Congress, not the Fed, should bail out America’s state and local governments

FOR MOSTGDP governments the pandemic is expensive. For America’s states, counties and cities, which provide the bulk of the country’s basic government services, it is a budgetary cataclysm. Lockdowns are depriving them of tax revenues just as they must spend more on public health, threatening budget shortfalls of more than one-quarter of annual revenues (see ). Investors have been dumping their bonds, making it harder to borrow. And many states are in any case required by their constitution or by law to balance their budgets, or forbidden from borrowing at all. As a result many have been drawing up plans to slash spending and lay off workers just when their services are in high demand and the economy is shrinking.The states do have some cash stashed away for a rainy day. They have built up funds worth 8% of their annual routine spending, on average. Yet that will not be nearly enough for today’s deluge, and in any case it is unevenly distributed. In 11 states, including hard-hit New York, rainy-day funds are less than 5% of spending. Infusions from the federal government are therefore the only way to avoid ill-timed austerity. The states could need as much as $650bn (3% of ) to cope with the economic crash—and more to help them fight the pandemic.