History Is Waving A Big Red Flag As Negotiators Hit Stalemate Over State And Local Funding

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As the four lead negotiators prepare for their eighth meeting on a COVID-19 relief package Thursday afternoon, House Leader Nancy Pelosi (D-CA) and Senate Minority Leader Chuck Schumer (D-NY) are projecting confidence. 

Despite the seeming impasse on a deal, the two were noticeably fired up at a Thursday morning press conference, seasoning their talking points with impassioned lectern slapping and an anecdote about the high-spirited Democratic leaders singing a song together before the press conference started. 

They’ve publicly refused to budge on the biggest planks of their plan, reportedly eking out billions of dollars in concessions from the White House negotiators, Chief of Staff Mark Meadows and Treasury Secretary Steve Mnuchin. Those two are facing immense pressure from a fractured Republican caucus, some of whom are desperate to take a deal home to their constituents — and some of whom refuse to spend a dime more in federal aid.

One of the key sticking points that has emerged in negotiations is direct funding to states and municipalities.

Democrats have proposed over $1 trillion, about six times as much as was spent in the last relief package. That boodle would be split into $500 billion for states, $375 billion for municipalities and counties, $20 billion for territories and $20 billion for tribes. They’ve also sprinkled additional dollars on top for helping states to fund Medicaid, education and other priorities.

Republicans, as Politico reported Wednesday, have counter-offered $150 billion. 

“I just don’t think it’s enough,” Wendy Edelberg of the Brookings Institute’s Hamilton Project said of the Republican proposal. “Even as the labor market was improving, the one sector that has repeatedly had negative employment numbers is the state and local sector.” 

And that’s a problem, policy analysts told TPM — one we’ve seen before. 

“One of the lessons of the Great Recession is that it affected state and local government very harshly due to property taxes, then unemployment getting very high, then income taxes falling,” said Stephanie Aaronson, director of economic studies at the Brookings Institute. “It’s part of the reason that the recovery from the Great Recession was so slow — state and local spending was a drag on overall spending for almost a decade.” 

And states are in a worse place now than they were then. State budget shortfalls are on track to exceed $500 billion this year, according to the Center on Budget and Policy Priorities. Even calculating in federal aid from the COVID-19 relief packages Congress has passed, plus states dipping into their rainy-day funds, that number still hovers around $360 billion — a figure that dwarfs the $283 billion they lost after the Great Recession.

Almost all of the states have to maintain a balanced budget, largely a result of bills passed in the last 30 years. During shortfalls, that means they have to impose austerity measures like raising taxes and slashing spending. Those measures can have ripple effects — in the aftermath of the Great Recession, for example, one of the results of those strictures was sky-high tuition at state colleges, which contributed to the growing student loan debt crisis.

“A lesson of the Great Recession is even though we got a lot of great federal stimulus, it was offset by state and local austerity efforts that hurt the recovery,” Arnab Datta, senior legislative counsel at Employ America, told TPM. 

To try to offset that, one of the integral differences in the aid Democrats are proposing for states this time around is that it can be used to make up for revenue shortfalls. The aid in the last package could only be put toward expenditures related to fighting the pandemic, such as the cost of providing health care.

The funding would also stop the bleeding among the public-sector jobs state and local governments maintain, stemming layoffs which would strain unemployment benefits, another tenet of the relief package. Without the aid, “states will have to start laying off workers — which they’ve been doing but not in huge numbers,” said Aaronson. 

Pelosi is touting the state and local employment piece as the one of the key reasons the funds are needed.

“Health care workers, first responders, teachers, sanitation and transportation workers are employed by state and local government,” she said Thursday on CNBC. “If they don’t get the money, many of these people, millions of them, will be unemployed and go on unemployment insurance, so what money is that saving?”

The Republican proposal, which Senate Minority Leader Mitch McConnell (R-KY) seemingly lacked the support to put up for a vote, omitted any direct state and local aid. He has denounced the $1 trillion Democratic proposal as a “slush fund.” 

So the political dance continues, with the negotiators huddling again Thursday evening, a day after a grim hiring report’s publication and one day before a jobs report is released that is not expected to be much cheerier. 

But if they forget the lessons of the Great Recession, Aaronson warns, the country will pay in the long run. “If Congress doesn’t do anything to support state and local governments, that is actually going to be catastrophic,” she said.

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