Odd Lots - How To Stop The Fiscal Emergency Facing U.S. Cities And States

Episode Date: April 13, 2020

With the U.S. economy going into a deep slump, the Federal government has attempted to counteract the pain by increasing spending. But for cities and states, it’s virtually impossible for them to run counter-cyclical fiscal policy. Furthermore, the crisis is draining local coffers due to public health expenditure and the collapse of tax revenue. This has already led to the start of a state and local austerity wave (spending cuts, layoffs, etc.) that could take years to reverse. On this week’s episode, we speak with three people who have been writing about this aspect of the crisis, and how it could be addressed by both the Fed and the U.S. Treasury. We’re joined by Skanda Amarnath of Employ America, Yakov Feygin of the Berggruen Institute, and Alex Williams, a grad student at the Levy Economics Institute of Bard College, to discuss the shape of the problem and the way back to economic health.See omnystudio.com/listener for privacy information.

Hello and welcome to another episode of the Oddlots podcast. I'm Joe Wisenthal. And I'm Tracy Allo. Tracy, do you remember you said on a recent episode something akin to, oh, we finally covered all of the different aspects of this crisis? I knew you were jotting that down in your memory and it was going to come back to haunt me. I stand by it. I think we've hit the really big ones, but I know you're going to pull another one out of your pocket right now. I think of like 20 more to pull out. No, come on.

I said the major strains in the financial system. I caveated it. You can't say that there are 40 major financial strains. But you're going to. I think I can tell. I think there might literally be 40 more

major ones. But nonetheless, we definitely have not hit all the major ones. And so I think that today's episode will be one that I think sort of unquestionably counts as major, even if, you know, the number of remaining ones are still TBD. All right. Fair enough. And I think I know which one it is. It has to be the Muni market, right? Yeah. So absolutely. So due to the nature of the crisis that we're seeing, we have a situation in which a lot of the costs, particularly on the public health side, are falling on state and local authorities.

At the same time, their tax revenue is rapidly drying up because there's so little economic activity going on within these state and local taxing authorities. And so what is a major employer of many people and a major source of economic stability, they're all simultaneously running into rapid budget problems. And we've already seen, just in the early days, a major wave of cuts, layoffs and so forth,

from cities, towns, and states around the country. Yeah, and I think from a market's perspective, I remember seeing a couple headlines that basically said we didn't have any new issuance, new muni bond issuance in March, and we had a bunch of outflows, I think the most outflows on record from muni bond funds. So really, we have this big investor exodus,

and as you point out, if tax receipts are expected to fall, and at the same time, states can't issue, as easily as they once could in the Muni bond market, then that all adds up to a pretty big financing crunch at exactly the time where you wouldn't want to get that. Right. Is a financing crunch, and then that leads to an economic crunch because, you know, if we saw during 2008, 2008, 2009, financing constrained municipal authorities, they had to cut a lot of spending for the same reasons is now, and it took them years and years to recover that law spending. And so, you know, when we think about the sort of longer-term ramifications of this and the damage that

these last several weeks will do to the economy, potentially for years to come, state and local finances is a huge problem that we're facing. Yeah. And I have to say, the only thing I really remember from the Muni market is Meredith Whitney making that big call many, many years ago. Do you remember that where she predicted a bunch of defaults. I think hundreds of defaults across the muni space. And of course, that didn't come to pass. So I'm really interested in returning to this topic. It's been a while. Yeah, the defaults didn't happen. It was more just played out on the real economic side and a slow return to hiring. So anyway, on today's episode, we're going to dive into the state, the state of state and local municipal finance, how much strain they're on

What are the ramifications of that strain and what can possibly be done to alleviate that pressure? And today we have three guests. This is a first time we've ever had this on the podcast where we've had three guests at once. So it could get a little crazy. But all three of them have been doing a lot of writing about this crisis and how it can be addressed from the sort of Federal Reserve side, what the Fed can do to help ease the problem and what the Treasury can do. So I'm going to introduce our three guests today are Skanda Amernath, Director of Research and Analysis at Employ America,

Alex Williams, he's a grad student at the Levy Institute, and Yaakov Fagan, he's an associate director of the Future of Capitalism Program at the Berggrine Institute. I want to thank them all. So Skonda, thank you for joining us. Thanks for having me on. Alex, appreciate you coming here. Thanks for having me.

