State and Local Governments Need Some Tough Love From Uncle Sam

No more bailouts.


State and local governments want more funds from the federal government to patch their budgets. Lack of revenue due to the recession and self-inflicted damage from the COVID-19 shutdowns of their economies, as well as larger-than-ever expenditures on top their regular overextended budgets, mean that many of them are hurting for cash. And while they're asking for $500 billion in bailout cash, Speaker of the House Nancy Pelosi wants to give them $1 trillion. I, on the other hand, think it's about time state and local governments start fending for themselves.

As I've explained before, there are many reasons to oppose state and local government bailouts. For starters, these jurisdictions have already received large amounts of federal funds to pay for their coronavirus-related expenditures. As part of the Coronavirus Aid, Relief and Economic Security Act and other relief measures, they've received $280 billion for various coronavirus-related expenses and another $150 billion for more flexible needs. The Federal Reserve has also set up a $500 billion program to facilitate short-term borrowing by state and local governments.

That's on top of the annual handout that the federal government gives to state and local governments. In fiscal year 2020, they received an estimated $790.7 billion in the form of 181 grants to pay for various expenses. In other words, 30 percent of their budgets comes from the federal government annually, which is an amount that has increased 27 percent since 2015.

Then there's the issue of poor planning on the part of many states. My Mercatus Center colleague Tad DeHaven and I have written about this issue. We highlight the moral hazard that comes from systematically bailing out institutions, whether they are state and local governments or private companies. When bailed out, decision-makers have much-reduced incentives to plan better for the next time around. There's also the fact that, contrary to the common refrain from journalists and states themselves, these governments have increased spending quite considerably since the last recession and failed to plan appropriately for the next time they're inevitably in trouble.

But there's another argument against bailing out state and local governments that has surfaced recently. A report from the National League of Cities in May revealed that the states weren't very good at getting the money to local governments. Also, a new dataset collected by the Department of the Treasury Office of Inspector General that looks at how much the state and local governments have spent of their coronavirus relief bill funds as of June 30 shows that they have spent much less than you might think.

Some states have spent virtually none of the money allocated by Uncle Sam.

South Carolina, for example, has yet to use its $2 billion in relief. Michigan, which is asking for a bailout, spent only 3 percent of the more than $3 billion it received. New Jersey is also asking for a bailout, yet it has distributed a measly 2.1 percent of its federal funds so far.

The states demanding bailouts may likely argue that what they really need is more flexibility in order to be able to use federal funds to address their revenue shortfalls. As matters stand right now, states must use the bailout money on coronavirus-related expenditures. So, when those actual expenditures are lower than the allocated funds, they can't spend them.

The flexibility argument doesn't hold water, in my opinion. It's one thing for state and local governments to ask the federal government for help to cover expenditures they couldn't foresee, such as those related to the pandemic. But they shouldn't be asking federal taxpayers to pay for their routine expenditures, especially when these governments have failed to plan appropriately for revenue shortfalls that inevitably occur, as they're bound to encounter emergencies. Governments should prepare for them. They should cut spending and, if that's not enough, they should turn to their own citizens for the funds needed to cover non-coronavirus expenditures. Those funds could be obtained through higher taxes or spending cuts elsewhere. Their routine spending should come from their taxes.

State and local governments are always eager to have the federal government solve their financial problems for them. But they will continue to have financial difficulties as long as Uncle Sam continues to cave. The first step toward having healthier and more responsible state and local governments would be no bailout.


NEXT: America Is Going To Vote by Mail. We’re Not Ready.

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  1. It is the only thing that will end the tryanny of the lockdowns. Governors are absolutely drunk on the power the lockdowns have given them and will never give up that power until they are forced to. It doesn’t matter if a vaccine is developed and the COVID death rate goes to zero. They will just invent another excuse. Governments never voluntarily give up power.

