Role of State and Local Government is Overlooked As Anti-Recession Tool

January 19, 2022

Contact: KL Conner, 202-281-4159

Washington DC — As Congress debates the contents of the federal budget for fiscal year 2022 and beyond, the question of aid to state and local governments remains salient. Senior Research Fellow Max B. Sawicky offers a detailed analysis of this neglected but key component of the economy in “These States: US Federal-State-Local Fiscal Relations in the Wake of Pandemic-Driven Recession,” released today by the Center for Economic and Policy Research (CEPR).

“Most public investment is carried on by state and local governments, so stagnation of federal aid injects a permanent, negative factor into US economic growth,” says Sawicky.

Unlike the federal government, most public services are delivered by state and local governments. If vital public services go bankrupt, the private sector — households and business firms — will bear the burden.

Sawicky warns, “the impact of [state and local governments] on any economic recovery is inescapable,” and, if ignored, “recovery will be unnecessarily prolonged.” But his article outlines the pressures faced by state and local governments in the pandemic-driven recession and offers several lessons that federal budget debaters could learn from:

State and local governments comprise a large share of national employment and a crucial source of services. It follows that the state and local government sector is among the most important avenues for fiscal stabilization policies.
The state and local government sector has been the victim of long-standing, bipartisan neglect by the federal government.
Failure to bolster state and local governments after the Great Recession was an important drag on the recovery, especially beyond the immediate aftermath of 2009.
Currently, the state and local government revenues show, along with the economy, a surprising extent of recovery, but spending remains depressed, and significant employment shortfalls in the national labor market persist. The future in this respect remains uncertain, both for state and local governments and for the economy as a whole.
The use of state and local governments for fiscal stabilization remains a priority, ideally with formula-based, automatic provision of ample, well-targeted federal general assistance.