And, uh, Yaakov. Thank you. Thank you, too. I wanted to introduce all three of you so that people could recognize your voices, uh, in advance. So, uh, to get started, uh, Skanda, I'll start with you. Just talk to us a little bit about what we've seen so far from your perspective. Your, uh, talk to us about what you do at Employee America and how the initial wave of financing stress that we've already seen at the state and local level is sort of playing out in the economy. Sure. So in Planned America, our organization is focused on a combination of tighter labor market sustainably. And to get there, obviously, it requires fighting recessions aggressively and mitigating their costs. The costs of recessions aren't even just seen in recessions

or the official NBER dates, especially when you think about like the weakness of the prior business expansion, you think about the growth and the weakness in getting unemployment down. So we had high unemployment for about three years, and that was in large, not in three years, I was saying longer than that, but we had state and local austerity that was, that helped sort of keep growth low and to keep unemployment high for a lot longer. And what we're seeing now is state and local governments already starting to announce a lot of job cuts similar to what we saw around 2009 to 2012. And part of that is right now, these are not fully in motion just yet because states

built up rainy day funds over the past expansion and they're now running them down. But it's not going to last that much longer just because of the scale of the shock. So you have states that are saved up a lot, didn't really spend much during the past expansion, but are still in a pretty fragile position in terms of being able to manage this shock because they are budget constrained, as you mentioned, I think. And it's just that they're not able to sort of finance their way through it the way the U.S. Treasury and the federal government can. So I have a dumb question, and this is partly because I'm outside of the U.S. at the moment,

and I haven't been following a lot of these dynamics as closely as you all have. But there seems to be an assumption here that state governments are on the front line of the coronavirus pandemic, as well as the economic fallout. Why is that the case? Should states actually be the first line of defense? And what's the role of the federal government here? So part of this is the sort of the vestiges of a more federalist system in the past. So a lot of administration still ends up occurring at the state local level, even though the financial levers are still. controlled in D.C. So there's a bit of a mismatch there that's going on, but should more of that

be centralized, I think for a lot of these types of coordination and collective action problems, as we see it's sort of procuring the necessary equipment. And those are all things that should clearly be centralized in some way. But the reality of this is just that there's a lot of safety net programs, public services that are typically in higher demand during, a crisis like this in terms of a public health crisis and the economic crisis. And those are still conducted at the state government level, the local government level, and yet they don't really have the flexibility precisely when you need it. So that's kind of what, and so what ends up being collateral damage in the process is there's a lot of cuts to, Andrew Cuomo had mentioned, had

announced very recently, Governor of New York, cuts to Medicaid, higher. FRIES, plans for big expenditure cutbacks in the coming year. So you've already started to see a lot of these announcements come out, that they're going to have to take an axe to other types of economic activity at the public sector performs. Yeah, I just want to add in that, you know, yes, it might be better that certain things are centralized, but this is the system we live in it with the United States, and there are some advantages to governmental redundancy, especially in a,

that world in which regional cycles are very disconnected in the United States between various regions and are driven by global shocks more generally. But a particularly perverse sort of aspect of the way that it's set up now is Skanda mentioned, cuts to Medicare and cuts to Medicaid right now. These programs at the federal level are actually set up to be mechanically pro-cyclical at this point, where if a state government cuts its Medicare funding or its Medicaid funding, those are funded at the federal level through matching grants. So every dollar that they cut due to lost tax revenue or excess take up in other spending programs loses them an additional dollar of federal spending on those programs, which is like there are lots of these sorts of little things, you know, in this system of distributing, you know, federal abilities to state levels that, you know, have these sorts of perverse outcomes. So, Yaakov, I want to go back to what you were just saying about the sort of governmental redundancy and the appeal of that.

Like, we have this federal system. States have a lot of autonomy. Cities have various authorities. We have, it's a very, it's not like other countries where maybe it's sort of all run down by one sort of centralized chain of command. That's our political system. What in a crisis like this, what do you see is the sort of advantages versus disadvantaged? Well, I think we all know about the disadvantage, and I do think, kind of from my point of view, it's still more disadvantaged than advantage.

