Home Economic Trends States Clamor for More Federal Aid as State Budgets Shrink – James...

States Clamor for More Federal Aid as State Budgets Shrink – James Talocka (08/25/2020)

President Trump announced an executive order on August 8 that would extend unemployment benefits at a reduced rate and require states to front some of the cost. This generated almost immediate pushback from governors, who instead demanded more federal funds with no strings attached.

The executive order signed by the president was one of four aimed at bypassing congressional gridlock that has prevented another coronavirus relief bill from passing. The president’s extension reduces the amount of unemployment benefits offered to Americans from $600 to $400 per week but also requires that states take on 25 percent (or $100) of this weekly cost.

This requirement was met with disapproval from multiple governors across party lines. Democratic New York governor Andrew Cuomo and Republican Arkansas governor Asa Hutchinson released a statement through the National Governors Association (NGA) expressing their concern over the “significant administrative burdens and costs this latest action would place on the states.” California governor Gavin Newsom and Colorado governor Jared Polis also expressed concern over their states’s ability to cover the cost.

The president’s executive order came just days after a request by the NGA for $500 billion in unrestricted additional federal funding for states. The existing funds have largely been restricted to coronavirus-related expenditures, and some states have only distributed small portions of their shares.

The federal aid already extended to states includes well over $150 billion from the Coronavirus Aid, Relief, and Economic Security (CARES) Act along with the Federal Reserve’s $500 billion loan program to support both state and local governments. The recently expired $600 per week unemployment benefits package from the CARES Act also offset significant costs for states. These measures have helped enable states to pursue lockdown measures in the face of declining economic activity and reduced tax revenue projections. They have thus been able to circumvent some of their budget constraints without having to make the kinds of spending cuts or reallocations that would otherwise be required in the face of an emergency.

Absent federal relief measures, states must face budget constraints because they do not have the vast tax base or the same ability to issue debt claims as the federal government, who have shown their near-limitless spending capabilities of late. Of course, another major contributing factor to these circumstances is that unlike the federal government, states do not have their own currencies or central banks to monetize their expenses. However, relief from Congress and the Federal Reserve has allowed states to utilize these spending mechanisms and disperse their costs in the form of a rapidly increasing national debt and money supply.

While the president’s executive order continues unemployment benefits, it will do so at a lower cost than the previous policy. Requiring states to pick up some of the tab is also a small step toward fiscal responsibility in a political environment where the only conflict in Congress has been how much they can add to the deficit.