    The only way to force them to give up that power is for them to run out of money and have to open society back up or go broke. The threat of bankruptcy is, other than violent revolution, the only way this nightmare is going to end.

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    2. Even California governor Karen Tiresome allowed pro sports (minus the fans) to be played in California (and pro athletes to be taxed by California for games played there) when Arizona offered to host the games instead.

    3. John, The People’s Republic of NJ is the poster child for profligate spending and corruption. From my perspective, we elected (and re-elected) these people who ripped us off for DECADES, by double-dipping, sweetheart union contracts, no-bid contract awards, no-show jobs. Now we have an incompetent GS reject running the People’s Republic and it is a total shitshow. We did this to ourselves.

      We truly deserve the representation we elected.

      I have decided to leave this state. I will take my upper middle class income (and the tax revenue I generate) and go elsewhere. NJ will not want me to go; my response will be ‘Peace Out’.

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  2. Doesn’t sound like anyone in government cares much. Elect Biden and you get more of the same x10.

  3. “State and Local Governments Need Some Tough Love From Uncle Sam . . . No more bailouts”

    Finally, a call for the parasitic, can’t-keep-up states and communities to stop sponging off our modern, successful, educated states and communities? A spotlight on a chronic problem of lesser states (Mississippi, South Carolina, Louisiana, Alabama) getting handouts from their betters (Connecticut, New York, Delaware)?

      1. However, Mr Cuomo, a Democrat, said he could not support greater taxes on the ultra-wealthy as rich people already have one foot out of New York City and he fears they will leave for good if their taxes go up.

        Instead, he wants the federal government and New York’s congressional representatives to send billions of dollars in aid.

        1. Of course he does. He knows the begging won’t work.

    1. No Republican state needs a bailout. The states that are broke are New York, Illinois, and California if it was honest about it’s pension liabilities.

      Angry, retarded, and ignorant is no way to go through life son.

      1. So you want to strip the Rev of his only defining qualities? You’re literally asking him to give up his entire identity.

        1. Angry, retarded and ignorant is his move. Everyone needs a move.

      2. And, yet, he will do just that. No clue what site he actually hangs out on, Vox or Daily Kos, 1 suspects, but his trolling is low-grade.

      3. ” No Republican state needs a bailout. ”

        Republicans states tend to be ignorant parasites, with strong reliance on federal money (despite relatively low contribution to the federal budget), low educational attainment and quality, unskilled citizens, downscale infrastructure, and generally poor economic performance. They get bailouts from the taxpayers and workers of better states every day.

        1. Tbh those are all things the federal government stuck its nose into and created said programs. That’s different from bailing out states for state programs and other spending.

          There is no reason to heave state borrowing on state things onto the federal government’s borrowing, already 6 trillion over their normal 1 trillion borrowing this year.

          States can borrow for their own spending, or cut back. Either way, and then suffer the voters. We’ve reached untenable borrowing at all levels.

          I’m up for some Jiffy Pop.

    2. Conveniently skipping over cash-strapped, leftist states like NJ, CA, IL, etc.

      Just an oversight, I’m sure.

      1. They’d be less cash-strapped if Republican states weren’t such enthusiastic parasites, feeding off the work of residents of better states.

        1. Then increase the tax on the wealthy, a small minority, while leaving the statistically large voting masses alone.

          Oh, wait. The wealthy are fleeing because it turns out telepresence is fine.

          Anger brews large. We must extend our claw of control everywhere so they cannot escape our clutches! If they vote with their feet, we mist go there first and be ready to control them!

    3. Now do Maryland and Northern VA. Why the rest of the country wants to send money to us to return to them at a loss, I’ll never understand but do appreciate it. Thanks, clinger.

    4. Most of that money is social security and medicare.

      If you want to turn that off, go ahead. Is that part of winning the culture war?

  4. Bottom line is that we need independent oversight for all areas of government. It should be treated more like a business, where independent consultants are brought in to identify redundancies in employees and/or to ensure the proper allocation of funds.