But on the other hand, when we've seen that the federal government, for whatever reason you attribute to it, hasn't been very swift in responding to this. But you've also seen that some of the states, particularly, you know, especially up in Washington here in California, have been much faster at responding to that. do this than the federal government. And, you know, God, you know, God help us if they hadn't been, right? It could have been much, much worse. So there is always some advantages to redundancy. But one of the problems that I point out in the working paper that I put out, though, is that the last sort of couple months, you know, because of that governmental redundancy, the problem is, is that

there's redundancy in, you know, ability to execute policy, but not an ability to provide financing. So you have the situation where, you know, these states know that if they enact these broad lockdowns, like that's going to, you know, essentially wreck their finances. And so all of, you know, one way of looking at basically what happened through January, February, and March is that you basically had a whole bunch of these different state governments effectively playing chicken where the, you know, sooner they locked things down, the sooner they'd lose revenue and the less money they'd have to treat the aftermath. But the later they waited, more revenue they'd have, but the worse of it.

an outbreak they'd have. So it's this kind of, you know, sort of distributed game of chicken because of this non-integration of, you know, budgetary and political abilities. It's a perverse incentive system for dealing with something like a pandemic. But since you mentioned that working paper, maybe we should talk a little bit about what you think would actually start to solve the problem of this sort of financing crunch in the Muni market or in the state financial system? So I'm going to let Yaakov and Scanda talk about the community market because they, you know, has done more of the work there. But the proposal that I put forward basically looks at the fact that states have a, you know, states tax revenue elasticity with respect to

GDP. So basically how much the state tax revenues grow as GDP grows is just around one or just a little it below one in the long term. So states face a shrinking tax base, you know, long term without raising tax rates. But at the same time, in the short run, they have a very high elasticity with respect to unemployment. So if, you know, unemployment falls by one point, you know, tax revenues will fall by 1.5 points or 1.8 points. And so what I sort of did with this thesis was to come up with a sort of, you know, you guys have had Claudia Somm on talking about the SOM rule for recessions and for getting money out. And essentially, you know, state governments are subject to these same constraints because they're balanced budget-constrained entities. So the idea was essentially to take that

and then move it over to the space of tax revenue replacement per unit unemployment. And so the idea was that it would create sort of an autonomous financing facility that didn't require, you know, specific legislative reimbursements that would support state revenues during a downturn that generally is, you know, not caused by anything that happened in the states. The states, you know, are subject to regional and national and global trends. Much of the movement in state level unemployment is not caused by state level policy per se. And so the idea behind this proposal would be that, you know, for every, you know, when you have something like the SOM rule, so if unemployment goes up a half a percentage point over its three-month moving average,

Anytime that is triggered, it looks at that, like it looks at the past year or so of unemployment and takes that as a baseline. And for every percentage point that unemployment goes above that baseline rate, this facility would essentially transfer 8% of the previous year's tax receipts for that period to that state as a block grant for the states to basically use for general revenue. Part of this is because states historically, when they are trying to close budget gaps, have undertaken sort of more aggressive financing maneuvers, things like securitization of future revenues or things like privatization of existing services.

But when you're in a financial crisis or when you're in a crisis that has financial dimensions even, that sort of really aggressive dealmaking basically becomes impossible and you just need something in order to stop the bleeding, basically. And so a big blanket policy like this that gives states wide latitude to deal with the causes of the crisis, I think would go a long way towards remedying this sort of perverse incentives system. Well, why don't we talk about from more of the market side? I mentioned that we'd seen record outflows from a bunch of munibon funds. We've seen strains in the market. I think almost no new issuance in the month of March. What would help there? Well, Skonda and I argue that

what would really help there would be of the Federal Reserve intervene much like it does in other markets and backstop the market and purchase some municipal bonds. I just, just attack on there to Yaakov's point. We've seen already that they've been willing to engage in direct purchases for investment-grade corporate bonds, including buying the LQDETF. So I think in this situation, given the sort of public interest need alongside the same sort of budget-constrained, financial constraint problem that sort of emerges in these types of crises, direct purchases of investment grade state and local government debt. It's a little harder because the market's more fragmented, but it's something that we'd, I think, at least add an additional degree of freedom

to the more comprehensive fiscal solution that Alex is proposing in his work of paper. So let me ask you further about that, Scanda, and then others can take it, because intuitively, it's Okay, the Fed in theory could buy municipal debt directly or the secondary market from the states or the towns to backstop their finances. And technically from a mechanical standpoint, it's clear how the Fed could do that because it creates money. On the other hand, there are obvious concerns about sort of democratic accountability that sort of remind me of in Europe when they're like, well, if we just start backstopping all the debt from the different countries, then what is to limit?

