Bailouts, Stimulus and Debt Archives - Reason Foundation Free Minds and Free Markets Fri, 16 Sep 2022 15:53:43 +0000 en-US hourly 1 Bailouts, Stimulus and Debt Archives - Reason Foundation 32 32 Biden administration’s monkeypox funding request highlights the flawed budget process Fri, 16 Sep 2022 04:00:00 +0000 The ability to make emergency requests such as this points to a broken budgeting process. 

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The Biden administration has asked Congress to approve $4.5 billion in emergency funds to help address the monkeypox outbreak, but such a large spending measure is questionable at best. The monkeypox funds are part of a larger package of emergency funding requests.

National Public Radio reports:

The White House is asking Congress for $47.1 billion in emergency funding to cover expected costs for Ukraine, COVID-19, monkeypox and natural disasters. The administration hopes the funding request will become part of an upcoming short-term spending bill aimed at funding the federal government beyond Sept. 30, when the current spending package is set to expire.

Congress must pass the short-term spending bill by the end of September to avoid a partial federal government shutdown on Oct. 1. But the ability to continually make emergency funding requests points to a broken budgeting process. 

Is monkeypox truly an emergency right now? As of early September, the U.S. had less than 25,000 confirmed cases of monkeypox, and the rate of newly confirmed daily cases was declining from its peak in mid-August. Less than 400 new cases are being diagnosed each day as of this writing. 

Although very painful, monkeypox is rarely fatal. Los Angeles County recently reported the first confirmed U.S. death from monkeypox. In August, health authorities reported one death potentially related to the virus, but the affected individual’s cause of death has yet to be confirmed. Notably, older Americans, who were the main victims of COVID-19, have some protection from monkeypox because anyone born more than 50 years ago received a smallpox vaccination.  

According to the Biden administration’s funding request, 1.1 million doses of the monkeypox vaccine have already been made available. By the time any emergency funding becomes available, it is likely that all these shots will have been administered, and there may not be sufficient demand for additional vaccinations. But the administration’s request still includes $1.6 billion to procure monkeypox vaccines, $1.2 billion for testing, treatment, and vaccination services, $1.1 billion for other domestic purposes, and $0.6 billion to fund responses to monkeypox outside the United States.

This last figure should certainly be questioned. With most monkeypox cases occurring in North America and the relatively affluent counties of Western Europe, it is not clear that monkeypox is a sufficient threat in low and moderate-income countries that might need foreign aid. 

It is also worth noting that monkeypox treatment for most Americans will be covered by private insurance, Medicare, or Medicaid. Some forms of coverage may also offset the cost of vaccination. 

The outbreak of monkeypox is certainly a serious public health issue, and it is understandable that it has attracted attention from Congress. But members of Congress should carefully review the proposed funding package. The federal budget process is broken. Congress’ consistent use of emergency spending bills, continuing resolutions and reconciliation rather than a transparent appropriations process, and the failure to offset new federal spending with budget reductions elsewhere are some of the reasons the national debt is already at alarming levels.

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Debtor Nation Wed, 14 Sep 2022 19:00:00 +0000 The national debt is over $30 trillion. Between 1965 and 2020, the federal government ran an annual budget deficit in 52 of 57 years.

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This post was originally published in May 2022. It was updated with more recent data on September 14, 2022.

At the end of the second quarter of 2022, the $30.6 trillion debt of the United States federal government was 1.2 times larger than the annual economic output of the country. The U.S. is now reaching federal debt levels, as a share of gross domestic product (GDP), that we have not seen since the end of World War II.

Federal spending is increasingly untethered from fiscal realities. From 1965 to 2022, the federal government ran an annual budget deficit in 52 of the 57 years.

The annual federal budget deficits during and following the Great Recession of 2007-2009 were dwarfed by the recent federal deficits of 2020 and 2021, however, when annual budget deficits were $3.1 and $2.8 trillion respectively. The COVID-19 pandemic and accompanying lockdowns and policies sparked the largest spending bills in American history, including the $2.2 trillion CARES Act signed by then-President Donald Trump in March 2020. A year later, in March 2021, President Joe Biden signed the $1.9 trillion American Rescue Plan Act.

After accounting for inflation, the national debt jumped by almost $5 trillion in less than two years—rising from $25.9 trillion in the first quarter of 2020 to $30.6 trillion at the end of the second quarter of 2022. To get a sense of the magnitude of the growth of the debt, the current debt of more than $30 trillion translates to each American individual owing $91,814 based on the U.S. Bureau of Economic Analysis (BEA) estimate of 333 million Americans. This is an increase in the national debt of nearly $14,000 per person just since the first quarter of 2020.

While the increase in the national debt during the pandemic has been particularly shocking, it is consistent with a decades-long, bipartisan trend of deficit spending where government expenditures consistently exceed government receipt of money. When tax revenue is insufficient to cover government spending, the government must issue U.S. Treasury bonds, shorter-term obligations like bills and notes, or other debt instruments

Federal Debt Holders

The federal debt is often classified into two buckets: intragovernmental holdings and debt held by the public.

Intragovernmental Debt

Intragovernmental holdings are government debt held by government agencies. As of September 8, 2022, intragovernmental holdings totaled $6.6 trillion, which is 21.4% of the total outstanding public debt. The largest share of this intragovernmental debt is held by the Social Security Trust Fund (46%).

Debt Held by the Public

Debt held by the public can be broken down into debt held by the U.S. public, foreign entities, or the U.S. Federal Reserve. The U.S. public is a broad category that encompasses domestic non-federal investors. It includes state and local governments, private pension funds and insurance companies, banks, and other investors. Foreign entities include the governments and central banks of other countries and private international investors. 

In recent years, even relative to the first two groups of debt holders, the U.S. Federal Reserve has greatly increased its holding of government debt. The Federal Reserve buys the debt with newly created reserves, but these purchases raise the risk of inflation by monetizing the debt. Since new reserves can increase the nation’s supply of money, they can lead to higher prices as more dollars chase the same volume of goods and services. The Federal Reserve asserts, “Federal Reserve purchases of Treasury securities from the public are not a means of financing the federal deficit.” But Federal Reserve asset purchases are traditionally a means of circulating newly printed bills. While new tools like interest on monetary reserves can mitigate the impact of such expansion, the dramatic increase of Federal Reserve debt purchases (which include mortgage debt and corporate bonds as well as Treasurys) is a serious concern.

Given the persistence of federal deficit spending, if demand for U.S. debt does not keep pace with debt accumulation, the risk of debt monetization via Federal Reserve purchases rises further.

Foreign Holders of U.S. Debt

Demand for U.S. debt has increased because the dollar is the de facto reserve currency of the world. The Bretton Woods system, which pegged other currencies to the U.S. dollar which was redeemable for gold, effectively ended after President Richard Nixon suspended dollar-to-gold convertibility. Since that point, the nations belonging to the Organization of the Petroleum Exporting Countries (OPEC) have principally denominated oil sales in U.S. dollars, therefore boosting demand for America’s debt.

The United States heavily relies on foreign buyers for debt financing, which can potentially be a liability if or when international conflicts arise. Russia held $139 billion in U.S. debt in 2013. After the Russian annexation of Crimea in 2014, the U.S. responded with aggressive sanctions and threats to remove Russia from the Society for Worldwide Interbank Financial Telecommunication (SWIFT) system. In response, Russia’s central bank began divesting from U.S. Treasurys. Today the West is once again sanctioning Russia after its invasion of Ukraine.

Historically, many countries have relied on the safety and stability of U.S. Treasurys. Western sanctions on Russia are a reminder that this “risk-free” asset is not risk-free for those failing to align with American foreign policy. The mid-March reporting that Saudi Arabia may begin pricing Chinese oil sales in yuan is an indication that U.S. financial dominance is not completely unchallengeable. Yuan-denominated oil sales could further erode Chinese demand for our debt, which has declined in recent years.

Today, China and Japan account for nearly one-third of all foreign holdings of U.S. debt. Given America’s friction with China and the population decline experienced in Japan, it is not a certainty that these two countries will indefinitely continue to sweep up large volumes of additional U.S. debt.  

Ultimately, the United States government must understand that we do not have an unlimited capacity for financing our deficit spending. This will become even more difficult as we pay out the rapidly growing liabilities for programs like Social Security and Medicare.

Other Long-Term Federal Financial Obligations

Organizations incur long-term financial obligations in forms other than bonds and the U.S. federal government is no exception. Some common types of financial obligations include pension and retiree health care costs for veterans, civilian federal employees, and the general public (through Social Security and Medicare benefit commitments). Looking at the federal government's balance sheet as of 2021, public holdings of U.S. Treasury securities make up less than one-quarter of total federal liabilities. Unfunded entitlements, like Medicare and Social Security, account for the most at 59% of obligations.

Overall federal obligations have now surpassed $300,000 per American. While substantial in their own right, the debt obligations of state and local governments across the country are dwarfed by the various categories of federal debt.


Unfortunately, the United States does not seem positioned for economic expansion like it was the last time the debt-to-gross domestic product (GDP) ratio was this high during the post-World War II era. Following WWII, debt was reined in by brief periods of inflation and several decades of exceptional economic growth.

In the first two quarters of 2022, the U.S. economy experienced negative growth. With weak or negative economic growth expected, and no significant restriction on federal spending in sight, the debt-to-GDP ratio will continue to rise.

Jeffrey Rogers Hummel, Professor Emeritus in the Economics Department at San Jose State University, was consulted on the “Federal Reserve Assets as Percentage of Publicly Held Debt” chart.

Data & Methodology

  • Federal Spending Versus Receipts: 
    • Overall data is from the U.S. Department of Commerce’s Bureau of Economic Analysis (BEA) National Income and Product Accounts data, specifically Table 3.2 (Government Current Receipts and Expenditures, which is reported quarterly). 
      • Spending data is from “Current Expenditures” on lines 24 and 44. 
      • Revenue data is from “Current Receipts” on lines 1 and 41. 
      • The inflation-adjusted data series are adjusted according to Q2 2022 dollars using the U.S. GDP implicit price deflator (FRED: GDPDEF) sourced from BEA.
      • The percent of GDP data series are calculated using quarterly Gross Domestic Product data (FRED: GDP) sourced from BEA.
  • National Debt: Data are sourced from the U.S. Department of the Treasury—titled “Federal Debt: Total Public Debt” (FRED: GFDEBTN).
    • The debt data are inflation-adjusted to Q2 2022 dollars with the U.S. GDP implicit price deflator (FRED: GDPDEF) sourced from the U.S. Department of Commerce’s Bureau of Economic Analysis (BEA).
    • Per capita figures are derived from the above data and divided by U.S. population (FRED: B230RC0Q173SBEA) data sourced from BEA.
    • The percent of GDP data series are calculated using quarterly Gross Domestic Product data (FRED: GDP) sourced from BEA.
  • Who Holds the Federal Debt: Data is sourced from the U.S. Department of Treasury.
    • Federal Reserve Banks: Public debt securities held by Federal Reserve banks. Data are sourced from Treasury (FRED: FDHBFRBN). The data are reported and presented at the quarterly level.
    • Foreign Entities: Federal debt held by foreign investors. Data are sourced from Treasury (FRED: FDHBFIN).
    • U.S. Public: Calculated by subtracting debt held by “Federal Reserve Banks” (FRED: FDHBFRBN) and “Foreign Entities” (FRED: FDHBFIN) from a FRED data stream, from Treasury, called “Federal Debt Held by the Public” source from Treasury (FRED: FYGFDPUN).
    • Agencies & Trusts: Federal debt held by agencies and trusts. Data are sourced from Treasury (FRED: FDHBATN).
    • All data series above are inflation-adjusted to Q2 2022 dollars with the U.S. GDP implicit price deflator (FRED: GDPDEF).
    • The percent of GDP data series are calculated using quarterly Gross Domestic Product data (FRED: GDP) sourced from BEA.
  • Federal Reserve Assets
    • Total Federal Reserve Assets: The Federal Reserve has a balance sheet that contains both assets and liabilities. Notes in circulation, bank reserves, and other liabilities. On the asset side of the ledger, the Federal Reserve has securities that include things like: U.S. Treasurys, mortgage-backed securities, loans to banks or other institutions, and liquidity swaps with central banks from other countries. Total Federal Reserve assets as a percentage of publicly held debt are calculated by dividing reserve bank credit (FRED: RSBKCRNS) by total public debt outstanding (Treasury: tot_pub_debt_out_amt).
    • Total Treasury Deposits at the Federal Reserve: When the U.S. Treasury issues public debt and deposits the proceeds at the Federal Reserve this is considered a treasury deposit. This figure as a percentage of publicly held debt is calculated by taking reserve bank credit (FRED: RSBKCRNS) and backing out three other data streams (FRED: WTREGEN; FRED: WLRRAL; and FRED: WORAL) and dividing by total public debt outstanding When the Fed borrows from the private sector, it does through what is referred to as reverse repurchase agreements. That amount is calculated by backing out of reserve bank credit in two data streams (FRED: WREPODEL and FRED: WREPOFOR). The overall total of these two forms of Fed borrowing as a percentage of publicly held debt is the sum of the five data streams divided by total public debt outstanding.
  • Biggest Foreign Holders: Data is retrieved from the US Treasury Department’s Major Foreign Holders of U.S. Treasury Securities historic tables, which due to aggregations below certain thresholds may result in missing data for certain years for some countries. Data are adjusted to 2021 dollars with the US GDP implicit price deflator (FRED: A191RD3A086NBEA).
  • Beyond Publicly Held Debt
    • Federal: Data for these series are taken from the Financial Reports of the United States Government for the years 2000 through present published by the U.S. Treasury Department
      • The data is inflation-adjusted to 2021 dollars with the US GDP implicit price deflator (FRED: A191RD3A086NBEA). 
      • Per capita figures are derived from the above data and divided by U.S. population (FRED: B230RC0A052NBEA) data sourced from BEA. 
      • The percent of GDP data series are calculated using annual Gross Domestic Product data (FRED: GDPA) sourced from BEA.
    • State & Local: The bonded debt data come from the U.S. Census Bureau’s Survey of state and Local Government Finance (2020 and 2021 levels are extrapolated). 
      • Pension Debt: Data are sourced from the Board of Governors of the Federal Reserve System (FRED: BOGZ1FL223073045Q). Excluded here are state and local retiree healthcare liabilities for which time series data are not available. Reason Foundation has estimated that these liabilities totaled $1.2 billion in 2019. 
      • The data is inflation-adjusted to 2021 dollars with the US GDP implicit price deflator (FRED: A191RD3A086NBEA). 
      • Per capita figures are derived from the above data and divided by U.S. population (FRED: B230RC0A052NBEA) data sourced from BEA.
      • The percent of GDP data series are calculated using annual Gross Domestic Product data (FRED: GDPA) sourced from BEA.