    1. what is really needed is competition. make elections really matter — you get to choose your government, everyone wins. if you can have multiple banks, multiple insurance agencies and multiple pizza chains, why not multiple governments within the same geographical boundaries?

      1. Because government is force. Everything government does is based upon a very real threat of violence. How would competing governments resolve disputes? Through violence. There’s a word for that. War. And when its over there can be only one.

        1. And when its over there can be only one.

          *cues up Princes of the Universe by Queen*

        2. Well Said sarcasmic! A reality many seem to try and avoid.

          Value=Wealth and prosperity
          Gun-Power (gov) = Justice, liberty and defense
          … not …
          Gun-Power (gov) = Wealth and prosperity (that’s completely criminal)

    2. Government can’t be treated like a business because it produces nothing of value. It doesn’t have a “bottom line” because it doesn’t make a profit. All government does is spend money. Worse than that, it spends other people’s money on other people. So as Milton Friedman pointed out it has no incentive to strive for quality or a good deal.

      Whatever government does will be expensive, wasteful, corrupt and incompetent.

      Best to just limit it’s scope than to try to make it function better. Because it can’t function better. Incentives matter, and when you spend Peter’s money on Paul you’ve got no incentive to do it wisely.

      1. And really, the government doesn’t so much spend money as it does reallocate resources based on politics, with the highest time preference possible (i.e., with no thought given to future voters).

  5. While we’re at it, Uncle Sam could use a little tough love.

    1. I presume you’re not talking about writing in “Mickey Mouse” for every elective office.

      1. Frank Zappa if you want to give them that Dirty Love.

        1. “Like some tacky little pamphlet in your daddy’s bottom drawer.” 😎

        2. With politicians, the odds are less than 50/50

      2. Just about everyone elected is Mickey Mouse!

        1. New in the White House:
          The President is Mickey Mouse
          The CC dances in Disneyland
          In the Kremlin plays a hard-rock band
          quite loud

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  7. Calling the shut down “self-inflicted damage” is not defensible. Given what was known about covid in March and April, the states had no choice. Everyone across the world were doing similar shut downs. The states did not create covid, and were just trying to respond the best they could. Looking back knowing what we know now one can argue that we could have not done the shutdowns. Also, the federal response has been abysmal, so that blame is not on the states.

    1. Given what we know now, to avoid a shutdown and control covid, people would have had to wear masks, social distance, and have good hygiene, all with very high compliance rates. But we also know now that there is about 30% of the population that will resist all public health measures, so leaving only two options: shut down or “fuck it and it run rampant.”
      Aside: One can also make solid arguments that “fuck it and it run rampant” could be a viable strategy.

      1. It was self inflicted damage. No one made them shut their states down. Indeed, lots of states chose to shut down in less intrusive ways and for not as long. They are in better economic shape than those who enforced stricter shutdowns longer. The ones who didn’t make such wise choices have no right to expect the federal government to save them from their mistakes.

        Moreover, bailing these states out will just ensure they never open up their economies. These people have become depraved and no amount of decrease in COVID is going to convince them to open their economies back up. As long as there is some risk, and there always will be, they will use it to justify keeping things closed and using that power to punish their enemies and reward their friends. Only the threat of bankruptcy will stop that.

      2. Bullshit. There were (and are) various options between “shut it down” and “let it run rampant”; you’re seeing it right now among states like Montana which require masks in public-facing businesses but otherwise allow most businesses to keep operating at varying levels of capacity. Most people abide by it. If the goal is to SLOW the rate of transmission, this *seems* like a reasonable approach, even accounting for those who object to it. Of course, you could be one of the many people on the left who are moving the goal posts from “flatten the curve” to “no more deaths” to “no more infections.”