their spending going forward and things like that. And so the, you know, Draghi and the Eurozone crisis proposed a thing. We're like, okay, you can get backstopping from the ECB, but you have to submit to certain conditions regarding your spending. How should the Fed navigate that issue now such that it can backstop state and local authorities without necessarily writing them a blank check? I think so one of the parameters to the the proposal, Yaakov and I had put together a few weeks ago was to make it sort of time-dependent. I think there were aspects of the, sort of the Draghi's ESM proposal, in one sense that helped make sure there was access to financing, but there was also sort of the pitfall that it also encouraged a lot

of austerity that weakened the recovery. Which is the exact opposite of what they're trying to do. Yeah, the exact opposite. If we actually think about the big picture problem that we we really don't want to exacerbate it, aside from sort of the pro-cyclical aspect of state and local government spending is we want these governments to spend what's necessary for the public health response, not to sort of meet arbitrary budget constraint that could be loosened with the right policies in place of the Federal Reserve, the federal government. So in this case, I don't think that the answer is to sort of make them commit to some austerity policy for the foreseeable future. What I think is, should be, this should be,

constrained in our proposal is make it sort of the timeline should be consistent with the national crisis, right? That these, like the fed's ability to effectively lend to state governments should be something that's available for a limited time, right? So just as the commercial paper funding facility in 2008 and nine was, actually was open until February 2010. So it really bookended the worst parts of the financial crisis and gave some time. for corporations to roll over short-term debt until we had gotten through the worst period of the global financial crisis in the Great Recession. Something similar could be calibrated here in terms of making financing available to the state governments for, we call it approximately 12 months

from the worst point in terms of the economic impact from this crisis. So we could take the peak unemployment rate or we could take some other economic parameter or public health parameter even. I think one of the things that's also missed in these discussions about moral hazards for providing financing facilities for subnational entities in the U.S. is the fact that in the Eurozone, these balanced budget requirements are centralized and centrally enforced. They are the Maastricht Treaty saying, you know, this is the space that your budgets are allowed to be in. In the states in the U.S., By contrast, they are entirely enforced and acceded to at the local level. There are aspects of the state constitutions rather than anything in federal law.

So you wind up having this situation where on the one hand, the states are saying, yes, we are doing this on purpose, you know, and there's been studies showing that this affects muni bond yields in those states, you know, in this way and that way. But it's the state saying that they're going to do it, but then the states also putting themselves in a position basically where it's impossible for them to pursue basically like an anti-correlated capital structure. So there's no way they can set their sort of financial house so that their financing costs get lower when there's a crisis because the financing costs are done.

They're displaced entirely to basically capital accounts because these states with balanced budgets that only obtains for the general revenue account. that they do to sort of like build infrastructure or do a wide variety of other things, they can essentially move off budget in a way that like you see, you saw, we talked about the nudie blowups that didn't happen. But one of the things that did happen is there were a lot of off budget enterprises that did blow up. The Detroit Water Authority was a very big one that went on for a long time because they

had a complicated swap's portfolio. But states, you know, progressively do that when they securitize or when they privatize their revenues in order to make up for shortfalls in their general revenue account in a given period. They do it by pushing things into these capital accounts and into these off-budget enterprises that are themselves fragile, but which operate in the muni markets. So backstopping those muni markets does provide a kind of secret quasi backstop for, you know, states attempts to relieve themselves of their self-imposed burden, which is sort of a different overall environment from the Eurozone of member states trying to deviate.

and spend more. Yeah, if I could just quickly tack on to what Alex was saying here. So there are balanced budget laws and rules, but as he just pointed out, for each state, there are exemptions in various ways in terms of how to adhere or not adhere as much to them. And I think that sometimes gets lost in this discussion because there's an assumption that there is a law and it is airtight and that these states have to just start slashing spending as soon as tax revenue falls. And there are ways to manage and maneuver around it that were probably less, there was probably less political willingness to explore them in the early 2010s in a way that I think now, just because of the nature of this, should be explored more aggressively.

There's also exemptions for certain types of natural disasters, exemptions through different types of what they are called special districts that allow for certain types. types, certain parts of the state government to issue debt and not be constrained by these sort of arbitrary balanced budget laws and rules. I'm curious, but why did the Fed not buy muni debt back in the financial crisis of 2008? Was it the sort of moral hazard issues that you're all alluding to, or was it something more technical, or was it just that the crisis didn't really warrant the kind of state response that we need now during a pandemic? I think I can take that. I think there are a variety of reasons.