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How President Biden’s plan for student loan forgiveness will make student debt worse Thu, 02 Jun 2022 14:00:00 +0000 The president's plan to forgive $10,000 in debt per borrower - no matter their income level - has serious consequences.

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Many of the 43.3 million Americans with federal student loan debt totaling $1.61 trillion have anxiously anticipated President Joe Biden’s decision about student loan forgiveness. 

Last week, The Washington Post reported that the president’s plan, which sources say is nearing a formal announcement, will resemble his 2020 campaign promise to forgive $10,000 in federal student loans per borrower. The Committee for a Responsible Budget estimates this will cost taxpayers $230 billion.

While political firebrands such as Sen. Bernie Sanders have long supported substantially increasing federal higher education spending, including offering things like free college, President Biden’s proposal would represent a significant change in policy from previous presidential administrations, including Democrats.

President Barack Obama’s 2008 campaign promises were modest by comparison. President Obama sought to expand Pell Grant access to low-income students and eliminate government subsidies to private student lenders. Even Obama’s 2014 executive order that sought to forgive some federal student loans only did so after 20 years and required borrowers to make regular payments via the Pay As You Earn Initiative.

By comparison, the Biden administration’s plan is a major departure from Obama’s more modest and measured approach to student debt. While it would certainly be popular with many of the people who have $10,000 of their student debt forgiven, public opinion is quite divided over how to handle college student debt.

A CNBC national poll conducted in January of 2022 found that 34% of respondents supported loan forgiveness for all student loans. Only 27% of respondents opposed student loan forgiveness entirely. However, 35% of respondents supported a middling approach, preferring loan forgiveness only for those “in need.” 

Supporters of student loan forgiveness for those in need may be pleased to hear that President Biden’s proposal is reportedly going to be means-tested, with individuals eligible for student loan forgiveness if they have an income of less than $150,000 ($300,000 for couples).

The Washington Post editorial board notes some of the problems with that cut-off:

These provisions, while welcome, would not stop the policy from becoming yet another taxpayer-funded subsidy for the upper middle class. The president’s means test would be almost useless, as some 97 percent of borrowers would still qualify for forgiveness. The Committee for a Responsible Federal Budget, a nonpartisan watchdog, estimates that such a plan would cost at least $230 billion, that 71 percent of the benefits would flow to those in the top half of the income scale — and that a quarter of the benefits would go to the top 20 percent. Even this does not express fully how regressive the policy would be, because many recent graduates from medical, law and business schools would qualify for forgiveness even though their lifetime income trajectories don’t justify it.

Similarly, The Wall Street Journal has reported that more than 40% of all student loan debt is held by individuals with advanced and lucrative degrees, such as doctors and lawyers. 

Only one-third of Americans have bachelor’s degrees. These individuals are statistically likely to earn more than the two-thirds of Americans who don’t have those credentials.

This means that many taxpayers nationwide, 85% of whom do not have student loan debt, would now be paying off the student debt of their college-educated peers who, in many cases, enjoy greater affluence because of their college degrees. 

Importantly, this loan forgiveness proposal does not actually address the major problem of rising college costs. Biden’s plan would likely only exacerbate what many have labeled the student debt crisis. 

The American Enterprise Institute’s Beth Akers points out that there will definitely be a change in borrower behavior after any sort of debt reduction. She wrote

“Economically rational people will respond to that dynamic by choosing more expensive programs of study and borrowing more than they would have otherwise. The result: a pool of outstanding student debt growing even more quickly than before.”

This means that Biden’s proposal would incentivize future students to invest in riskier loans under the hope or assumption that their loans could later be forgiven. Such a plan is a disaster in the making that, over the long-term, could significantly expand Americans’ already ballooning student loan debt.

In fact, even if President Biden does reduce student loan debt by $10,000 per borrower, the Committee for a Responsible Budget reported that the total student loan debt would return to its current level in just three years, assuming no change in borrower behavior.

Instead of debt reduction, policymakers should consider reforms that have a lasting effect and address the rising cost of college. Extricating the federal government from the student loan business altogether or placing strict annual and lifetime caps on federal student loans could help encourage universities to stop hiking their costs.

At the end of the day, any sort of student loan forgiveness is a bad policy since it does not hold individuals accountable for their financial decisions. In fact, it would represent a massive betrayal of public trust. Many people worked to pay off their student loans. Others chose less expensive colleges to avoid student debt. Some people didn’t go to college at all because they decided they couldn’t afford it.

It may be well-intentioned, but President Biden’s student loan forgiveness plan is a recipe for disaster. It would potentially encourage bad borrowing behavior going forward. It would disadvantage those who made significant sacrifices to avoid or minimize their student debt. And, perhaps worst of all, it would force American taxpayers who didn’t go to college to pay for student debt they chose to not accrue and from which they will not benefit.

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Russia’s invasion of Ukraine isn’t a good reason for the U.S. to further increase defense spending Mon, 18 Apr 2022 04:00:00 +0000 As with all government programs, we should endeavor to limit military spending to only what is needed.

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President Joe Biden’s 2023 budget proposal calls for $813 billion in total national security spending, a significant rise from current year levels. The total, which includes $773 billion for the Department of Defense, plus smaller amounts for the Department of Energy’s nuclear weapons activities and the FBI’s national security functions, is $31 billion more than the Biden administration had set aside for the 2023 fiscal year in its previous budget. 

The president’s budget proposal would hike defense spending at the rate of inflation plus 1.5%, but U.S. Senate Minority Leader Mitch McConnell wants an even bigger increase in defense spending. Republicans are calling for an increase that would raise last year’s defense spending number by the rate of inflation plus at least 5%. Much of the impetus for increased spending demands is the recent Russian invasion of Ukraine, but events in Eastern Europe suggest that the U.S. may have less to worry about than previously thought when it comes to Russia specifically.

This is true for at least three reasons. First, the Russian army’s poor performance in Ukraine shows that it is not nearly as formidable as we may have feared. Instead, the Russian army appears to suffer from low morale and an inability to handle complex logistics. Corruption and a top-down command structure are hampering its ability to respond to changing battle conditions.

Second, it now appears that a portion of Russia’s military could be tied down in Ukraine for an extended period, further reducing its ability to project power against North Atlantic Treaty Organization (NATO) countries. Even if a peace agreement can be achieved, it appears that Russia may need to commit troops to Donbas or just over the border from Donbas for several years.

Finally, Russia’s action has encouraged NATO allies in Central and Eastern Europe to increase their own military preparedness. For example, Germany increased its defense budget to €100 million and committed to spending at least 2% of its gross domestic product (GDP) going forward. Poland plans to spend 3% of its GDP on defense going forward and will double its army to 300,000 soldiers within five years. Taken together, European NATO allies have more people and far more economic output than Russia and its ally, Belarus. By devoting more of these resources to defense, they’d be more likely to be able to counter a conventional threat from Russia, with or without help from the United States.

Some advocates of increased defense spending also cite potential threats from China, but there is really nothing new on that front to justify additional spending by American taxpayers in the Biden budget. In fact, China’s real estate collapse and renewed COVID-19 pandemic lockdowns in the country will limit Chinese economic growth and thus its ability to augment its own defense spending this year. In the long term, China may conceivably become a military threat to US allies, such as Japan and South Korea, but these countries should have the economic resources necessary to pay for their own defenses.

While it is true that the defense budget has declined as a share of GDP, and as a share of federal spending since the end of the Cold War, this yardstick is not necessarily relevant. As with all government programs, we should endeavor to limit military spending to only what is needed.  From ineffective weapons and defense systems that cost taxpayers billions to paying contractors exorbitant prices for basic equipment, the military budget includes many questionable items. One prime example: Does the nation really need to continue to pay between $110 million and $136 million for each F-35 fighter jet, especially in light of its design flaws and high operational costs, reportedly over $7 million a year per jet?

Also, defense spending trends should be considered in light of the country’s current political and fiscal realities. While it is well known that entitlement programs, especially Social Security and Medicare, account for most federal spending, they also enjoy very strong popular support and are difficult to cut. Instead, as the current rate of inflation drives increased cost-of-living adjustments for retirees and higher medical prices, these programs can be expected to become even more costly to taxpayers in the coming years.

The best opportunity for spending restraint in the near term would be to limit the growth of discretionary spending. Unfortunately, the current political dynamic in Congress makes this difficult. Both major political parties have driven up debts and deficits. Democrats call for higher domestic spending, which Republicans often oppose when they are not in control of the White House. But Republicans consistently call for more defense spending. Some Democrats call for cuts in defense spending to offset the other spending increases they want. And, in the end, there is typically a bipartisan compromise to increase spending in defense and non-defense categories. This dynamic will likely play out again in the current budget cycle, with Republicans already calling for more defense spending and both parties ultimately agreeing on more spending increases that set an even higher baseline for future budgets.

Thus, it’s important to look at how the ever-increasing defense spending contributes to the nation’s $30 trillion debt. In addition to large parts of the wars in Iraq and Afghanistan being financed by adding trillions in debt rather than paid for through annual budgets, the unnecessary annual increases in defense spending are set to continue to help drive up federal deficits through the 10-year budget window and beyond. 

The nation’s fiscal trajectory is on such a dangerous track that Congress needs to get serious about slashing deficits and economies must be found across the budget. The massive defense budget is one prime place to start cutting federal spending and acting responsibly. Otherwise, the United States may eventually face the risk of a severe fiscal crisis in which the federal government may have to suddenly curtail federal spending or destroy the value of the dollar through runaway monetary inflation. This would leave Americans vulnerable to threats that few of us can now imagine.

