Evidence Continues to Prove Federal Handouts to States Were Excessive

Early on in the pandemic, state governors looked at short-term revenue shortfalls and lost their heads. Though it was still April, with much of 2020 left to go and the long-term impact of the pandemic on the economy still highly uncertain, the National Governors Association (NGA) demanded $500 billion, equivalent to 57 percent of total revenues from the prior year, warning that state services could face massive cuts otherwise.

NTUF warned at the time that this amount was excessive, especially considering that the Coronavirus Aid, Relief and Economic Security (CARES) Act had just contained $150 billion for states and territories already. We recommended that Congress wait and evaluate budget pressures when the data became clearer, not based on extrapolated estimates. 

Through the end of 2020, Congress heeded this warning, and seemed to be vindicated in doing so. States went from anticipating a significant 8 percent year-over-year revenue shortfall to instead seeing just a small 0.4 percent decrease. The worst fears of pessimistic state budget officers were not realized, as the economy rebounded following limited reopenings. 

After all, the goal of coronavirus aid was always to treat the economy like a coiled spring. Unlike past recessions, the recession the virus created was not so much due to any underlying economic issues as much as it was artificially created by the impacts of a pandemic and government-imposed lockdowns. The goal of government aid was less to rescue failing or structurally flawed businesses as it was to preserve the strong economic foundation so it could “spring” back to where it was when the worst effects of the pandemic had passed.

This is why many experts urged policymakers to focus largely on “relief” rather than “stimulus.” Americans furloughed or temporarily pushed out of the job market benefited more from temporary federal increases to unemployment insurance programs and (three)-time cash infusions to hold them over until they could get back to work than they would have from a Keynesian economic stimulus. 

In this light, budget analysts predicting massive shortfalls continuing throughout the year were somewhat disconnected from reality. As costly as lockdowns and the pandemic have been on the country, there was always reason for optimism so long as the pent-up strength of the economy was preserved. 

New evidence continues to validate this view. The National Bureau of Economic Research recently determined that the recession officially ended in April, lasting only two months. Budget projections and economic responses based on expectations of continued decline on pace with what the economy experienced in February and March were not only wrong, they were backwards.

Another recent report from the Government Accountability Office shows a similar trend for state and local revenues. A sampling of eight states found that, while Q2 revenues took a major year-over-year decrease last year, six of the eight states saw revenues increase year-over-year in Q3 and Q4. Of these eight states, only North Dakota continued to see revenues decline in Q3 and Q4. GAO also found that overall state and local revenues increased substantially year-over-year in Q3 and Q4 after a large decline in Q2. 

Nevertheless, despite this mounting evidence, the new 117th Congress bizarrely decided to go forward with huge handouts for states regardless. States, localities, and territorial governments received a further $350 billion under the American Rescue Plan Act passed in March of this year. 

The size of the cash transfer was so excessive that Congress even found it necessary to insert a provision barring states from using federal aid to fund tax cuts, an unusual caveat for a provision that was billed as bailing out desperate states. After all, if states were barely staying afloat, they would use federal aid funds to save their budgets, not offset new tax cuts.

And that’s just one element of Congress losing all semblance of fiscal responsibility in the name of economic recovery. As of right now, the national debt is set to increase by over $6 trillion between just 2020 and 2021. Between 2022 and 2031, the debt will increase by a further $12 trillion. 

In this context, it’s perhaps no surprise that the June Consumer Price Index report saw an increase of 5.4 percent year-over-year. That’s the largest increase since August of 2008, and while it may not be a permanent condition, it shows few signs of going away soon.

Even in the face of such substantial inflation, the Biden Administration appears to have no new solutions but to spend even more. Currently, Congress is considering both a bipartisan $1.2 trillion infrastructure plan and a budget bill that would cost $3.5 trillion

While experts thus far remain relatively confident that inflation is likely to cool down later in the year, it, along with robust growth projections for 2021, should perhaps suggest to legislators that it can slow down the money printer. After all, the consequences of excessive spending go well beyond inflation — the real danger, very present even before the pandemic, is out-of-control debt. 

Congress has spent much of this year spending money it doesn’t have with little regard for whether it’s truly necessary. One must begin to wonder what level of preponderance of evidence is necessary for Congress to consider a more responsible approach to budgeting.