COVID relief is not a shell game
It’s absurd to use stimulus funding to simply pay off debts, for states as well as individual taxpayers
The Federal Reserve Bank of Chicago: the Fed can do much more to aid the COVID recovery, and the Biden administration appears ready to put it to use. (Wikimedia Commons/TonyTheTiger)
By Ameya Pawar and Ted Cox
It didn’t have to be this way. It doesn’t have to be this way.
The failure of the Fair Tax Amendment has put Illinois in a box, no doubt about it. It’s cost the state an estimated $3.4 billion in revenue just at a time when tax revenue is already being lost in the economic calamity brought on by the coronavirus.
Gov. Pritzker has repeatedly pointed out that Illinois is not alone in that regard. All states and local governments are suffering from lost tax revenue in the pandemic. But the federal government — the only entity capable of addressing those massive needs — has yet to adopt a coherent, cohesive policy on COVID relief and stimulus.
Pritzker announced last week the state would be borrowing an extra $2 billion from the Federal Reserve’s Municipal Liquidity Facility, a $500 billion fund created in an earlier COVID relief package specifically to fill those needs. But there was a major problem with the way the fund was set up, in that it continues to charge state and local governments interest on what’s still considered loans.
That’s why Illinois was the first and, for a long while, the only governmental body to draw on the fund, with $1.2 borrowed earlier this year. Pritzker and Comptroller Susana Mendoza have defended that, as well as the new borrowing, and rightfully so. In a bad situation, it’s the best option. Pritzker has repeatedly stated in recent days that he “believes” there will be another COVID-19 relief package passed by Congress, in the early days of the Biden administration if not under the current lame-duck session, and if so he’ll use that money to pay back the money borrowed from the Municipal Liquidity Facility.
But step back for a moment and look at how absurd that is. One arm of the government is providing states with grant money considered “stimulus” in the struggling economy as it staggers through the pandemic, but states are only going to be using that money to pay down debt, paying it into the nation’s central bank.
Look, as economists have pointed out many times before, “stimulus” payments stimulate the economy most when they’re pumped right back into the economy. That’s why low-wage workers are the best targets for those payments, because the added money is frequently put right back into the economy in buying goods these working families previously couldn’t afford. By contrast, more well-to-do taxpayers receiving stimulus checks are more likely to use the money to pay down debt, which has little if any impact on the overall economy.
The dynamic is no different on the state level; it’s just immensely larger. The state is borrowing to maintain essential government services, and that in turn is fueling local economies. But the main intent of any “stimulus” package is to boost that impact, and that opportunity to instill growth is lost if that additional stimulus money goes right back into the Federal Reserve.
We should be expanding government service by creating the infrastructure for vaccine distribution, expanding mental health and social services, protecting schools as much as possible from the pandemic, and bolstering rural broadband. Doing all this will aid the recovery.
Yet the Illinois Policy Institute, the Wall Street Journal Editorial Board, Bloomberg, credit ratings agencies, and most of all Republican budget hawks who’ve suddenly rediscovered the deficit after approving a $1 trillion tax break for the wealthy that blew a hole in the deficit: they’re all crying out for austerity. But what we need, in fact, to be doing is investing in government services — including the Rebuild Illinois capital plan, with its provisions for rural broadband — to help municipalities to drive local economic development, which will in turn bolster local tax revenues and, ergo, local bond ratings.
A recession calls for stimulus, spending, investment — not austerity. And don’t get us started on the hypocrisy of providing the rich with a $1 trillion tax cut only to turn around and insist we can’t afford to cancel student debt.
There are signs that the Biden administration understands that. When President-elect Biden announced his senior economic advisers in his cabinet on Monday, United Press International pitched as an “economic team with COVID-19 relief a focus.”
"As we get to work to control the virus, this is the team that will deliver immediate economic relief for the American people during this economic crisis and help us build back better than ever," Biden said. "They will work tirelessly to ensure every American enjoys a fair return for their work and an equal chance to get ahead, and that our businesses can thrive and outcompete the rest of the world."
One key appointment was Janet Yellen as treasury secretary. Yellen previously headed the Federal Reserve from 20014 to 2018. She, like current Fed Chairman Jerome Powell, has shown a willingness to “go big” on stimulus, especially with the Fed’s monetary policy. Powell moved swiftly early in the pandemic to bolster stock prices by backstopping corporate debt, but more recently he and Trump administration Treasury Secretary Steve Mnuchin have clashed over extending the Fed’s stimulus measures into next year. Yellen and Powell are expected to be more simpatico.
Understand, in charging penalty rates and requiring 3-year repayment terms, the Fed’s Municipal Liquidity Facility implements a policy choice. The Federal Reserve made a choice to support bond markets — and their rich investors who rely on tax-free income — over working people and families. Our point is they could have done both. The rating agencies should be for the latter. Helping protect the budgets and service provision of states and cities should be positive for bond ratings.
As Bloomberg reported: “With Yellen in charge, Biden’s Treasury Department will be prepared to join Fed Chairman Jerome Powell’s policy of lower-for-longer interest rates with extended, expansionary government spending.”
The Bloomberg story added: “Yellen and Biden may seek to avoid a repeat of what many economists considered a policy mistake following the 2008-09 financial crisis, when a premature return to fiscal austerity by Congress held back the recovery even as the Fed sought to spur growth through controversial quantitative easing programs. It’s a misstep Powell is well aware of and which Biden observed firsthand as President Barack Obama’s No. 2.”
Let’s say that Powell moved aggressively to halt interest charges on loans drawn from the Municipal Liquidity Facility, and to extend repayment plans well beyond the current 3-year deadline. That would truly provide states with the comfort they need to pump stimulus funding into local economies.
Consider that restaurants, bars, theaters, clubs, and even retail stores are being called on to diminish their business traffic if not shut down entirely, yet are receiving little if any money at this point to tide them over. That’s equally absurd, and it needs to be addressed in the next COVID relief package. That can be done by the states, including Illinois, if they’re given a free hand to spend and invest that additional funding, not pay it right back into the Federal Reserve Bank.
We found out in the Great Recession a decade ago that a recession is no time to impose austerity. This coronavirus recession, most economists agree, is far worse, but could be poised for a stronger, more immediate recovery if the government only tides otherwise healthy businesses over during the pandemic. We hope that, under the Biden administration, that common-sense approach gets a chance to prevail.