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Testimony: State and Local Fiscal Recovery Funds program was not a good use of taxpayer money Wed, 02 Mar 2022 04:25:00 +0000 A version of this testimony was presented to the U.S. House Committee on Oversight and Reform on March 1, 2022. Chair Maloney, Ranking Member Comer, and Oversight Committee Members: Thank you for giving me the opportunity to share my observations … Continued

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A version of this testimony was presented to the U.S. House Committee on Oversight and Reform on March 1, 2022.

Chair Maloney, Ranking Member Comer, and Oversight Committee Members: Thank you for giving me the opportunity to share my observations about the Coronavirus State and Local Fiscal Recovery Funds provided under the American Rescue Plan Act. My name is Marc Joffe, and I am a senior policy analyst at Reason Foundation, specializing in fiscal policy issues.

When federal, state, and local governments began implementing COVID-19 public health measures two years ago this month, it was reasonable to expect that states, counties, cities, and smaller government jurisdictions would face large and widespread revenue losses.

But, by early 2021, in the runup to the passage of the American Rescue Plan Act (ARPA), it had become apparent that the severe revenue losses government entities were expecting had not materialized and were unlikely to occur. Thanks to recent technological innovations such as cloud computing and videoconferencing, large parts of the American workforce were able to work remotely without significant productivity losses. While some sectors of the economy, like travel and hospitality, were hit hard, consumers substituted online purchases for visits to retail stores. Most Americans received federal stimulus checks. And Federal Reserve stimulus helped elevate stock and real estate values. As a result, tax receipts from income, capital gains, sales, and property taxes remained robust.

In February 2021, I determined from a review of interim state fiscal reports that state governments had suffered an overall revenue decline of just 0.01% between the calendar years 2019 and 2020.  Similarly, quarterly Census Bureau data on local government revenues also suggested that they had not suffered through that point of the pandemic.

These totals hid variability across governments. Entities heavily dependent on tourism such as Hawaii, Nevada, and the city of Anaheim, home to Disneyland, were hit harder than other places. California also suffered significant revenue losses at the beginning of the pandemic, but these losses were offset by a gusher of income and capital gains taxes from technology companies and their employees, who benefited from the pandemic-driven boom in online activity.

While the facts available to us last March may have justified a targeted revenue support program for a small number of government entities, it clearly did not support a generalized federal aid program. Unfortunately, advocates of this stimulus largely relied on stale revenue projections, as well as overly pessimistic responses from a survey of city officials that was taken at the start of the crisis.

The Coronavirus State and Local Fiscal Recovery Funds (SLFRF) program was not only excessive but was also poorly targeted. The state of California, which received $26.5 billion, or 7.6% of the total aid package, went on to report a record state budget surplus. There was also a disturbing discrepancy in per capita aid distributions. While Florida’s state, county, and local governments were allotted $739 per capita, the Commonwealth of the Northern Mariana Islands and its local governments are receiving more than $10,500 per capita. The Commonwealth itself was allotted $482 million to spend on its 47,000 residents.

The most recent interim reports submitted by states, counties, and metropolitan cities to the Treasury Department indicate that governments had spent less than $10 billion of their SLFRF revenues as of July 31, 2021. The largest share of expenditures went to replenishing depleted state unemployment funds. While this was a judicious use of relief proceeds, it is not one that provides any near-term stimulus. With so little of the SLFRF funds being spent on employees, supplies, or services, it is clear that state and local ARPA spending had little impact on economic growth during the second quarter of last year. In hindsight, this result undermines another dubious justification that was used to call for quick passage of ARPA—that it would provide a quick stimulus to lift the economy out of a pandemic-induced recession. In fact, we know the economy had already been growing for 11 months before ARPA was signed.

Legislative restrictions on the use of SLFRF proceeds are complex. Treasury regulations have compounded challenges to effectively use the funds. Several states are litigating a ban on using the SLFRF money to backfill tax reductions, which could stimulate economic activity. Other states, like Illinois, which might have used ARPA funds to pay down debt their unfunded public pension liabilities were prohibited from doing so.

The Treasury Department did not publish final regulations on the usage and reporting of funds until January 2022, after most of the money had been distributed. The department was also slow to publish reports it received from recipient governments and, contrary to the spirit of the bipartisan Grant Reporting Efficiency and Agreements Transparency (GREAT) Act of 2019, did not provide machine-readable reporting standards for grantees. As a result, our understanding of the overall impact of SLFRF is based more on anecdotes than on rigorous data analysis.

I do not doubt that the American Rescue Plan Act advocates and governments receiving the Coronavirus State and Local Fiscal Recovery Funds can point to positive things that have been accomplished with this federal support. But, as the recent resurgence of inflation has shown, the laws of economics have not been repealed: Resources are scarce. The United States cannot pretend otherwise by financing large federal deficits with newly created dollars. Taxpayer funds should always be used judiciously. Giving $350 billion in emergency aid to state and local governments that, for the most part, were not facing a fiscal emergency was not a judicious use of federal taxpayer money.

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The US national debt is a threat to the nation’s economic future Mon, 01 Nov 2021 05:00:00 +0000 The ratio of publicly held federal debt is expected to hit 202% in the next 30 years.

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Spiraling federal budget deficits since the beginning of this century — and projected to continue for as far as the eye can see — are undermining America’s economic future. Contrary to popular wisdom on the right, the practice of persistently spending more money than the federal government collects is a bipartisan convention.

As the country enters uncharted territory for its debt-to-gross domestic product (GDP) ratio, there are serious risks, especially from inflation, which the Federal Reserve may think is needed to finance the nation’s nearly $29 trillion mountain of debt.

According to Congressional Budget Office (CBO) data, the ratio of publicly held federal debt increased from 32% of GDP in 2001 to 102% today, and is expected to hit 202% in the next 30 years.

While it may be convenient to blame Democrats for this rapid accumulation of debt, Republicans bear a large share of responsibility. After President Bill Clinton and Congressional Republicans partnered to balance the budget in the late 1990s, federal budget deficits returned under President George W. Bush.

Bush cut taxes in 2001 and 2003 without making spending cuts. He also started the long and costly wars in Afghanistan and Iraq. According to the Costs of War Project at Brown University, the budgetary costs of these conflicts exceeds $2 trillion. And that’s only the tip of the iceberg: the wars continue to drive increased spending on veterans’ benefits and decades of deficit spending triggered additional borrowing costs. When other Pentagon spending on the ‘War on Terror’ is included, Brown researchers estimate costs of about $8 trillion since 2001.

President Bush and Republicans also added prescription drug benefits to Medicare, without paying for them, and, ironically, with very little support from House Democrats. CBO projects that this benefit will add about $1.4 trillion to federal deficits over the next 10 years—more than this year’s $1.2 infrastructure bill, another bipartisan deficit builder, if it is passed.

While former President Barack Obama is often blamed for the first trillion-dollar deficit in fiscal year 2009, almost a third of that fiscal year (October 1, 2008 to January 20, 2009) transpired under the Bush administration. Although Obama’s main policy response to the Great Recession, the American Recovery and Reinvestment Act cost $831 billion, less than half of that was incurred in FY 2009.

Of course, the single largest budget deficit in American history occurred under President Donald Trump and a Republican-controlled Senate. The fiscal year 2020 deficit of $3.1 trillion even exceeds the most recent year’s $2.8 trillion shortfall, which is a shared responsibility of the Trump and Biden administrations as well as bipartisan Congressional majorities for all but the final COVID-19 stimulus bill.

Although the most recent gargantuan deficits can be blamed on COVID-19, it is worth noting that federal deficits were rising under President Trump even in the strong economy before the pandemic. In Obama’s last full fiscal year, 2016, the federal government recorded $585 billion in red ink compared to Trump’s $984 billion deficit in 2019 — before the pandemic.

But, regardless of blame, political gridlock via a Republican takeover of the House in 2022 may offer the best short-term prospect for tackling the debt crisis. A Democratic president coupled with a Republican Congress has been the best combination for limiting federal spending in recent decades.

Unfortunately, much of the political left, influenced by the precepts of Modern Monetary Theory, have become “deficit denialists.” They point to decades of warnings that debt and deficits would create an economic crisis that, thankfully, hasn’t arrived yet and assume that means deficit spending and borrowing, like the proposed $3.5 trillion reconciliation bill, can continue indefinitely without consequence.

But if major fiscal reform at the federal level does not start soon (and probably even if it does), the U.S. will face serious economic consequences from the last 20 years of fiscal irresponsibility. This year we’re seeing significant inflation, but the Federal Reserve will continue to accommodate large deficits by printing money to purchase bonds and will keep interest rates artificially low. If the Fed allows interest rates to rise to an economically rational level, it risks triggering a bear market in stocks and further spiking federal borrowing costs via higher interest payments.

So the politically easier solution for the Fed is to devalue the debt by depreciating the dollar. Unfortunately, this could help cause a return to the double-digit inflation and frequent economic recessions the country suffered in the 1970s.

It’s difficult to imagine either major political party seriously addressing the national debt right now. Eventually, to make a lasting improvement in our debt trajectory, Congress should implement process reforms such as zero-based budgetingpay-as-you-go procedures that have real teeth, and debt-to-GDP targeting (which may receive more bipartisan support than balanced budget amendments that have failed to pass in previous Congresses). In the meantime, Congress can at least stop the massive annual deficit spending that keeps adding to the debt.

A version of this column previously appeared in the Daily Caller.

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Paying down its debt should be a priority for California Fri, 10 Sep 2021 20:16:30 +0000 Leaders in Sacramento have largely opted to spend this year's budget surplus on short-term priorities.

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As California voters consider their options in the recall election, one factor to consider is the state’s long-term fiscal health. With California’s state government receiving $26 billion in COVID-19 relief and stimulus from federal taxpayers and a large state budget surplus this year, it is easy to forget the “wall of debt” that former Gov. Jerry Brown frequently warned us about. While the state’s finances have had plenty of good news in recent years, Gov. Gavin Newsom’s administration has thus far failed to build upon many of Gov. Brown’s fiscal reforms, leaving the state vulnerable to future economic storms.

California’s 2020 audited financial statements are over four months late, so according to the state’s 2019 audited financial statement, the state government and its component units (i.e., subsidiaries such as the University of California system and the California Housing Finance Agency) have a total of $359 billion in long-term obligations.

With a surprise $75 billion budget surplus this year, California’s flush financial situation was an opportunity to use the surplus to pay down some of the wall of debt but, instead, leaders in Sacramento have largely opted to spend that money on shorter-term priorities.

Most of California’s long-term liabilities making up the wall of debt arise not from bonds but from unfunded future obligations to provide retired state workers with the pensions and health care benefits they’ve been promised. Gov. Brown implemented reforms to contain the growth of these public pension liabilities, but Gov. Newsom’s administration has not followed up on them.

Brown enacted reforms intended to help the state’s two pension systems, the California Public Employees’ Retirement System (CalPERS) and California State Teachers’ Retirement System (CalSTRS), to begin digging out from their deep financial holes. These reforms included raising retirement ages for new hires and increasing pension contribution rates. But the two systems remain deeply underfunded, reporting ratios of assets-to-actuarial liabilities of about 71%, as of June 30, 2020.

While these funded ratios should improve substantially when updated for 2021, given the recent stock market performance, both pension systems remain well below fully funded at a time of record equity prices. As of 2020, CalPERS still had $163 billion in unfunded liabilities and CalSTRS had $106 billion in unfunded liabilities—debt for which state and local taxpayers are ultimately on the hook.

Reason Foundation’s Pension Integrity Project finds states often must make multiple rounds of legislative reforms to make the structural fixes necessary to straighten out their pension systems. Unfortunately, since Gov. Brown left office, there has been little enthusiasm in Sacramento for further pension reform.

Short of making fundamental reforms, California could simply make extra pension contributions (above and beyond those recommended by system actuaries) to pay down unfunded liabilities. Brown began this practice, and it continued at the beginning of the Newsom administration. But Newsom canceled a planned $2.4 billion extra payment to CalPERS in 2020-2021 amidst the emergence of COVD-19.