In Ben Bernanke's memoirs, it's noted that two of the vice chairs, and I will tell you who they are in a second because I have them written down. I think it was David Cohen and Kevin Warsh, who were most skeptical of the proposals. And my understanding and instinct is there were several things involved. First of all, the Fed isn't really familiar with the municipal bond market. And the municipal bond market itself isn't a very deep market, which is very unfortunate. And one of the reasons I do think the Fed should be stopping this market and working with it

because it just needs to be fixed overall. I think there was another reason in which it did seem like it would be the Fed doing fiscal policy, which at the time, I think there was still a lot of nervousness about building that divide. And the third reason is, and I think this is still a reason that hasn't happened today, is quite frankly, neither the state treasurers nor the Federal Reserve Board really understand what each is doing. It's very likely that one of the reasons we don't see this is the Fed does assume states can't borrow because of balanced budget laws.

And because of those laws, what you see is the, collateral base of the municipal bond market is extremely hard to understand, even for people who are very, very seasoned investors in that market. In California, I'm actually doing an exercise with the California, some people in the California state government looking at what could be receivable. And it turns out there might be 100 billion of, at least, of things that we could we could refinance through that potential Fed window, but it just doesn't look like it's attached to California because it's all done through these special districts to get around the Prop 13 barrier and the barrier of the balanced budget constraint. But it doesn't mean it's not out there.

It just you need to know where you look. Let's just talk a little bit more about, you know, we were talking about these sort of like constraints in the law that states have. They have different ways of getting around them or even theoretically a state or a city could call a special session of the legislature and change the laws if they have if they have them in the law. That's up to them. What would be in your view and maybe Skanda could start with you, but others join in. What would be sort of the ideal instrument here for the Fed, because, you know, as all of you pointed out, there's numerous different ones. There's water authorities and transit authorities.

And so it's an extremely complicated mosaic of different issuing authorities and states and towns. What would be the ideal instrument for the Fed to announce that it would be willing to buy, either primarily or secondarily, which then it could be left up to the states or cities themselves to figure out how they can issue under their existing law? Yeah, so in the ideal state, the U.S. state and local government debt market looks a little bit more like Canada, as I would say, in the sense that Canada issues what are effectively, Canadian provinces issue effectively general obligation debt, right? So it's backed by the taxation authority and it's all pretty uniform and standardized. And actually, Canadian provincial debt market, well, I don't know how much is actually, I've had trouble finding a lot of written product on this, but actually it's a very deep market. and it's actually a pretty sophisticated market relative to call it the U.S. Uni-debt market, which is very fragmented. And there's a big difference between revenue-backed bonds and general obligation debt.

So it would be ideal if there was a deep market. The absence of that probably means that what would be the sort of second best solution, I think, is sort of direct loans that the Fed makes to probably states and large cities that are of investment grade. So you obviously do, there's, the Fed has certain, um, justifiable qualms about, um, engaging in too much credit risk. So at least keeping it to sort of the same parameters they've kept for corporates. And then to some extent, if you, if you just at every single state and local government entity that existed, it would obviously be a little bit hard to manage

administratively. So I think it's just a starting point. Um, if state governments were willing to accept loans from the federal, from the federal reserve, I think, think that's the kind of thing that should be encouraged in some ways. And actually, this could be a chance to really catalyse some standardization and some ability for state governments to think a little bit more expansively about how to get the necessary financial flexibility in a crisis, which right now they sorely lack. One of the problems with this idea that a few people have pointed out is the notion of the Fed actually coordinating this action with 50 state government. governments, how would you suggest they go about doing it that?

So it is a regionalized Federal Reserve System too, right? There are 12 Federal Reserve banks, and they all have pretty close relationships across their regions. I mean, these take a lot of pride in it. So I don't actually think that I think 50 states is compared to sort of like the scale of what they've been doing in other markets is not actually like insurmountable. When you think about 12 Federal Reserve presidents, you've got, 12th regional Fed presidents that can help lead those efforts.

They have a lot on their plate, obviously, but it's not the kind of thing that I think that's probably more manageable than trying to go about this through. I mean, I think it's just a starting point. They can obviously do secondary market purchases of municipal debt, and I hope they at least start with that. But I think as far as actually kind of giving state governments the appropriate financial flexibility and working with state treasurer, 50 state treasurers to 12. Regional Fed banks is not something I think that's actually as logistically challenging,

as opposed to trying to do it with every single city and county and township. That's probably too much. It's also worth noting that a large proportion of local government revenues are actually intergovernmental transfers from the state level. And this is one of the first things that goes in a crisis when states start to face a budget crunch, is they cut their offerings to local governments. And part of the reason for this is that local governments have a large part of their like own source revenue drawn from property tax, which is actually comparatively inflexible to the overall, you know, sort of employment picture at a given time because property tax assessments, you know, come every, you know, a couple of years or whatever. And so your problem is not that, you know, income goes down and receipts immediately go down.

