Covid-19 federal assistance to state and local governments and its consequences

Gavin Newsom, the governor of California and an optimist for the presidency, recently reached an agreement with state legislators on one more check to mail to families in the state (Luna 2022). The families will receive up to $ 1,050 in cash from the state government, a strategy that will cost about $ 10 billion. This follows two previous rounds of so-called Golden State Stimulus payments to California residents in 2021.

All of this constitutes quite a change of tone from May 2020, when Newsom proposed significant cost reductions in response to the recession caused by the Covid-19 epidemic (Governor Gavin Newsom 2020’s office). What happened?

In the first months of the epidemic, analysts and policymakers alike expressed significant concern about the impact of the initial recession and widespread lockdown on state and local budgets (Bartik 2020, McNichol et al. 2020). Since state and local governments in the United States are generally bound by balanced-budget requirements, revenue cuts can cause sudden disruption of service provision and reduce employment for state and local government employees (Clemens and Miran 2012, Shoag et al. 2019). To avoid such unrest, the federal government has taken responsibility for the stability of state and local budgets.

And it has assumed responsibility. Across the four major Covid-19 relief bills, the federal government has allocated approximately $ 900 billion to state and local governments. This was consistent with the most pessimistic estimates of early revenue for the epidemic (e.g. Bartik 2020). These estimates, however, dramatically overestimate the impact the epidemic will ultimately have on state and local budgets. In fact, since the beginning of 2020, the state’s tax revenue has exceeded the pre-epidemic forecast (Dougherty and de Biase 2021, National Association of State Budget Officers 2021).

There are two main reasons for missing the initial forecast signs of revenue loss (Clemens and Vigar 2020, imminent). First, they did not account for other elements of the recessionary policy response, including the unprecedented amount of support for families and organizations, as well as the rapid development and deployment of vaccines. These policies indirectly supported the tax base of state and local governments, making direct assistance to state and local governments less necessary. Second, they often relied on the historical relationship between macroeconomic indicators and revenues that were quite different during the Covid-19 crisis.

We at Clemens et al evaluate the results of possibly overly generous federal financial assistance to state and local governments. (2022a, 2022b). In both papers, we exploit the fact that the allocation of federal aid was much more generous to residents of states that were more favorably represented in Congress than to residents of less favorable states. Representation does not measure proportionately to population, largely because each state elects two senators regardless of its population, and partly because each state gets at least one member of the House of Representatives. The resulting over-representation of low-population states (or ‘smaller’ states) strongly predicts their aid allocation. This led us to use a measure of representation of the state’s counter-resident congress as a helpful variable. As Figure 1 (Clemens and Vigar 2021) illustrates, this ‘small-state bias’ leads to significant differences in the amount of Covid-19 relief funds per resident received by the public sector in smaller states than in larger states.

Figure 1 Assistance to residents by the level of congressional representation

The difference in federal funds flowing to different states as predicted by the difference in congressional representation cannot be explained by other factors, such as the projected revenue deficit, the severity of the threat to public health, or other proxies for funding needs. As a result, they allow us to avoid an ideal source of bias, namely that aid flows most generously to the most needy states, as we estimate the impact of financial aid on macroeconomic outcomes.

The first and main results of interest we analyze in Clemens et al. (2022b) is state and local government employment. Preserving state and local government employment is important and, in itself, for its role in ensuring the provision of continued services and stabilizing the larger macro-economy.

Figure 2 shows the local-projected emotional response to state and local government employment in financial aid. This indicates that each $ 1 million grant has been modestly reserved for 18 public sector job-months across 18 months of our sample, or more so to speak, financial assistance of $ 855,000 for each state or local government job-year. Saved. This number is much higher than comparative estimates of past recessions. Research on the impact of elements of the 2009 U.S. Recovery and Reinvestment Act, for example, has an estimated cost per year of work ranging from $ 26,000 to 2 202,000 (Chodorow-Reich et al. 2012, Wilson 2012, Conley and Dupor 2013). In the context of the epidemic, the paycheck protection program is estimated to cost $ 169,000 to $ 258,000 per job-year (Autor et al. 2022a, 2022b).

Figure 2 Impact of federal aid per resident on state and local government employment

Figure 3, from the same paper, shows that the impact on the larger economy was (even) more modest (see also Auerbach et al. 2021). Federal assistance to states and locals does not appear to have statistically significant effects on private-sector employment, wages, income, or output. This may also contrast with past work on the multiplier effect of federal spending (e.g. Inoue et al. 2022). Historical recession estimates from the Great Depression through the Great Depression tend to make multiplier estimates between 0.5 and 2 (Ramey 2019, Chodorow-Reich 2020).

Figure 3 Impact of federal aid per resident on macro results

Clemens et al. (2022a), we and John Cairns report some more positive results. Federal assistance appears to have helped states introduce more effective testing activities. As shown in the figure below, the testing benefits of the states that received the most federal funding have steadily increased since the summer of 2020.

Figure 4 Impact of federal assistance per resident on total Covid-19 tests conducted per 100,000 people

An analysis of our states’ vaccination campaigns shows that states that receive more federal funding per resident do not outperform their peers due to higher vaccination rates. It turns out that larger federal funds have created a more equitable type of vaccination: states that have received more federal funding have seen smaller gaps in vaccination rates for residents with college education than those with higher school education.

The overall picture drawn by the brief work here suggests that federal assistance for state and local governments was only decently effective, if only as a macroeconomic stimulus. In addition to the overly generous support allocated to state and local governments, two factors are probably important in explaining this. First, for most of the past two years, the public health situation has led the government to impose restrictions and to discourage families and organizations from voluntarily engaging in a wide range of economic activities. Voluntary pullbacks on these restrictions and economic activity could shut down a core process through which revenue stimulus traditionally works. Second, before the state and local governments used the full amount of their allocated funds, the economy entered a period of significant inflationary pressures. It distinguishes the recent macroeconomic context, for example, in the aftermath of the global crisis, when the overall demand deficit was strong.

It remains to be seen how far federal funds have advanced other targets of interest. Our analysis of the states’ testing and immunization campaigns suggests that federal funding has moved toward at least some interest. The impact of federal funding on education, law enforcement, and other local public services needs to be evaluated in future research.


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