Fears of a prolonged economic downturn were understandable when COVID-19 first hit, but rather than a fiscal crisis, California and its tech sector experienced an economic boom that produced a $75 billion surplus for the state government. Unfortunately, even when it was clear the state wouldn’t have a deficit, Newsom didn’t go back and make the pension payment he canceled.

The state’s 2021-22 budget includes $2.3 billion in extra CalSTRS and CalPERS contributions—payments mandated by Proposition 2 (2014), another legacy of the Brown era, which requires the state to apply a portion of capital gains tax revenue to public pensions and other long-term obligations when the tax collections rise above a specified level.

But, rather than taking advantage of the state budget surplus and doing more than the statutory minimum to pay down this debt, Newsom and the state legislature prioritized spending on stimulus checks—in addition to checks provided by the federal government—and funding things like broadband infrastructure, which is also redundant since the federal government is also sending California money for broadband-related projects.

Financial reforms from the Brown era are still helping California tear down its wall of debt. Hopefully, whoever prevails in the recall election will prioritize and continue this essential work.

A version of this column first appeared in the Los Angeles Daily News.

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The $3.5 Trillion Reconciliation Package’s Supposed ‘Pay-Fors’ and Its Impact on Inflation Tue, 03 Aug 2021 17:03:17 +0000 At a time of rising inflation and massive federal red ink, this deficit spending poses many financial risks the country cannot afford.

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The $3.5 trillion reconciliation package recently launched by Congressional Democrats would likely raise federal deficits — despite their assurances to the contrary. At a time of rising inflation and massive federal red ink, this deficit spending poses many financial risks the country cannot afford.

For the first nine months of the 2021 fiscal year, the federal government’s deficit totaled $2.2 trillion, which is actually down from the same period of the last year of the Trump administration. The Congressional Budget Office (CBO) recently projected a 2021 deficit of $3 trillion, also slightly below last year’s record $3.1 trillion deficit. Under its current 10-year projection, CBO sees deficits declining through 2025 before rising later in the decade as the last Baby Boomers reach retirement age and access more federal benefits, including Social Security and Medicare. Annual federal budget deficits never fall below 3 percent of Gross Domestic Product during the forecast period.

Because CBO forecasts are based on current law, they do not reflect the impacts of the bipartisan infrastructure package or the reconciliation budget measure under consideration. Although President Joe Biden’s American Recovery Plan and American Families Plan contained “pay-fors,” which Democratic leaders in Congress says they intend to include in the reconciliation package, there is no assurance that the new revenue will offset the new spending. One way to get such assurance is to ask the Congressional Budget Office to thoroughly score the final package before final votes are taken. But given political pressures, packages are often rushed through before all their provisions are fully evaluated.

Senate Democrats will need all 50 members of their caucus to vote for the reconciliation package, including Sens. Joe Manchin (D-WV) and Kyrsten Sinema (D-AZ), who have expressed concerns about the total price tag.

“I have also made clear that while I will support beginning this process, I do not support a bill that costs $3.5 trillion — and in the coming months, I will work in good faith to develop this legislation with my colleagues and the administration to strengthen Arizona’s economy and help Arizona’s everyday families get ahead,” Sinema said in a written statement.

Lobbyists seeking to shield clients from portions of any tax hikes included in the final bill will also be shopping legislative language to any Senator willing to listen. Cumulatively, the types of loopholes lobbyists will be seeking can drain hundreds of billions of revenues from tax hikes and ‘pay-fors’ in the package. Meanwhile, House Democrats representing areas with high state and local income taxes want to repeal the cap on state and local tax (SALT) deductions, which would further reduce the bill’s revenues.

On the spending side, Democrats are cramming numerous programs that would cumulatively cost more than $350 billion annually (or $3.5 trillion over the 10-year budget window) into the reconciliation bill. To make it all fit, lawmakers may phase in programs, thereby reducing their incremental costs in the near term.

In other cases, Congress can cut the long-term price tag by claiming it will terminate programs in later years while expecting a future Congress to extend them. This tactic was famously used by President George W. Bush’s administration, which phased out its tax cuts late in the 10-year budget window. Income tax rate reductions for all but the highest brackets later became permanent. Similarly, the Tax Cuts and Jobs Act of 2017 contains individual income tax cuts set to expire between 2025 and 2027. Since many of these tax cuts also benefit middle-class Americans, they have good prospects of being extended.

If the reconciliation package does increase the deficit, the consequences could be quite negative. As some fiscal hawks have been warning for years, the federal government is headed for a long-term fiscal crisis due to the rapid growth of entitlement spending. CBO has been projecting for years that the nation’s debt-to-GDP ratio would reach record territory in the 2030s and 2040s. The COVID-19 pandemic, recession, and massive government spending in response have accelerated the rising debt trajectory. The reconciliation bill would further exacerbate the debt.  

While many correctly note that deficit hawks’ dire predictions haven’t come about — yet — the fact is that no one knows what level of federal debt is sustainable. Evidence from Japan suggests a modern, first-world economy can support much higher debt burdens than the United States has accumulated. On the other hand, Japan may be able to sustain more government debt than the U.S. because its consumers and businesses save a higher proportion of national income than we do.

Because U.S. Treasury securities offer negative real returns, there is a limit to the amount that can be sold to private players. Unless debt issuance is controlled, the Federal Reserve will eventually be obliged to purchase more Treasury securities with newly printed money, which risks higher inflation.

We do not know whether the country’s currently rising inflation figures represent a transient spike or the beginnings of a long-term trend toward more rapid consumer price escalation. Those arguing that the impact is transient rightly highlight that recent price increases have been concentrated in a few sectors, such as used cars and rental cars that are facing specific issues.

But if consumers have limited money to spend, supply-driven price shocks in one sector should reduce demand for other goods and services, placing downward pressure on their prices. Right now, however, there appears to be so much money in the system that price spikes in specific sectors can be absorbed without reducing demand and pushing down prices elsewhere. And with the Fed adding money by making $120 billion in new bond purchases each month, there is reason to believe that price hikes could rotate around the economy later in 2021 and 2022.

Although 1970s-vintage double-digit inflation may not be in our immediate future, persistent annual price increases of 4 percent or 5 percent can seriously erode savings and impoverish those relying on fixed incomes in just a few short years. Similarly worrying, as the U.S. saw in 1968, inflation at this level combined with other factors such as intergenerational tensions, can, in some circumstances, also contribute to larger economic and social instability.

Rather than take these risks, Democrats should reduce this $3.5 trillion reconciliation package and their other spending plans to actually align with the tax revenue they can reasonably expect to generate. And both major political parties should finally start to grapple with the massive debt and deficits they’ve been laying on the shoulders of future taxpayers.

A version of this column originally appeared in The Hill.

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Recent Inflation Figures Should Not Be Ignored by Policymakers Thu, 24 Jun 2021 04:01:00 +0000 The sharp increase in consumer prices this spring may be a blip but may also be a sign that inflation is returning as a chronic problem. For those of us who can accurately recall the 1970s economy, it is a frightening prospect

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The sharp increase in consumer prices this spring may be a blip but may also be a sign that inflation is returning as a chronic problem. For those of us who can accurately recall the 1970s economy, it is a frightening prospect. Everyone else would benefit from reading contemporaneous news coverage.

Recent events call into question pronouncements of the leading Modern Monetary Theorists who thought that the U.S. could sustain much larger deficits without triggering major hikes in the cost of living. Instead, it appears that the traditional rules of public finance still hold: deficit spending financed by Federal Reserve money creation is inflationary.

Analogies between today’s situation and the 1970s are not quite on target. By the early 70s, inflation was well underway. Instead, we should be drawing lessons from the year 1965, when price inflation began to take off. Prior to that year, inflation seemed to be under control with annual CPI growth ranging from 1.1 percent to 1.5 percent annually between 1960 and 1964 — not unlike the years prior to this one.

Like 2021, the post-election year of 1965 saw the inauguration of an ambitious unified Democratic government. That year, Congress enacted Medicare and Medicaid, began providing federal aid to local school districts, and greatly expanded federal housing programs. At the same time, the Johnson administration was expanding U.S. involvement in Vietnam, increasing the defense budget. The federal budget deficit expanded from $1.6 billion in the 1965 fiscal year (which ended on June 30 in those days) to $27.7 billion, or 3% of GDP, in fiscal 1968.

Although the Federal Reserve made some attempts to ward off inflation, it generally accommodated the government’s fiscal policy according to Allan Meltzer’s detailed history of this period published by the St. Louis Fed. Between calendar years 1965 and 1969, annual CPI growth surged from 1.6 percent to 5.5 percent, setting the stage for the Nixon administration’s closure of the U.S. Treasury’s gold window and imposition of wage and price controls. Inflation reached double digits in 1974 and again between 1979 and 1981. Notably, these were also recession years, refuting the fallacy of the Phillips Curve, which depicted a supposed policy trade-off between inflation and unemployment. By the early 1980s, we had ample evidence that ill-considered policies could give us a combination of high inflation and unemployment, known back then as “stagflation.”

This policy mix was also not great for equity investors. The Dow Jones Industrial Average moved sideways during the inflationary period, closing at the same level in December 1982 as it did in January 1966. One lesson from that period was that high interest rates can be bad for stocks.

That may be one reason the Fed remains reluctant to allow interest rates to rise today. Although messaging from the latest Federal Open Market Committee meeting showed greater willingness to normalize interest rates, action is not expected until 2023.

Rate hikes may bring other worries for the Fed in today’s environment. Given the large volume of variable rate mortgages and corporate loans outstanding in the U.S. today, a rise in interest rates could push highly indebted homeowners and companies into bankruptcy, potentially triggering a recession. The federal government would have to roll over its record stock of short-term debt at higher interest rates, ballooning its interest expense and potentially crowding out more popular spending priorities.

But if private capital is to continue participating in debt capital markets, such as those for corporate bonds and bank loans, interest rates will have to rise to compensate them for the loss of purchasing power on their principal.

Although annual growth in CPI fell sharply after 1982, it is not strictly correct to say that inflation was defeated. Except for a few years around the turn of the century, the federal government continued to run deficits, a portion of which were monetized. Notably, the government began running trillion dollar deficits, and the Fed drove interest rates down to near zero during the Great Recession, but CPI growth remained muted.

But CPI does not tell the whole story. Some sectors of the economy have experienced substantial inflation, but they are not fully incorporated in the consumer price index. Home prices, healthcare costs and college tuition all soared in recent decades. Meanwhile, apparel and consumer electronics remained affordable due to globalization and improved technology.

Back in the 1970s, most of the world was not part of the global economy. Eastern Europe was in the Soviet bloc, while China, Vietnam and India had yet to become major exporters. As more low-cost producers of goods and services came online during the 1980s and 1990s, prices were pushed downward (often and regrettably at the expense of American manufacturing jobs). The trend toward developing countries joining the international trading system and producing inexpensive consumer goods is now over. Indeed, the recent increase in protectionism is, if anything, rolling back the wave of international price competition.

On the other hand, technological improvements may continue to shield us from inflation in certain sectors. For example, the displacement of human cashiers by automated check stands might restrain price hikes at the big box retailers, supermarkets, fast food chains and other establishments that can afford to invest in them. Smaller businesses, facing higher wages, may have to try to pass them through to consumers in the form of higher prices. Already in some parts of the country, restaurants are trying to recoup costs without raising prices on their menus by adding various surcharges ostensibly tied to specific costs.

It is possible that inflation is now moving from assets and human-intensive services to consumer products, but we will need several months of additional data to know for sure. Meanwhile, policymakers should be cautious about adding more to the national debt and the money supply.

A version of this column originally appeared on

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COVID-19 Pandemic Response Illustrates Need for Better State and Local Financial Data Tue, 30 Mar 2021 16:00:39 +0000 If every state, major city, and county produced monthly cash reports in a standardized, machine-readable format within two weeks of month-end, federal policymakers would have a much better picture of how revenues and expenditures are evolving.

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The debate over COVID-19 aid for state and local government revealed a broad range of opinions that were only partially informed by the facts. Lacking complete information about the history and trajectory of state and local government revenues and expenditures, federal policymakers had to make educated guesses about how to size and allocate the taxpayer-funded aid—or if the aid was needed at all. Policymakers and taxpayers could avoid a similar conundrum during a future crisis by investing in financial data standards, increased reporting frequency and fully transparent predictive models now.