It's that income goes down and delinquency goes up a little bit in those situations. So there's a kind of, you know, every man for themselves. to these intergovernmental transfers in a crisis. And so if we backstop these 50 states, there is sort of an existing administrative framework for those 50 states to then in turn backstop their own sort of local governments. And even within the states, there's this perception that there's this jigsaw puzzle of special districts.

But in a lot of states, as we've surveyed and looked at, A lot of them actually is a fiction. All of these things are being coordinated through the Treasury Department, through the treasuries or some kind of special body that coordinates the district and has all the information on them. So we've been talking a lot about moral hazard and perceptions of how this will work. And I guess one of the things I was wondering about is the Muni market, the Muni bond market is kind of a special one.

it comes with all these tax benefits. And I'm thinking of how to phrase this question, but I guess I'm wondering about the moral hazard when it comes to bailing out investors or effectively bailing out investors in muni debt. These are people who probably do have a lot of assets, who are probably investing in muni bonds because they're worried about taxes. Does that make this move more politically sensitive than it would be otherwise? I think the, the sort of qualms about asset purchases and who they benefit. I think it's a valid point to bring up in the sense that the people who own these assets and who will probably benefit from loosening financial conditions more broadly

tend to be on the wealthy end of this spectrum. I'm not sure it's necessarily disproportionate for a muni market. Obviously, there's a tax exemption within, if you're a California investor in California debt, you have a tax exemption, full tax exemption there. As opposed to, you can't actually is a very weird thing because it actually narrows the investor base in some ways because if you're a New York investor in California debt, you don't really get any real benefit there in terms of tax exception. So it tends to lead to be sort of narrow investor bases. And it's, I appreciate the point, but also it's also one of these things that we're doing this in corporate bonds. We've done this in other asset classes.

I'm not sure if you think about like who owns MUNY's versus who owns most financial assets. I think that that skew tends to be the same. If anything, it's probably more likely to be skewed for asset classes that have a truly global investor base, as opposed to if you're buying Idaho bonds and you're an Idaho investor, there's at least some sort of, these are pretty narrow investor bases itself. But yes, there is some distortion there to acknowledge. And the distortion goes both ways, right? because one of the reasons it's not a great market is because most of the reason you buy municipal bonds is tax exemption. So you have very, very liquid markets. You have very shallow markets. And these are the markets that since 1996 have funded 72% of all infrastructure investment in this country. So I think it's less of a moral hazard problem than the underlying market structure not being very stable.

And I think the advantage of moving this program along is to get some standards. standardization and to get some thinking and information on how to fix these markets in the long run. If I could turn around the moral hazard point as well, the fact that the overwhelming majority of this infrastructure is funded in these municipal bond markets is itself a kind of moral hazard question of the federal government displacing its responsibility to fund state-level infrastructure projects onto these municipal bond markets by forcing states to create these off-budget enterprises in order to do necessary investment.

There is a good graph going around showing that basically net investment at the state level, you know, sort of in fixed capital formation, has been, you know, net net plus or minus, you know, 0.15% of zero since 2012. It's like really been kind of abandoned in that way. And so these moral hazard questions of, oh, what if these local places spend too much money and then distribute the cost to everybody else, in practice is actually inverted, where the refusal to fund state infrastructure projects at the federal level and also the progressive increase in unfunded mandates put by the federal level on the state level,

essentially create a moral hazard problem of the federal level, which does not need taxes in order to fund its spending, essentially absorbing the tax bases of these state level governments. before we wrap up just real quickly and anyone can take this what are the consequences economically if we were to see a sort of wave of austerity from state and local authorities on top of this that largely went unchecked so we have something in the CARES Act there's some money going to state and locals but maybe they'll do a little bit more how bad could it compound the problem of recovery if there's not

something sort of done imminently to address this crisis in terms of how long it takes us to get back to pre-crisis level? We saw after 2008 that it took until 2014 for a fair number of states to recover trend growth and tax revenues. And if we've seen from other data that the immediate demand drop-off has been so much steeper than it was in 2008 and so much more tied to basically things that takes place in, you know, physical space, use of public services, use of retail brick and mortar, use of all of these things that generate tax revenues. So, I mean, just going from that baseline, I mean, it seems like a

disaster if further relief is not worth coming. All right. Well, thanks to all three of you for joining us. Really appreciate all your perspective. Not something that we've discussed much on the podcast before. So Skonda, Alex, and Yaakov. Thanks for joining out. Thanks so much. Thanks for having us. Yeah, thanks, y'all. Thanks. Tracy, I really liked that conversation.

