History shows that the big cuts to state budgets deepen and prolong recessions. Allowing states to go bankrupt, as Senate Majority Leader Mitch McConnell cavalierly suggested last Wednesday, would erase much of the positive impact from the measures Congress has taken, and will hopefully continue to take, to financially support families and businesses, and might mire the country in depression.
I learned this lesson when I started my first term as a Washington state legislator in 2013, five years after the Great Recession. Our state along with many others was still struggling to make up for the deep spending cuts that were thought to be necessary in the wake of the Great Recession of 2008. But it turns out that cutting spending was neither smart nor necessary—it actually backfired, deepening the economic downturn. By taking money out of the pockets of our citizens through cutting critical services and laying off state employees, we ended up prolonging unemployment and slowing economic recovery. If we are to avoid a COVID-19 Depression, states cannot make the same mistake this time.
This common-sense understanding is backed up by extensive studies by academic economists following the 2008 recession, which led to the conclusion that stimulus is more powerful, and austerity more harmful, than previously understood. As economist Michael Madowitz summarized: “Whether via tax hikes or cuts in government spending, contracting the government’s budget during a recession reduces gross domestic product, or GDP, by more than the size of the cuts—possibly as much as three times more.”
We can see the economic folly of austerity by comparing the economies of the twenty states, including Washington, that cut spending between 2007 and 2011, with the 30 states that actually increased spending. It turns out, the economies of the austerity states did much worse. By contrast, the states that invested more in the wake of the recession drove quicker returns to economic growth.
From 2007 to 2011, the 30 states that increased spending had lower rates of unemployment on average, including in the private sector, than the 20 states that cut their state budgets. The economies of the investment-strategy states contracted less as well. Notably by 2011, the economies of the austerity states were still in decline, with growth averaging 2.7-points less than pre-recession. But the higher-spending state economies were averaging 2.6-points faster economic growth than before the recession.
None of this should be surprising, even as it disproves the argument that in a depression, states must tighten their belts. States are not households. In tough economic times governments need to make up for losses in the private sector by spending more. When states take money out of the pockets of families and the payrolls of businesses and nonprofits, the economy sinks further. When states put more money in the pockets of people who rely on the government for jobs, basic benefits and vital services, they set their economies on a quicker path to recovery.
The Republican Chair of the National Governors Association, Maryland Governor Larry Hogan and his Democratic Co-Chair Andrew Cuomo, called for Congress to provide $500 billion in aid to states, but so far at least McConnell has shut them down. States will need the funds to replace the devastating blow their revenues have suffered due to the COVID recession.
While state leaders continue to push for Congress to do what only it can do—run deficits—there are other steps that governors and state legislatures can take, some of which involve spending and some of which don’t.
To speed outlays from the boosted unemployment insurance program, Gov. Jay Inslee (D-WA) waived the waiting period and job search requirements for unemployment insurance. To protect renters and homeowners, Inslee, along with governors in many other states, instituted a statewide eviction moratorium and stopped utility shut-offs. States can take other common sense measures such as protecting consumers against debt-collection, including car repossessions, and vigorously enforcing laws against price-gouging.
The last thing that states should do is ignore the lessons about how austerity measures make recessions deeper by following bad advice like that from the editors at the Seattle Times: “Coronavirus requires painful cuts to Washington state budget.” There should be no cuts to any state programs that provide vital services or benefits or boost income. States should not shift costs like college tuition from the state budget to family budgets. Every step like that is a step toward depression.
Instead, states should help struggling families to meet their basic needs by removing barriers like work requirements from public benefits and assuring that everyone who is newly eligible for Medicaid, Child Health Insurance, Obamacare coverage, SNAP, and other vital programs is enrolled. The more that states help families tcare for and support themselves, the quicker their economies will rebound.
We need to keep people working, and states have a key job here, too. States should avoid laying off or furloughing their employees, or cutting contracts for state services, which would drive businesses and nonprofits to lay off their employees. Every additional lost job takes more money out of that state’s economy, deepening the economic calamity.
Avoiding a COVID-19 depression also means rewriting the playbook on how to finance spending. States should raise taxes on the wealthy, who will continue to be able to afford whatever they want. That’s not only the right decision, it’s very popular as voters overwhelmingly favor raising taxes on the wealthy and now believe that Trump’s economic response to the coronavirus favors the wealthy. And please don’t listen to any whining from the rich because the stock market went down; they are just as rich as they were a little more than two years ago!
In states like Washington, where balancing the budget is a law rather than a constitutional requirement, states should deficit spend now to keep the state’s economy from tanking. States should spend their total of $72 billion in rainy day funds now that it’s pouring. States should leverage their full borrowing authority to maintain and increase projects that keep people working or put people to work when the health crisis eases.
But state governments can only do so much. If McConnell and Trump follow through on their threats to starve state economies, they will guarantee that, come November, the last thing Trump or Republicans will benefit from is a recovering economy.
Jessyn Farrell is a former Washington state representative and senior vice president of Civic Ventures.