The data void at the federal level regarding the fiscal position of state and local governments is not due to the absence of state and local government financial data. All states and most sizable local governments produce annual audited financial statements, but these usually appear 6-9 months after the end of the fiscal year. Most states and a few local governments produce monthly or quarterly financial reports—typically on a cash basis and limited to general fund activity—with a much shorter time lag.

Most annual audits comply with pronouncements from the Governmental Accounting Standards Board yet appear in widely varying formats. Interim reports are not governed by national standards and lack even a modicum of consistency.

The Securities and Exchange Commission (SEC) has raised the issue of stale municipal financial disclosure in recent years. For example, an SEC transparency subcommittee observed:

[T]he average municipal issuer provided its annual financial information within 12 months of the end of its fiscal year provided such annual information 188 days after the end of the applicable fiscal period. If a municipal issuer does not provide interim financial disclosures and it files its annual financial disclosures within the averages referenced above, the financials available to investors could be over 500 days old as the next submission date approaches.

During the coronavirus pandemic, the lack of timely and standardized state and local disclosure prevented policymakers from quickly determining with any degree of accuracy how much revenue was lost as the pandemic unfolded.

If every state, major city, and county produced monthly cash reports in a standardized, machine-readable format within two weeks of month-end, federal policymakers would have had a much better picture of how revenues and expenditures are evolving.

At the federal level, the Treasury Department shows the way by producing its Monthly Treasury Statement in Excel format each month. Excel files are easier to parse and thus consolidate than Adobe PDF files. Even better than Excel are non-proprietary formats such as CSV, JSON and XML. All of these options are supported by Treasury’s new FiscalData website, which includes an exportable dataset of Monthly Treasury Statements.

Among states, Texas provides its monthly state revenue collections in both Excel and CSV formats. Connecticut offers a monthly revenue data set exportable to Excel, CSV and XML formats. Local governments are generally less advanced, but New York City—as the nation’s biggest city—does provide extensive revenue and expenditure data in a Google Sheet updated quarterly.

If the nation’s 200 largest state and local governments provided data like this, the vast majority of state and local financial activity would be available in near real time. But collecting this data would still be non-trivial due to variances in the number, type and identification of the data elements provided. Ideally, of course, all state and local governments would adopt a single reporting taxonomy (i.e., data dictionary) that could be readily consolidated. Our Standard Government Reporting working group at XBRL US has produced a draft taxonomy for annual financial reporting. A small subset of items from this taxonomy could be applied to monthly reporting. Our taxonomies can be used with CSV, JSON and human-readable HTML reports.

In the absence of this standardization, data collection is typically handled by organizations that are willing to make the investment of time and energy to process all the varying government disclosures. This too often means that compilations are not available to the public for free or that the data is selectively reported in support of a certain political narrative (e.g., state and local governments are suffering and need a large federal aid package, or they are doing just fine and do not require a bailout).

The federal government—through the Census Bureau—undertakes a parallel data collection effort which is likely free of commercial or ideological motives. The Census Bureau conducts an Annual Survey of State and Local Government Finance and produces a Quarterly Summary of State and Local Tax Revenue. Unfortunately, these products appear after significant time lags, and because they are based on separate data collection instruments than those of state and local governments they may not fully agree with public financial reports issued by each state and local government. The Census Bureau’s efforts could be improved by the availability of public, standardized, machine-readable data

Commercial and ideological players also dominate the discussion of projected revenue losses and spending, using proprietary models to reach their findings. There’s nothing wrong with that, but as we learned during the global financial crisis of 2007-08, if government agencies rely on proprietary models operated by self-interested parties with financial stakes in the game, these models can help produce unacceptable results for taxpayers. Although the Congressional Budget Office is not always correct, it has achieved a level of openness and objectivity that instills confidence across most of the ideological spectrum. As federal involvement in state and local finance increases, citizens need institutions whose analyses and projections of state and local government finances would be met with similar levels of confidence. Perhaps CBO could expand into this area, or a non-ideological, non-profit could take on this challenge. In any case, taxpayers should have easy access to the data and modeling software code and assumptions would ideally be placed in the public domain so that third parties could fully review the analysis.

Economic historians will ultimately weigh in on the question of whether the American Rescue Plan’s $350 billion state and local aid component was reasonably sized and allocated. For those of us condemned to live in the present and without the benefit of hindsight, we should be taking every opportunity to improve our data and analytics to make the best possible decisions during the next financial emergency.

A version of this column previously appeared on Federalism US

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More Census Data Shows Government Tax Revenue Hasn’t Been Negatively Impacted By COVID-19 Mon, 29 Mar 2021 22:34:04 +0000 The results further undermine the case for the large state and local aid package included in the American Rescue Plan Act.

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A recent update of the Census Bureau’s Quarterly Summary of State and Local Tax Revenue provides full-year comparisons of revenue performance between the calendar year 2019 and 2020. The conclusion, consistent with our previously reported data, is that overall state and local tax revenues were not heavily impacted by the COVID-19 pandemic.

Without seasonal adjustments, the Census Bureau estimates 2020 aggregate state and local tax revenues of $1.62 trillion, or about 2 percent above the 2019 total of $1.59 trillion.

The Census Bureau also provides an aggregate state-only tax revenue estimate. State tax revenue was down about 1 percent in 2020: from $1.01 trillion in 2020 versus $1.11 trillion in 2019. In this case, increases in personal and corporate income tax receipts mostly offset a drop in sales tax revenue during the pandemic.

Results from the two series imply a slight increase in local government revenue, likely due to increased property tax receipts amid the strong residential property market.

The Census Bureau does not provide a specific local government-only tax revenue series.

More detailed Census revenue data (displayed in the below map) show that tax revenue performance varied greatly across states. Alaska and North Dakota, for example, suffered the two largest tax revenue drops due to lower energy prices. It is worth noting that these two states have accumulated large cash reserves that allow them to absorb the effects of price shocks. Also, energy prices have been rebounding in early 2021, suggesting that the revenue loss could be transient.

State Government Revenue Growth From 2019 to 2020

The only other state suffering a double-digit percentage revenue decline was Hawaii, which saw an understandably dramatic falloff in tourists and the tax revenues they generate. Nevada, another tourism-dependent state, ended the year down less than 3 percent.

Idaho registered the biggest increase in tax revenue from 2019 to 2020, gaining over 12 percent in 2020. Some of this increase is likely to stem from people temporarily, or permanently, relocating to the state in search of greater distancing than is possible in urban areas and/or in search of less onerous lockdowns than ones imposed by some states, including those on West Coast.

Despite out-migration and strong shelter-in-place restrictions, California registered a small revenue increase due to strong income tax collections. Many of California’s white-collar tech workers were able to work from and many businesses in the tech industry are thriving during the pandemic.

In the aggregate, the increase in state and local tax revenue further undermines the case for the large state and local aid package included in the most recent stimulus and relief bill, the American Rescue Plan Act, signed by President Biden in mid-March.

When it is over and taxpayers and lawmakers look back at the COVID-19 pandemic, it will be clear that states and local governments did not need a huge federal bailout in 2021.

While we’re continuing to see claims and headlines, such as, “With Federal Aid, Washington State Revenue Returns to Normal,” the fact is that state and local government revenues weathered the pandemic and have now received a large federal-taxpayer-funded windfall.

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How to Spend Stimulus Money to Reduce State and Local Retiree Health Care Debt Fri, 12 Mar 2021 21:00:29 +0000 The newly enacted $1.9 trillion American Rescue Plan Act of 2021 promises to provide an unnecessary revenue windfall for many state and local governments. The amount of federal aid in the new coronavirus relief and stimulus bill, coming on top … Continued

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The newly enacted $1.9 trillion American Rescue Plan Act of 2021 promises to provide an unnecessary revenue windfall for many state and local governments. The amount of federal aid in the new coronavirus relief and stimulus bill, coming on top of assistance already provided by previous federal stimulus measures over the past year, will far exceed state and local tax revenue losses and increased expenditure requirements attributable to the COVID-19 pandemic. This excessive federal spending further increases the national debt, which is already near record levels as a percentage of gross domestic product (GDP).

But since the massive federal spending bill has already been passed and signed, it would be wise for state and local governments to use this one-time revenue boost to reduce unfunded retiree health care obligations, which total $1.2 trillion nationally.

Because the new federal aid is not an ongoing revenue stream, using it to expand existing programs or start new ones would be imprudent fiscal policy and invite budgetary pressures down the road. Restrictions in the new law added by the Senate prohibit federal funds from being used to reduce taxes or pay down unfunded pension obligations. But the law does not explicitly mention other post-employment benefits, known in the government accounting world as OPEBs, which primarily take the form of health care coverage for retirees.

In some cases, state and local governments show net OPEB liabilities, which is the total amount of benefits already promised to retirees, as large or larger than their net pension liabilities. Although the total future cost of retiree health care benefits is smaller than pension benefits, which are intended to replace income, most governments have at least partially prefunded their pension benefits while setting aside little or no money to cover their future OPEB costs. This is often attributable to the strong legal protections granted to public pensions but that largely do not extend to OPEB benefit promises made to workers in most places. Nonetheless, by failing to set aside funds for retiree health benefits as employees accrue them, government employers are burdening future taxpayers with growing debt. The size of the problem is also raising doubts among prospective retirees about whether the benefits promised to them will really be there when they retire.

In this post, I consider two potential strategies for using the temporary increase in governments’ fiscal capacity to address unfunded other post-employment benefit liabilities: (1) prefunding and reforming defined retiree healthcare benefits, and (2) switching employees to defined contribution retiree health care benefits.

Option 1:  Prefund and Reform OPEBs

Many state and local governments currently finance OPEBs on a pay-as-you-go basis, meaning that they set aside no money while employees are working and then pay their health insurance premiums in retirement as the bills become due.

Under Government Accounting Standards Board (GASB) Statement Number 75, the present value of future OPEB costs (less any assets held to cover these costs) must be shown on a state or local government’s balance sheet. When that government uses a pay-as-you-go funding method, the future costs must be discounted at a “tax-exempt, high-quality municipal bond rate.” Some governments meet this definition by using The Bond Buyer 20 Index, which is the average yield for 20 general obligation municipal bonds with an average rating of AA from Standard & Poor’s and/or Aa2 from Moody’s. This index declined from 3.50 percent on June 30, 2019, to 2.21 percent on June 30, 2020, obliging many governments to report increased net OPEB liabilities for their most recent fiscal year.

But GASB Statement 75 allows governments to apply a higher discount rate “to the extent that the OPEB plan’s fiduciary net position is projected to be sufficient to make projected benefit payments and OPEB plan assets are expected to be invested using a strategy to achieve that return.”

This could be interpreted to mean that if a state or local government adopts a policy of paying its actuarially determined employer contribution each year, it can discount its future OPEB payments at the same rate it uses to discount pension obligations, typically around 7 percent (although the Reason Foundation and other pension reform advocates typically recommend more conservative discount rates).

A hypothetical case can demonstrate the significant balance sheet benefits of implementing an OPEB prefunding policy. Consider a public sector entity that expects to pay $100 million in retiree health caare benefits this year and for its costs to grow 6 percent each year, reaching almost $542 million in 30 years. Discounting this stream of benefits at a rate of 3 percent yields an OPEB liability of $4.55 billion. But, if we apply a 6 percent discount rate to the same set of annual costs, the liability shrinks to just $2.83 billion.

Now, before we continue, a caveat is in order. Many researchers and practitioners would argue that this balance sheet benefit is just an accounting trick. Their contention is that future benefits should be discounted at a rate based on the likelihood of the future benefits being paid rather than the expected rate of return on the assets being set aside to cover these costs. But irrespective of whether such a large balance sheet savings is theoretically justified, few would deny that prefunding benefits is both fiscally prudent and fairer to future taxpayers and retirees, many of whom will be our children and grandchildren.

That said, prefunding OPEB costs is a permanent commitment that lasts long beyond the 2024 deadline for using American Rescue Plan funds. Thus, OPEB prefunding will require an additional budgetary commitment from states in the near and intermediate-term (while saving money in the long-term as investment gains cover a portion of future retiree healthcare costs).

