What Is the Remedy for State and Local Fiscal Squeeze During the COVID-19 Recession? More Debt, and That Is Okay

• Published date: 01 August 2020
• Date: 01 August 2020
• DOI: 10.1177/0275074020941717
• Subject Matter: Public Management Opportunities & Challenges in the Era of COVID-19Financial Management in an Unprecedented Time

https://doi.org/10.1177/0275074020941717

American Review of Public Administration

2020, Vol. 50(6-7) 584 –589

© The Author(s) 2020

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DOI: 10.1177/0275074020941717

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Financial Management in an Unprecedented Time

Introduction

The U.S. economy is taking a major hit from the coronavirus

crisis. The country is falling into a recession, if not a depres-

sion. State and local governments (SLGs) are serving on the

front lines in dealing with the virus at a time when their rev-

enues are declining. At the time of writing this piece (May

2020), it is too early to know the full extent of the fiscal

squeeze that SLGs will face over the next 24 months, but

early projections paint a grim picture. Many states are pro-

jecting substantial shortfalls for the fiscal years 2020 and

2021.1 This, of course, is not at all surprising because SLGs

are being starved of needed revenues as many parts of the

economy have shut down. At the same time, expenses are

increasing as more and more Americans file for unemploy-

ment, demand for Medicaid services grows, and govern-

ments strive to maintain order, public health, and other

services. During normal economic downturns, SLGs often

fare poorly because of balanced budget norms and require-

ments. The current crisis, however, is hardly a normal down-

turn. The federal government has appropriated US$150

billion in the Coronavirus Aid, Relief, and Economic Security

(CARES) Act (often referred to as Phase 3 of the stimulus)

to assist SLGs in fighting the pandemic. This is sure to be

grossly insufficient. Indeed, the National Governors

Association has called upon the federal government to appro-

priate an additional US$500 billion to help states and territo-

ries address their budgetary shortfalls.2 At the time of writing,

the House of Representatives was pushing for more assis-

tance for SLGs, but Republicans in the Senate were showing

a hesitance to “bail out” SLGs. Even if more federal aid if

forthcoming, it may not be enough to fully alleviate the fiscal

squeeze over the duration of the economic crisis. In the

absence of such aid, SLGs are likely to resort to large-scale

budget cuts and perhaps even some tax increases and other

revenue enhancements. Such austerity measures will only

make things worse and prolong the eventual recovery (e.g.,

Blyth, 2013; House et al., 2019; Rickman & Wang, 2018).

Traditional thinking regarding deficits is that states should

always balance their operating budgets, even during times of

fiscal stress, because they do not have the same capacity to

engage in fiscal stabilization as does the federal government

(Musgrave & Musgrave, 1973). It is the federal govern-

ment’s role to run deficits during economic downturns and

emergencies, but deficit hawks warn that its capacity to do so

is limited. Too much debt, it is frequently argued (e.g., see

Congressional Budget Office [CBO], 2010, 2020), will even-

tually overburden the federal government’s capacity to pay

its bills, leading to a crash in demand for U.S. Treasuries and

skyrocketing interest rates. These arguments, particularly

regarding federal debt, are increasingly being called into

question by economists (e.g., Blanchard, 2019; Keen, 2011;

941717ARPXXX10.1177/0275074020941717The American Review of Public AdministrationDouglas and Raudla

research-article2020

1The University of North Carolina at Charlotte, USA

2Tallinn University of Technology, Estonia

Corresponding Author:

James W. Douglas, The University of North Carolina at Charlotte, 9201

University City Blvd, Charlotte, NC 28223, USA.

Email: jwdougla@uncc.edu

What Is the Remedy for State and Local

Fiscal Squeeze During the COVID-19

Recession? More Debt, and That Is Okay

James W. Douglas1 and Ringa Raudla2

Abstract

The COVID-19 crisis is placing a tremendous fiscal squeeze on state and local governments in the United States. We argue

that the federal government should increase its deficit to fill in the fiscal gap. In the absence of sufficient federal assistance,

we recommend that states suspend their balanced budget rules and norms and run deficits in their operating budgets to

maintain services and meet additional obligations due to the pandemic. A comparison with Eurozone countries shows that

states have more than enough debt capacity to run short-term deficits to respond to the crisis.

Keywords

public debt, public deficits, balanced budget norms, fiscal crisis