States Need Help From the Fed This Time
They were largely on their own in the last recession, and that made the slump longer and worse.
Put it to use.
Photographer: Mark Kolbe/Getty Images AsiaPacState and local governments are the main providers of basic public services in the U.S. They are on the front lines of combating the Covid-19 pandemic, the most serious public-health threat in a century. When the number of infected people increases, public hospitals will have to treat them. When schools close or people stay home from work, state and local employees will still have to deliver key public services. But it’s unlikely these governments will have the funds they need to fight the epidemic properly unless Congress acts to require the Federal Reserve to expand state and local fiscal powers.
Compared with the federal government, state and local governments have limited fiscal firepower to fight the pandemic and support local economies. The federal government can readily borrow to fund needed programs. If borrowing fails, the Federal Reserve can monetize new federal spending by printing dollars, the world's reserve currency. In contrast, state and local government must approach the lending market like any private corporation, and their borrowing power is highly constrained. They have very limited ability to surge their spending in response to emergency situations like the one we face now. Just during the past week we have seen major disruptions in municipal funding markets as liquidity collapses and investors scramble to determine the impact of the epidemic.