Given the increased short-run budgetary burden, state and local employers should also use any shift to pre-funding as an opportunity to reassess their OPEB packages. Retiree health care benefits were often initiated decades ago at a time when health care costs were much lower. Now that health care insurance premiums are so much higher, especially for retirees who have yet to reach the Medicare eligibility age of 65, benefit enhancements may require a second look. Among the items that should be reviewed are:

  • The inclusion of spousal and dependent coverage;
  • Whether dental and vision plan premiums should be covered along with medical premiums;
  • Whether retiree health plans should incorporate such cost-saving elements as copayments, deductibles, and provider network limitations; and
  • Whether to continue offering employer-paid life insurance plans (since this perk is not among those likely to promote employee retention).

Although public employees may not welcome skinnier retiree benefit packages, they would benefit from the fact that prefunding reduces the risk that their post-employment benefits will be suddenly canceled, as they were during the 2012 bankruptcy of the city of Stockton, California. Since OPEBs typically lack the legal protections afforded to pension benefits, employees should be willing to at least consider a tradeoff between the generosity of the OPEB package and the likelihood of ultimately receiving it.

Option 2: Replace Defined OPEBs with Retirement Health Care Savings Accounts

The prefunding approach leaves the Total OPEB Liability in place while increasingly offsetting it with assets. Another alternative is for public sector employers to replace their OPEB plans with defined contribution plans that provide comparable value to retirees.

Retirement health care savings accounts provide employees with 401(k)-like accounts to which both the employer and employees can contribute. Employee contributions and investment returns on the saved assets are not taxable until the account is used to pay healthcare premiums in retirement.

Governments could use some of the extra budgetary space created by the American Rescue Plan’s funding to make initial deposits into each employee’s health care savings account. They could then make smaller annual contributions each year until the employee retires. Although these annual deposits create a similar cost stream to prefunding a defined OPEB plan, they do not create a liability on the government’s balance sheet because there is no commitment to provide a specific level of benefits upon retirement.

Although a shift to retiree health savings accounts transfers risk to employees, it may actually offer a better benefit to shorter-tenured employees—who make up the bulk of people hired into public service today. These employees often do not stay with their government employers long enough to vest in the defined retiree health care benefits. But they could use their retiree health savings account balance at retirement, regardless of where they were last employed.


The two potential strategies outlined here are not necessarily exclusive. Retention of the defined retiree health care benefit with prefunding may be more appropriate for employees nearing retirement, while transitioning to retiree health savings accounts may be a better fit for more junior employees and new hires.

Either strategy, or a combination of the two, can set government employers on a path toward having zero net OPEB liabilities on their balance sheets at some point in the future. The removal of these unfunded obligations would be welcomed by credit rating agencies and municipal bond investors today and would provide a better fiscal legacy for taxpayers and employees tomorrow.

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A Not-So-Simulative COVID-19 Stimulus Bill Thu, 04 Mar 2021 05:00:02 +0000 Economists advocating the $1.9 trillion American Rescue Plan often harken back to the 2009 stimulus bill during the Obama administration, which they saw as essential yet insufficiently large to fully lift the economy out of the Great Recession. Analogies between … Continued

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Economists advocating the $1.9 trillion American Rescue Plan often harken back to the 2009 stimulus bill during the Obama administration, which they saw as essential yet insufficiently large to fully lift the economy out of the Great Recession. Analogies between this earlier episode and the current economic situation are imperfect at best, and any lessons learned from the early Obama-era experience need to be taken with a grain of salt.

When the American Recovery and Reinvestment Act became law in February 2009, the economy was still shrinking (though the rate of shrinkage had begun to slow). The stock market bottomed the following month, the Great Recession officially ended in June and the unemployment rate — typically seen as a lagging indicator — peaked in October.

We appear to be much later in the recovery phase in 2021 than we were when the 2009 stimulus bill passed during the Obama administration 12 years ago. The economy is experiencing its third quarter of GDP growth since last spring’s steep decline. The stock market bottomed out last March and the unemployment rate peaked last April. The National Bureau of Economic Research has yet to call the end of the Coronavirus Recession, but its Business Cycle Dating Committee typically calls economic peaks and troughs on a delayed basis; it remains reasonable to expect that the committee could conclude that we reached the trough of economic activity sometime in 2020.

If the economy is indeed growing already, it seems reasonable to ask why more stimulus is necessary. A common response is that, although the contraction may have ended, the economy is now operating well below full employment, with millions of workers either looking for jobs or discouraged from doing so. But if the purpose of the current relief bill is to increase employment, its provisions are poorly tailored to achieve that goal. Certain federal spending programs could reduce unemployment, but the current plan going through Congress is not such a program.

Indeed, Congress’ current relief plan includes two measures that promise to reduce employment. First, the bill renews and increases an unemployment benefit “plus up” that would add $400 per week to each beneficiary’s payment through August. This supplement reduces, and in some cases eliminates, the difference in income workers receive from not working as opposed to working, reducing some of their incentive to find new jobs. As a result, some reopened restaurants have reportedly struggled to find staff.

Another job reducing provision of the House stimulus bill is the minimum wage increase. The bill would raise the federal minimum from $7.25 per hour to $9.50 per hour immediately, followed by four annual increases until the minimum reaches $15 per hour in 2025. Irrespective of its purported merits, it is hard to imagine that this provision will not eliminate at least some jobs, especially in states with lower per capita income. The Congressional Budget Office recently estimated that the minimum wage hike would reduce employment by 1.4 million workers when fully phased in.

Other stimulus bill provisions may increase employment but are not especially efficient ways of doing so. For example, the $1,400 direct stimulus payment to lower- and middle-income taxpayers would, in theory, be spent on goods and services, stimulating job creation. But since these one-time payments would go to many individuals and families who have not suffered negative economic impacts from COVID-19, they may instead use the money to pay down debt or supplement their savings.

On the other hand, funds for vaccine development and distribution could spur employment and economic growth. To the extent that widespread vaccinations promote herd immunity, they could encourage state and local governments to end lockdowns more quickly and give people more confidence to travel, visit restaurants and go to entertainment venues. That would restore jobs in some of the industries hardest hit by the pandemic.

But, since Congress has already spent billions on vaccine production and distribution, the incremental benefit of new funding is questionable. The U.S. has already purchased enough of the Pfizer and Moderna vaccines to provide two injections for every American adult. By the time the new bill likely passes, upwards of 100 million doses may have already been administered.

The main barrier to an accelerated vaccination program is a lack of supply and not much can be done to speed the production of the two approved mRNA vaccines. But, with the Johnson & Johnson vaccine now approved, President Biden says the country should have enough doses of the vaccine for every American adult by the end of May.

While government spending may create jobs and temporarily stimulate economic growth in certain cases, the ill-timed and poorly targeted COVID relief measure now in Congress is unlikely to substantially move the dial, its high sticker price notwithstanding.

A version of this column previously appeared in The Hill.

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House COVID-19 Stimulus Bill Has Big Differences In Per Capita Money Going to States Wed, 24 Feb 2021 02:00:53 +0000 The latest draft of the Coronavirus stimulus and relief legislation, the American Rescue Plan Act of 2021, would award $350 billion to state, territory, tribal and local governments using a variety of allocation formulas that produce some incongruous results. On … Continued

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The latest draft of the Coronavirus stimulus and relief legislation, the American Rescue Plan Act of 2021, would award $350 billion to state, territory, tribal and local governments using a variety of allocation formulas that produce some incongruous results. On a per-capita basis, Florida, Georgia, Ohio, and Virginia are among the states that would come out on the short end of coronavirus relief allocations.

Of the $350 billion that would go to state and local governments, just under $200 billion is earmarked for the 50 states, the District of Columbia, and five overseas territories. Excluding those territories, the state aid averages $593 per resident, based on 2020 population estimates from the Census Bureau.

The allocation formula includes a flat $500 million for each state and a special $750 million allocation to the District of Columbia to compensate for the fact that it did not receive a state allocation under the CARES Act. But the bulk of the funding is allocated according to the average number of unemployed people in each jurisdiction during the last three months of 2020.

Setting aside the District of Columbia, the allocation formula used by the legislation benefits low population states and those that had high unemployment rates at the end of last year, relative to other states. Among the states benefitting from this scheme are low population Vermont, which is slated to receive $1,050 per person, and California, which would expect to receive $667 per person, in part because the state ended 2020 with a 9 percent unemployment rate—well above the December national unemployment rate of 6.7 percent. It should be noted that because December 2020 unemployment statistics from the Bureau of Labor Statistics are still preliminary, allocations are still subject to change.

Vermont and California do not appear to be the neediest candidates for federal aid given their relatively strong tax revenue performance. For the calendar year 2020, revenues in Vermont exceeded prior-year tax revenues by 12.8 percent, according to a Reason Foundation analysis of monthly state revenues. The state’s economy benefited from an influx of residents escaping urban areas and it is less dependent on businesses hit hardest by the COVID-19 pandemic, such as restaurants and hotels.

In California in 2020, the state’s general fund revenues rose 4.2 percent year on year. Despite the pandemic driving high unemployment, lockdowns, and extensive business closures, the state’s revenues were helped by income tax receipts from its high-income technology and finance professionals who enjoyed stable employment and capital gains.

California did lose a lot of jobs, but most of them belonged to individuals with modest incomes. Due to the highly progressive nature of California’s income tax system, the state’s tax revenue gains from upper-income workers who continued to work during the pandemic far exceeded its losses from those who became unemployed.

By contrast, Florida stands to receive only $474 in state aid per resident from the House coronavirus aid bill, despite suffering a calendar-year tax revenue loss of 7.8 percent. Without a state income tax, Florida did not have an income stream to offset its declining tourism-related tax revenues. Three other large states that will also receive less than $500 per person of federal aid from the COVID-19 stimulus bill are Georgia ($438), Virginia ($442), and Ohio ($486).  Unlike Florida, these three states saw small revenue gains for the calendar year.

Unemployment rates may seem to be a reasonable basis for state aid allocations, but when one gets into the details of state finance, they can prove to be less relevant. States certainly have higher unemployment insurance and health care costs due to the pandemic. California’s unemployment insurance payments increased from $5 billion in 2019 to at least $24 billion in 2020. But unemployment insurance is already partially covered by the federal government as well as taxes on employers. And states can borrow additional money from the federal government if these tax revenues are temporarily insufficient, as they were during the Great Recession and again last year. Unemployment also impacts Medicaid enrollment. Although Medicaid is typically a state’s largest expenditure, the federal government has already offset some of the added state costs arising from COVID-19 by increasing the share of each Medicaid claim it covers.

On a per-capita basis, the allocations to the 50 states in the House stimulus bill are dwarfed by those going to four US territories with small populations. American Samoa and the Northern Mariana Islands stand to receive over $8,000 per person from the House bill. Both territories have fewer than 60,000 residents but benefit from the fact that the aid bill allocates $450 million to each of the five territories regardless of their population. The rest of the territorial funding formula is based on population. Guam and the US Virgin Islands also stand to receive outsized per capita allocations, while Puerto Rico’s funding is on a par with some smaller states.

As we and others have reported, state revenue losses are proving to be far less than originally feared and are almost certain to be a small fraction of the $200 billion in federal support now included in the latest reconciliation measure.

State and Territorial Aid Per Capita in Budget Reconciliation

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New Budget Reconciliation Resolution Portends Dangerous Debt Trends Mon, 08 Feb 2021 17:00:19 +0000 The resolution shows the national debt reaching a total of $41.1 trillion in 2030.

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Congressional Democrats are currently using the budget reconciliation process to advance President Joe Biden’s $1.9 trillion COVID-19 relief and stimulus measure, the American Rescue Plan. The budget reconciliation process can be used to move federal spending, debt, and budget bills more quickly through the legislative process.

Friday, Senate Democrats used this process to approve a concurrent resolution that calls for a $3.8 trillion federal deficit this fiscal year followed by a $1.5 trillion deficit in 2022. Committees in the House and Senate still need to draft the actual coronavirus stimulus legislation but the resolution, which also includes 10 years of projected federal budget data, forecasts the national debt reaching a total of $41 trillion in the 2030 fiscal year. The national debt is currently over $27 trillion.