I really liked, you know, all the allusions to the Eurozone crisis are like coming back to this crisis except in reverse. Because, of course, that was essentially the problem in the Eurozone post the great financial crisis, which is that you had all these authorities. They didn't print their own money because none of them have their own central bank. They were all credit constrained. They're all forced into austerity. And it's like this, like, it's this weird U.S. parallel we're facing where this time the question is how much domestic U.S. austerity will we see because none of these entities currently have access to sort of either blank check funding from the central bank or the ability to conduct their own countercyclical fiscal policy. Yeah, I'm also getting terrible target two flashbacks where everyone was sort of arguing about whether or not that liquidity support from the ECB amounted to a stealth bailout of certain Eurozone members. Those were fun times. But I do think this idea of mixing fiscal policy with monetary policy or having a monetary policy authority step in to. allow fiscal stimulus to happen through the states. I think that's really interesting. And it's one

that we've touched on before. I guess the question is, you know, the Federal Reserve is the sort of unelected body that has a very specific mandate. But it feels like in a situation like this, they're encroaching on a bunch of different areas, but people aren't necessarily worried about it in this particular circumstance because what they're doing seems very, very needed. I just wonder how far it's going to go and what the pushback is going to be, if there is any eventually. I also think it says something about sort of the U.S. culture and U.S. politics in general that, like, if the Federal Reserve buys so-called investment-grade debt or backstops that market, like, okay, we need to do that, credit dislocations, et cetera,

but if the Federal Reserve were to say like backstop or buy the debt of New York State or California, suddenly like, oh, you're bailing out the states. And we have this like weird thing where in our system, we're actually the sort of central view of many people who sort of talk about that stuff is that it's somehow more legitimate to backstop banks and companies than it would be to backstop New York City or New York State, which is actually directly fighting this health. this health emergency. Yeah, as much as people complain about corporate bailouts, you can imagine it would be even worse for state bailouts. And again, it's kind of weird because ultimately all the states are part of the United States of America, and yet we have these weird divisions.

I guess that's the nature of the U.S. political system. But it is definitely worth discussing and worth reminding people of in the context of what's going on in finance and markets and the economy right now. And I think people forget just how much much friction there is between these individual state-level governments and the federal government at the moment. Yeah, because the way the U.S. is set up, there's all kinds of sort of gaps there. And I do think that's really important. Like, look, we've had like this incredible crisis that pushed us from a very strong economy

into sort of depression-level economic activity for a while, or really just the matter of weeks. And even if we were to find a cure or a health solution in the next month or something, and of course, no one really expects that, the asymmetry is such that, as I forget who mentioned it, I think it was Alex pointed out, it took until 2014 during the last crisis to return to sort of a trend state tax collection. So it could just be years of unnecessary austerity, budget cuts, further economic pain, simply as a result of what could, you know, and hopefully will be a very short, real shock to the system, which makes it all the more urgent to come up with some mechanism to prevent that. Absolutely. Time is of the essence here. All right. Speaking of time,

shall we leave it there? Let's leave it there. All right. This has been another episode of the All Thoughts podcast. I'm Tracy Alloway. You can follow me on Twitter at Tracy Allaway. And I'm Joe Wisenthall. You can follow me on Twitter at the stalwart. And you should follow our guests on Twitter. They are Skanda Amarnoff of Employer America. He's at Irving Swisher on Twitter. Yacob Fagan of the Bregorian Institute. He's at Buddy Yaakov. And Alex Williams of the Levy Institute. He's at Tragic Bios on Twitter. And be sure to follow our producer on Twitter. Laura Carlson. She's at Laura M. Carlson. Follow the Bloomberg head of podcasts on Twitter. Francesca Levy at Francesca Today and check out all of our podcasts at Bloomberg under the handle at podcasts. Thanks for listening.