ bill dead on arrival, and was skeptical about more federal help for governments, calling it a “blue-state bailout.”

Instead, he proposed something most would’ve considered unthinkable just a few months ago: allowing states to declare bankruptcy.

U.S. Sen. Pat Toomey, a Republican from Pennsylvania, said recently he’s “open to the idea.”

Toomey is concerned that more borrowing risks “higher interest rates and inflation,” his communications director, Steven Kelly, said. Borrowing so far amounts to more than one-quarter of the country’s GDP, has pushed the national debt to $25 trillion, and created an annual deficit twice as large as the worst year of the financial crisis, Kelly said.

Some see a potential political upside for the GOP, as well.

Bankruptcy could allow states to wipe out most pension debt, and possibly pensions as a whole, crippling public-sector unions, said Joseph DiSarro, chairman of the political science department at Washington and Jefferson College and a Republican state committee member.

It’s a gamble, though — and one that could have disastrous consequences.

The notion that states cannot go bankrupt is the fundamental assumption underpinning the public bond market, Ryan said. Trillions of dollars in investments ride on the idea that states cannot run out of money because they can just raise taxes.

It’s akin to the assumption, circa 2007, that mortgages held by Fannie Mae and Freddie Mac were backed by the federal government.

“The minute people realized, no, they’re not, they had a crisis on their hands. The market imploded overnight,” Ryan said.

Imagine a repeat now — adding the financial crisis that caused the Great Recession on top of the worst economy since the Great Depression.

“This is the thing that keeps Frank Ryan up at night. If that happens, then the municipal credit markets are going to say, ‘Wait a minute. The assumption that we made, maybe that’s not valid,’” Ryan said.

“And at that point, if Pennsylvania needs to borrow whatever it needs, someone’s going to say, ‘Nope. Not interested.’”

Led by that fear, Ryan drafted legislation authorizing the state to borrow $5 billion now, just in case the bond market crashes.

Politics of recovery

U.S. Sen. Bob Casey Jr. called the bankruptcy proposal “insulting.”

Without more aid, the first funding states will cut will be education and human services — two things governments must provide, but that were first on the chopping block in the Great Recession, Casey said.

Those cuts shifted costs to local governments, who also work with balanced-budget requirements, and where the biggest pot of discretionary spending often is public safety.

“So if you want your public safety cut locally and if you want your education and human services cut at the state level, then you should go the Mitch McConnell-Republican way, and just say to states and local communities, ‘Drop dead,’” said Casey, who supports the House proposal.

On conference calls with county commissioners across the state, the plea for help is uniform, he said.

“Over and over again, county after county, big counties, small counties, rural counties, urban counties, Republican commissioners, Democratic commissioners, liberals, conservatives — a constant refrain is, ‘COVID-19 blew a hole in our budget. We need help filling the hole,’” Casey said.

That’s what perplexes him about GOP recalcitrance, he said. The call for help is bipartisan, and doing nothing imperils any chance of an economic recovery in a year in which President Donald Trump is up for re-election.

Governors noticed that, too. Trump’s surprise 2016 victory hinged on 78,000 votes spread across three states: Pennsylvania, Michigan and Wisconsin. Once considered Democrats’ “blue wall” in presidential races, Trump’s narrow win in those states gave him enough electoral college votes to overcome Hillary Clinton’s popular-vote margin of nearly 3 million.

The Democratic governors of those three states — Pennsylvania’s Tom Wolf, Wisconsin’s Tony Eavers and Michigan’s Gretchen Whitmer — sent Trump a letter asking him to back the $500-billion request from the National Governors Association, and warning of dire economic consequences if they don’t get that aid.

Recent polls show Trump trailing presumptive Democratic nominee Joe Biden by between 2 and 8 percentage points in all three states.

Lessons

In addition to the amount of federal aid, its duration could help determine the course of America’s recovery.

Federal aid to states and local governments after the last recession lasted from 2009 to 2013. The Tea Party insurgents who recaptured Congress for Republicans not only rejected extending that aid, they pulled every lever at their disposal to cut federal spending.

When state aid ran out, tax revenue still had not caught up to pre-recession levels, Rosewicz said. It created something of a second financial crisis for them.

“They again had to scramble and come up with funds, and so we saw a second round of cuts,” Rosewicz said.

It took five years for tax revenue — and, therefore, spending — to inch back up to pre-recession levels, Rosewicz said.

The consequences of that half-decade of austerity lingered far longer.

Cuts to higher education funding were passed along to families through tuition hikes that remain in place today. Two years ago, the country experienced its largest wave of worker strikes since the mid-1980s, and it was driven by teachers fed up with recession-era pay freezes. Postponements to infrastructure investments — roads, sidewalks, software upgrades, airfields — made existing problems worse even as new needs cropped up.

Think of it like your household, Rosewicz said. If someone loses a job, the family is likely to stop putting money into savings, and hold off on replacing the house’s aging roof.

“That’s the same thing states were doing,” she said.

The National Governors Association, in its letter to congressional leaders, has asked that, this time, the window for some types of aid — such as enhanced Medicaid reimbursement — be determined by the unemployment rate, rather than a set date.

“The governors were looking for a smoother phaseout,” Rosewicz said.

The duration of federal aid is “among the many lessons we learned” from the last recovery, Casey said.

“We’re going to have to have a Recovery Act on steroids just for the economic crisis,” Casey said, predicting that the economic consequences of the pandemic will long outlast the virus.

The Great Recession, during its worst stretch, cost the country 700,000 to 800,000 jobs a month, and around 8.5 million in total. This crisis wiped out 20 million jobs in a single month, creating devastation that’s historic in both scale and pace, Casey said.

That makes congressional action all the more urgent, he said.

“The idea that you spent most of April and all of May doing nothing about COVID-19?” Casey said. “I don’t know how you explain that to people back home.”