Because the national debt includes intragovernmental borrowing—money that the federal government owes to itself—it is a less useful measure of overall federal indebtedness than debt held by the public. Debt held by the public consists of all Treasury securities held by individuals and organizations that are not part of the federal government. Much of the debt held by the public has been purchased by the Federal Reserve, which is technically not part of the federal government. The budget anticipates this debt will rise to $36.5 trillion in 2030.

It is possible to compute projected debt-to-gross domestic product (GDP) ratios by dividing the publicly held debt projections from the Senate resolution by the Congressional Budget Office’s new GDP forecasts, which were released on Feb. 1.

The results of such a comparison are worrying. As shown in Figure 1, by the end of the current fiscal year, publicly-held debt as a percentage of GDP is forecast to eclipse its previous peak of 106 percent reached just after World War II. The ratio continues to rise gradually through 2030 when it is expected to reach 115 percent.

Figure 1: Federal Debt Held by the Public As a Percent of GDP

As the chart shows, there was a large uptick in recent years, with President Donald Trump adding nearly $8 trillion to it during his four-year presidency.  And these projections for future budgets through the 2030 fiscal year could be underestimating the debt, as the report assumes the federal government will make an unlikely return to budgets with sub-trillion-dollar deficits in 2024, 2026, and 2027.

The debt forecast also does not include the impact of potential new spending, like the infrastructure package President Biden has called for, which Congress may attempt to pass through a second budget reconciliation.

While debt-to-GDP ratios in excess of 100 percent may be manageable in an environment with low interest rates, if interest rates spike upward then debt service costs could quickly crowd out other federal spending and economic activity. In the most extreme cases, spiraling debt could eventually help cause a sovereign debt crisis like those seen in Argentina and Greece in recent years.

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The COVID-19 Pandemic Has Not Crushed State and Local Government Tax Revenues Thu, 17 Dec 2020 17:31:23 +0000 The Census Bureau finds state and local governments collected $1.12 trillion in tax revenue during the first nine months of 2020, just $8 billion less than the same period in 2019.

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The Census Bureau just reported that state and local governments collected $1.12 trillion in tax revenue during the first nine months of the 2020 calendar year, which is just $8 billion less than they collected during the same period in 2019. It’s clear that the worst-case forecasts estimating how badly the coronavirus pandemic would hit state coffers have thankfully not come to pass.

The new Census Bureau data also raises questions about the need for the proposed $160 billion state and local aid package that the Trump administration and members of Congress have been debating in recent weeks.

Census data are provided on a lagged basis, so it will be a few months until we know how state and local revenues held up during the fourth quarter of 2020. But some entities, including the state of California, publish monthly updates. In the 2020 calendar-year-to-date, California’s general fund revenues are running $2.1 billion (1.6 percent) above the 2019 levels.

The accompanying chart shows California’s general fund revenue collections for the first 11 months of 2020 versus the same period in 2019.

Source: California State Controller’s Office Monthly Statements

The full calendar year totals include the economically strong pre-COVID-19 pandemic months of January and February. If we just look at the March through November period, revenues were down $2.2 billion (2.1 percent).

While this is admittedly a significant revenue hit, state revenue declines of this magnitude have not historically elicited state bailouts or federal stimulus packages.

For the fiscal year to date, California’s revenue collections are running $12.4 billion above the state’s dismal projection issued back in May, when state officials feared the coronavirus pandemic and economic shutdowns would crush its economy. California’s revenue has exceeded its forecasts for each of the five months of the fiscal year 2020-2021, which started on July 1, 2020.

Of course, there is no guarantee that state revenues will continue to outperform expectations going forward. Another recent surge in COVID-19 cases and stricter public heath orders could impact sales tax revenues and employment. But since unemployment has been concentrated among lower-income workers during the pandemic, its effect on income tax revenues has been relatively small given the state’s progressive tax rates. Further, these revenue losses could be offset by unanticipated capital gains tax revenue arising from strong tech company performances and the successful initial public offerings this month by Airbnb, DoorDash, and other California-based startups.

While the state of California and many other government entities are seeing 2020 revenues running close to or prior calendar year levels, a few governments including those heavily dependent on travel and tourism are suffering steep revenue declines.

For example, Anaheim, California, has suffered an 89 percent reduction in its transient occupancy tax revenue compared to the same period last year due to the pandemic and state government-mandated closure of Disneyland.

Similarly, public transit systems across the state have also suffered sharp reductions in farebox revenue, but, because mass transit operations are generally operated by special purpose governments like the Bay Area Rapid Transit District (BART), they fall outside the universe of governments eligible for the recently proposed $160 billion federal aid package.

Because state and local governments lack the federal government’s ability to offset deficits with newly created money, their best practice is to build up liquid reserves to cushion them against contingencies. Prior to the COVID-19 recession, many state and local governments had built up considerable reserves. According to the National Association of State Budget Officers (NASBO), the 50 states had accumulated a combined $113.2 billion in rainy day funds and general fund reserves at the end of their 2019 fiscal years. A Reason Foundation review of 9,000 general-purpose local government financial statements found an additional $94 billion of unrestricted general fund balances. Taken as a whole, then, the state and local government sector entered the crisis with a $200 billion cash cushion—significantly more than the current 2020 revenue decline reported by the Census Bureau.

Contrary to some of the dire economic forecasts made early on during this coronavirus pandemic, state and local revenue losses thus far have been limited. Likewise, last month President-Elect Joe Biden expressed fears that local governments might have to lay off first responders due to budget shortfalls, but it is clear state and local governments have experienced smaller tax revenue losses than projected.

While the longer-term fiscal impacts of COVID-19 and this recession are unknown, a small number of governments have taken very significant revenue hits, and costs for things like unemployment insurance are certainly higher than expected this year, most state and local agencies should be able to offset their relatively minor tax revenue losses by drawing down reserves and selectively trimming costs.

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The Federal Budget Process Needs Structural Change Tue, 22 Sep 2020 04:00:51 +0000 To restore fiscal sustainability while making needed investments, such as rebuilding the nation's infrastructure, the federal government needs to consider structural budget changes.

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The coronavirus pandemic, economic shutdowns, and major stimulus spending have exacerbated the federal government’s already serious long term fiscal problems. The latest Congressional Budget Office data projects a “federal budget deficit of $3.3 trillion in 2020, more than triple the shortfall recorded in 2019.” It also forecasts annual deficits to exceed $1 trillion throughout the 10-year budget window and the ratio of publicly held debt-to-gross domestic product (GDP) to reach a US record of 109 percent by 2030.

A working group of public finance scholars convened by the National Academy of Public Administrators (NAPA) recently proposed a framework for fiscal reform that could start to address a number of the country’s fiscal problems. Their report, “Building a Stronger Fiscal Foundation: An Agenda for 2021,” recommends two changes that have great potential to strengthen the federal government’s finances: adopting accrual accounting (reporting government financial obligations as they’re incurred) and transitioning to multi-year budgeting (in which the budget cycle is longer than one year). The report also points to ways infrastructure can be better financed, managed and maintained over the long term, while requiring the least amount of potential taxpayer risk exposure.

While accrual accounting’s focus on aligning revenues and expenditures may seem beside the point amidst trillion-dollar deficits, reporting and process reforms are essential to fiscal sustainability. Following the adage that ‘if you can’t properly measure a problem you can’t improve it,’ a transition away from cash accounting is key to straightening out the federal government’s fiscal house.

Governments at all levels should account for obligations when they take them on, not when they disburse funds. If the federal government used accounting principles commonly required in the private sector it might show $135 trillion in debt, instead of $26 trillion of debt. That level of debt is over six times GDP and is large enough to perhaps convince even adherents of Modern Monetary Theory that the national debt is a significant problem that must be addressed. Further, when changes in federal benefits are being debated, the use of accrual accounting principles would compel legislators to think about the intergenerational financial impact of proposals, and not just their effects during a short 10-year budget window.

Recent decades have seen a total breakdown in the federal budgetary process first adopted in the 1970s and multi-year budgeting could help. Congress has been persistently unable to approve appropriation measures in time for the start of each budget year and relies increasingly on stopgap measures called continuing resolutions (CRs) that temporarily continue to fund government operations at, or near, recent levels. The use of CRs instead of regular budgeting procedures limits the ability of committees, whose members are more knowledgeable about the federal agencies they are charged with overseeing, to ensure that funds are properly prioritized. Instead, agency funding is largely on auto-pilot, with even the most obsolete activities receiving full funding.

Since Congress has consistently shown it cannot complete a budget each year, the best option is to use multi-year budgeting to lengthen the budget calendar to two years – as many states have done – or even four years, a full presidential term, as the NAPA working group suggests. Although they propose quadrennial executive budgets, the approach could also be adopted by Congress, especially if there is also the ability to make interim adjustments to the four-year plan.

As the federal government continues to navigate the COVID-19 pandemic and recession, there are going to be a number of harsh realities that come to the forefront. For example, there is an ongoing discussion in Congress about additional stimulus spending, including money for state and local governments, many of which are going to be dealing with growing budget deficits and unfunded public pension liabilities, along with major needs to repair and expand infrastructure.

State and local governments need trillions to upgrade, repair, and replace infrastructure of all kinds: airports, bridges, courthouses, roads, water, and sewer systems chief among them. In our current system, the federal government will be asked to facilitate some of the financing. The NAPA authors offer sage advice for this multi-trillion dollar problem, saying infrastructure asset investments “should seek to optimize an asset’s long-term performance.”

Unfortunately, states have put off needed maintenance and repairs so the infrastructure bills continue to grow. The deferred maintenance problems that plague many of the nation’s infrastructure assets can be attributed to a lack of a commitment to those assets’ long-term performance. One recommendation to address this issue is the extension and imposition of life cycle costing standards for infrastructure assets. Governments are getting better at adopting a more life cycle cost approach to public infrastructure management, but realities often dictate maintenance and other longer-term considerations take a backseat to other funding priorities.

Commitment to greater life cycle management of infrastructure includes myriad risks, and governments are usually ill-equipped to take on all the risks and tasks that come with major projects: from financing projects to ensure the construction process doesn’t suffer from delays and overruns to optimizing maintenance schedules to keep infrastructure in a “state of good repair,” as well as managing all of the environmental and other regulatory concerns.

Two means to those better-managed ends are mentioned by the NAPA report: favoring projects with dedicated user-fees and tapping into private capital sources in public-private partnerships (P3s). Without the ability to transfer risks agencies have trouble retaining—whether from contracting out, interagency agreements, outsourcing, P3s, or privatization—effectively managing infrastructure assets becomes more difficult, and in the long run, more costly.

An important approach to getting our nation’s finances back on track needs to focus on creating a new set of budget processes. These procedural changes would help put the country in a better position to restore fiscal sustainability and address needed infrastructure investments.

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Trump, Unions Call For More Taxpayer-Funded Airline Bailouts Thu, 06 Aug 2020 18:10:10 +0000 After weeks of maintaining their neutrality, last week many airlines decided to support airline union calls for another large federal subsidy to maintain existing airline workforces. The $2.2 trillion Coronavirus Aid, Relief, and Economic Security Act (CARES Act) signed by … Continued

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After weeks of maintaining their neutrality, last week many airlines decided to support airline union calls for another large federal subsidy to maintain existing airline workforces. The $2.2 trillion Coronavirus Aid, Relief, and Economic Security Act (CARES Act) signed by President Donald Trump included $32 billion in aid for airlines to prevent the involuntary termination of airline employees until Oct. 1.  As that date grows nearer, the airline unions have stepped up their calls another $32 billion airline bailout, in order to extend the airlines’ employment freeze for six additional months.

Yesterday, President Trump said he supports giving more taxpayer-funded aid to airlines. Marketplace reports:

President Donald Trump said Wednesday he would support additional aid for airlines to keep workers on payroll. The president was asked about a plan from more than a dozen Republican senators to provide another $25 billion in support for airlines.

“I think it’s very important that we keep the airlines going,” he said. “We don’t want to lose our airlines.”