        And the “let it run rampant” strategy is certainly better than “shut it all down”; individuals are better at determining what risks are acceptable to them – the vulnerable, whether their vulnerability is real or imagined, can self-isolate or take extra precautions if they choose to go out. Others can and SHOULD take the risk of getting it, especially since it is more than likely this coronavirus will be with us for years. The unseen costs of social isolation among everyone will almost certainly be astronomical if “keep it shut down” continues. Liberty will be gutted, too.

        It’s clear you’re a leftist who thinks everyone must conform to *your* beliefs or else get the state’s shaft. Your philosophy is if even one person suffers, everyone must suffer. Fuck that.

        1. An edit to my last sentence: Your philosophy is that if even one person suffers or dies because people are free, then no one should be free. Fuck that.

          1. ^Very well stated… Even the philosophy is based on faulty ideology. Non-free societies have a pretty good record of suffering and dying.

      3. “But we also know now that there is about 30% of the population that will resist all public health measures…”

        100% of whom voted for Trump if they voted at all.

        1. Eh probably more like 95%. There are probably a few left-wing accelerationists out there refusing to wear masks because they want more people to get sick, chaos to reign, and therefore bring about the glorious socialist revolution.

          1. Never thought of that. Guess I’m not cynical enough.

      4. OK Karen, whatever you say.

      5. “fuck it and let it run rampant” was the only viable strategy, as the economic carnage will make abundantly clear in the next several years.

      6. Please don’t pretend you know a goddam thing about viruses, epidemics, infectious disease transmission, or public health. Because you don’t. Your comments serve only our erstwhile slavers.

    2. It’s entirely self-inflicted damage, and it was great to see someone call it that in print. Everyone across the world didn’t do similar shutdowns. All 50 states didn’t do the same level of shutdowns. Some states and countries were far more restrictive than others, unnecessarily. And infection rates and death rates weren’t closely correlated to the strictness of the lockdowns.

    3. We had the data on infection & mortality rates from 1 cruise ship & 1 aircraft carrier -closed & captive populations w/o access to masks or hospital (the navy could have used nbc protocol for masking), don’t lie. Further, we knew earlier the mortality rate was extremely low. The lockdowns were a panicky, self-inflicted overreaction by a fearful group caught somewhere between crying wolf & shrieking that the sky was falling. There should be no use of tax-payer monies to fix stupid peoples’ decisions.

  8. What federal funds? Congress has no cash. The Feds are 26 trillion in debt.

    1. Hey, there’s an almost inexhaustible supply of electrons!

      1. And a (nearly) inexhaustible supply of future debt slaves!

        1. That’s what the *next* virus is for. 8-(

      2. We upgraded to 64-bit so we have plenty of room!

        1. lol… 🙂

    2. Dictator Murphy thinks the feds can just print money and give it to NJ to bail it out of its mess.

  9. I, on the other hand, think it’s about time state and local governments start fending for themselves.

    “Check your privilege!”

  10. They should cut spending…

    No, fuck you, cut sp- … oh wait, nevermind.

  11. We’ve got individuals on welfare. We’ve got businesses on welfare. We’ve got colleges and universities on welfare. We’ve got state and local governments on welfare. We’ve got 99 problems but capitalism ain’t one.

  12. Look, if the government can bail out Kodak, it can bail out Kansas. And it’s just meaningless pieces of paper anyway, there’s no longer any connection between what you’ve got and what you’ve earned any more – just check the stock market.

  13. It’s almost like we shouldn’t have a national income tax and, instead, the bulk of the taxes ought to be collected by the states and the federal government should be funded by laying a capita tax on the states, allowing for maximum flexibility among the states in how the bulk of taxes are collected. Too bad nobody thought of organizing things that way…

  14. State and Local Governments Need Some Tough Love From Uncle Sam…. And Uncle Sam needs some tough love from states. End federal theft called “revenue sharing’ and states won’t need federal monies.

    1. Yes, this!

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  16. What’s another Trillion dollars when we already spend $720 billion annually on our military to police the rest of the world.

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