Arguments from Trump and the airline unions include the concern that airlines could lose many thousands of skilled professionals they will need as the demand for air travel returns and grows in the future. There are also very real human concerns for mid-career people losing good-paying jobs that may be hard for them to replace. I can understand these human concerns. I grew up in an airline family, and we had hard times during several long strikes, one of which shut the entire airline down and left my dad temporarily out of work. Some years later, my best friend’s father—a flight engineer—lost his job when new cockpit technology eliminated the need for such a position.

But those human concerns collide with a harsh reality: air travel will not have recovered six months from now, and the post-pandemic aviation industry will be quite different from what it was in recent decades.

The International Air Transport Association (IATA) recently revised its forecast of when air travel may return to pre-coronavirus pandemic 2019 levels. Instead of returning to those levels by 2023, which it had predicted a few months ago, IATA now thinks it will take until 2024 for the industry to get back to 2019 levels.

Yet, U.S. airlines and their unions want to keep huge numbers of people on the payroll for another six months—and then what? Presumably, even more federal subsidies.

Paying tens of thousands of airline employees not to work for three more years—waiting for air travel to return to pre-pandemic levels— makes no sense for federal taxpayers or airlines. Based on economic conditions and demand, downsizing needs to happen and there is no point putting it off for six months.

The airlines know this, and have been preparing their legally-required notifications:

  • American has said it will soon issue 25,000 furlough notices;
  • Delta has thanked more than 17,000 employees who have accepted buyouts and early-retirement packages;
  • Southwest has not issued furlough notices, but has encouraged early retirements; and,
  • United has outlined plans for up to 61,000 furlough notices.

A possible reason for major airlines to support payroll subsidies is more disturbing. It is basically an attempt to preserve the status-quo structure of the industry, in which the big four carriers provide more than three-fourths of all U.S. air service. But that attempt flies in the face of foreseeable changes in post-pandemic air travel. Thanks to Zoom and similar video conferencing services, business travel is likely to be a smaller fraction of the total, especially international business travel. Business travel is the most lucrative market segment for the legacy carriers, especially the international portion.

As air travel resumes, domestic and leisure travel are likely to be significantly larger fractions of the total. That plays to the strength of smaller airlines such as Alaska, Hawaiian, and Jet Blue, and especially ultra-low-cost carriers Allegiant, Frontier, and Spirit. Expanded market share for these smaller airlines would be good for air travelers since their low fares have been shown to exert downward pressure on the fares charged by the legacy carriers. But this also means relative shrinkage of the big legacy carriers.

Attempts to maintain the status quo in a dynamic industry that needs to change would be central planning of the worst kind. Another round of federal bailouts for airlines would be a triumph of stasis over dynamism, of the kind as Virginia Postrel discussed in her book, The Future and Its Enemies.

We would not even be having this debate, were it not for Congress’ propensity to throw taxpayers’ money at problems—these days on an unprecedented scale.

In its recent lead editorial, The Economist identified this danger, writing:

One of monetarism’s key insights was that sprawling macroeconomic management leads to infinite opportunities for politicians to play favourites. Already they are deciding which firms get tax breaks and which workers should be paid by the state to wait for their old jobs to reappear. Soon some loans to the private sector will turn sour, leaving governments to choose which firms fail. When money is free, why not rescue companies, protect obsolete jobs and save investors?

However, though that would provide a brief stimulus, it is a recipe for distorted markets, moral hazard and low growth.

The airlines and their employees undoubtedly face tough times ahead, but taxpayers should not provide tens of billions in federal bailout funding so the airlines can delay those decisions for six months.

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Federal Aid for States Needs More Transparency, Should Not Reward Mismanagement Mon, 03 Aug 2020 15:01:12 +0000 If Congress does move forward with even more spending, it’s important that any support program not reward or encourage fiscal mismanagement in state and local governments.

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Congressional legislation to address the economic effects of the COVID-19 pandemic seems likely to contain federal funds to bolster state and local government budgets, most of which are facing sharp revenue declines. The costs of federal support for state and local spending exceed the likely benefits, but unfortunately, that has not stopped Congress from spending beyond its means in the past. After more than $3 trillion in relief this year, if Congress does move forward with even more spending, it’s important that any support program not reward or encourage fiscal mismanagement in state and local governments.

Requiring states to provide spending data to taxpayers and increase transparency in order to get relief funding is one potential way to encourage fiscal responsibility during the pandemic and beyond. This idea already has attracted some momentum and could include commonsense financial transparency requirements.

At minimum, governments that receive federal funds should be required to report how the aid was spent at the line-item level. Did the money go to respond directly to the harms caused by the pandemic, or was it instead used to plug preexisting holes in pension systems? Taxpayers should be able to know.

Requiring this level of transparency is nothing new. When the Obama administration implemented the American Recovery and Reinvestment Act of 2009, it created a website called to show how the stimulus money was being spent. A descendant of this project,, now provides details of all federal spending. Together with the work of a special inspector general, this transparency ensured that wasted taxpayer funds were kept to a minimum.

Many state and local governments provide detailed “checkbook” spending as well. A 2018 report from the U.S. Public Interest Research Group graded spending transparency websites for every state. Twelve scored B grades or better, with Ohio and West Virginia providing the best data — illustrating that states do not necessarily have to be very large or affluent to be transparent. Since the PIRG study appeared, one state that received an F grade, California, has dramatically improved its score by introducing its new Open Fi$Cal website.

Federal support should be used to encourage more state and local governments to follow best practices for spending transparency, starting with how any new federal funds are spent. But there is another reporting problem Congress also can help solve: tardy, infrequent, and opaque state and local financial statements.

Because the Securities and Exchange Commission lacks the authority to regulate them, municipal bond issuers’ disclosure practices fall far short of the standards enforced in corporate securities markets. Whereas an SEC-regulated corporate bond issuer typically produces a quarterly financial report within 45 days of the end of its reporting period, the average municipal bond issuer only reports annually and takes more than six months to do so. Some issuers take years to file audited reports (bankrupt Puerto Rico being among them).

A recent survey of audited financial statements by Truth in Accounting found that Illinois took 418 days to release its report. Seattle took 301 days. Some smaller entities take even longer than that: As of this writing, Compton, California, has yet to produce its 2015, 2016, and 2017 statements — although it recently published audited financials for 2018.

Public companies provide unaudited financial statements using SEC Form 10-Q each quarter. Some state and local governments provide interim reports, but there is no consistency or standardization across the public sector.

Not to mention that annual disclosures continue to take the form of voluminous, opaque, and inconsistently formatted PDF files more than a decade after the SEC embraced a machine-readable reporting standard for corporate security issuers. This format, known as eXtensible Business Reporting Language, is being used by companies worldwide as well as by local governments in Spain, Italy, and Brazil. As Will County, Illinois, demonstrated last year, it is possible for state and local governments to use XBRL as well — they just need the “will” to do so, or better yet, a kick in the pants from Congress.

Neither the SEC nor the self-regulatory Municipal Securities Rulemaking Board can do much to improve state and local government financial disclosure because they are expressly prohibited from regulating it. In the 1970s, Section 15B of the Exchange Act was amended to prevent these institutions from requiring state and local governments to improve their financial disclosure as a condition for issuing more bonds.

Submitting to the federal regulation of their financial reporting is a small price for state and local governments to pay in exchange for tens (or hundreds) of billions of federal taxpayer funds. If Congress, despite its own massive debt and deficits, insists on further relief spending, it should use the opportunity to compel aid recipients to open their checkbooks to public scrutiny. Taxpayers will thank them.

This column was co-authored by Jonathan Bydlak, director of the R Street Institute’s Fiscal and Budget Policy Project and creator of It originally appeared in the Washington Examiner

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After the $2.3 Trillion Stimulus, President Trump Wants Another $2 Trillion Stimulus for “Phase Four” Fri, 17 Apr 2020 04:02:57 +0000 The first $2.3 trillion stimulus package lacked transparency and was riddled with corporate bailouts. Before it even hit bank accounts, politicians were calling for more.

The post After the $2.3 Trillion Stimulus, President Trump Wants Another $2 Trillion Stimulus for “Phase Four” appeared first on Reason Foundation.

Before the first payments from the $2.3 trillion Coronavirus Aid, Relief, and Economic Security Act (CARES Act), the largest spending bill in history, started reaching bank accounts this week, politicians were already calling for another round of faulty economic stimulus to combat COVID-19 and the devastating economic impacts of the government-imposed shutdowns.

Speaker of the House Nancy Pelosi is calling for another $1 trillion in stimulus, while President Trump wants an additional $2 trillion stimulus.

Meanwhile, it is early, but the rollout of the CARES Act looks like another blundered federal program that grows the national debt by trillions, lacks accountability, bails out favored industries and, despite the record price tag, still underfunds the areas that need it the most. Out of the massive $2.3 trillion, less than half is being spent in a productive fashion on small businesses and individuals.

While the scale of the COVID-19 pandemic is extreme, the equally large scale of the CARES Act cannot be understated in economic terms. However, the $2.3 trillion bill fails to get money to the right places.

Unfortunately, a vital part of the stimulus program — the direct cash payments to individuals — just started reaching people via direct deposit this week and those who are getting checks haven’t gotten them yet thanks to the federal bureaucracy’s ineffectiveness and President Trump’s request to have his name on the checks. Over 17 million people, an astonishing record, have applied for unemployment benefits in the last three weeks, and yet the federal government has lagged in getting the stimulus money to them.

The Paycheck Protection Program’s loans for small businesses that include incentives for them to keep their workers on the payroll arguably does the most to help businesses in need. But the funding provided for this program is too small a number relative to what it seeks to accomplish — keep millions of people employed by helping small businesses pay their bills while there’s little-to-no money coming in. The loans could also help avoid a crash in commercial mortgage-backed securities, which could be triggered by businesses based in malls and commercial office spaces shutting down. One analyst calculated the aggregate monthly expenses of small businesses at $258 billion, making the $377 billion small business portion of the bill large enough to cover roughly 45 days of operation.

Meanwhile, $560 billion is set aside for large corporations, including $58 billion for the airline industry. There’s no real economic justification for airlines to get targeted assistance ahead of any other struggling sector. And there’s another $17 billion for “national security” which will likely go to politically-connected firms (Lockheed Martin, Boeing, etc.) with no apparent connection to the COVID-19 pandemic.

The remaining $450 billion in big business funds is in the hands of the Federal Reserve and the Department of Treasury to make non-forgivable loans to mid- and large-sized businesses. Some expect the Treasury to leverage this money 10 to 1, meaning some $4.5 trillion in loans could be available — more than the entire outstanding commercial and industrial markets, which held $2.35 trillion at the end of 2019. The scale of this stimulus program is truly unprecedented and would make the US government the largest lender in the country.

With lawmakers already pushing another stimulus, taxpayers should be very concerned about the transparency and efficacy of these programs, which are almost certain to devolve into cronyism reminiscent of the 2008-2009 bailouts. President Trump has already fired the Inspector General who was supposed to oversee the stimulus spending. And less than a week after CARES was passed, Treasury Secretary Steve Mnuchin independently changed the terms Congress had set, making the loans less favorable for some businesses. The lack of details and oversight leave far too much wiggle room for bad policy and corruption.

As the economy worsens and calls for more stimulus grow, there comes a point when Americans need to worry about the massive expansion of the national debt, now $24 trillion and rising, and Federal Reserve power. “The federal government budget deficit is on track to reach a record $3.6 trillion in the fiscal year ending Sept. 30, and $2.4 trillion the year after that, according to Goldman Sachs estimates,” The Wall Street Journal reported this week. And that’s before the additional $2 trillion stimulus President Trump wants.  At some point, the spending and red ink have to run out.

The Federal Reserve’s power has grown since the Great Recession, first moving past the traditional open market tactics (which it can no longer effectively use since it’s already pushed interest rates to near zero) into quantitative easing and last year’s historic $500 billion participation in the repo market. There has been a historically large, decade-long “pumping” of cheap money into the system even before the coronavirus pandemic.

Congress should not create another trillion-dollar stimulus. But if the political momentum for it is unstoppable, stimulus spending should focus on the small businesses and hourly-earners who are hardest hit by the economic impacts of government-imposed shutdowns. It doesn’t need to be complicated — direct cash payments, perhaps adjusted for income and employment, and widespread funding for small businesses in the vein of the Paycheck Protection Program.

A version of this column previously appeared in the Daily Caller.  

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