By: Mark Glennon*
In all the debate about the pending federal aid package for cities and states, you’d think something so obvious would have been said often, but it hasn’t been: America cannot bail itself out.
Bailing the nation as whole out is exactly the idea behind the $350 billion package of federal aid proposed in the American Rescue Plan now pending in Congress. It would provide $220 billion to state governments and $130 billion to local governments.
The allocation is based on population – so far, at least, in the pending bill. For example, Illinois has about 3.9% of the nation’s population, so it would get about $13.6 billion of state and local money, which is about 3.9% of the $350 billion.
Federal money isn’t manna from heaven for states. Whatever the federal government provides, even if it is borrowed initially, must be repaid through federal taxes.
The federal government would be giving with one hand and taking back with another.
The $350 billion aid package is supposedly compensation for costs and lost revenue resulting from COVID-19 and the economic downturn.
That’s also spurious. As Wirepoints documented this week in detail, COVID’s financial impact on state governments has been far less than initially feared, and the final tally shows that nothing remotely close to $130 billion is justified.
After taking into account federal CARES Act money already provided and the latest revenue reports, it turns out there’s a net surplus across all 50 states of $24 billion. The three states with the most significant shortfall, as our report showed, are the “usual suspects” when it comes to stories of financial crises: New York, Illinois and New Jersey.
Those numbers aren’t yet available for local governments but there’s no reason to think their story will turn out differently than the states’ experience.
Maybe some are thinking that an oversized federal package really is like manna from heaven because the Federal Reserve Bank will just create the money for it, as it has been doing with much of the federal deficit by purchasing treasury bonds.
That would be a huge mistake.
The Fed is already at the limit it thinks appropriate for its money creation and bond purchasing. How far the Fed should be going is the biggest debate in economics today, but the Fed sets is own course and, unquestionably, there are costs and risks even with the policy it is now following.
Specifically, at least some additional inflation is fully expected by the Fed and most economists, and critics think dangerously higher inflation is a serious risk. Fed policy has driven down returns on fixed income, hammering pensions and retirees particularly hard. And the flood of Fed money has destroyed price discovery of virtually every financial asset. That may sound like ivory tower academics, but it is not. The flood of Fed money means nobody really knows the true, market value of any financial asset, and in a system based on free markets, that means the entire system cannot function efficiently or as intended.
Others may claim that it’s sensible for the federal government to hand out borrowed money to states because the federal government can borrow much more cheaply than states.
That, too, would be a dangerous path. Making the federal government a cash cow for states would mean ending the credit discipline of local municipal bond markets. It would ultimately federalize the cost of state and local mismanagement, and well-run states would go unrewarded.
Which brings us to the scary part of where the negotiations on the American Rescue Plan may be headed. The current draft of the legislation would allocate the handouts based simply on population, but you can expect the worst run states to ask for more than that. New York Gov. Andrew Cuomo has already done just that. And last year Illinois Senate President Don Harmon made national headlines last year with a stunning $41.6 billion bailout request from the federal government.
So there you have it: A nonsensical effort for the nation to bail itself out from a problem that doesn’t exist for the nation as a whole, with a few states likely to be looking for more than their share.
*Mark Glennon is founder of Wirepoints
Expect no retraction or apology. This what they do.
The state’s existing buyout program for its own pensions is the precedent for Chicago, which should be a warning: Look out for similar exaggerated claims and shoddy analysis.
Mark: Thank you for the thoughtful, brilliant article, as usual !!
And thx for the link to the actual 1/20/21 American Rescue Plan.
I have NEVER seen so much promised to so many, that will require an insane amount of money-printing. Did you catch the PAID, LEAVE OF ABSENCE TO 106 MILLION EES ? To stop the spread of the Virus ? What in the WORLD could THAT COST?
Insanity has taken over Wash DC. Hold onto your hats and invest wisely and appropriately!
this is a done deal people as long as democrats control all three branches of government this passes and anything else they want elections have consequences
Excellent opinion piece WP – Biden and Democrats are willing to take America into unchartered financial waters with great risk. WP has shown the additional $350B for states and local governments is largely unfounded, and not really needed. Fiscal responsibility says to ‘pump the brakes’.
When it comes to tax breaks, bail outs, TIFS, “enterprise zones, and all manner of sweet trade deals and government contracts for the oligarchs, money is no object. When you start talking about helping working people? We cannot afford it! The cult of corporatists and tax breaks has become a religion for even a fair number of middle class voters who fail to see that we are robbed blind by the kleptocrats in government and he corporations. They’ve shipped manufacturing jobs overseas, especially in the Midwest, and we give them tax breaks to do so! They want you to live… Read more »
I get the feeling–more and more–that smart money people know that this thing is unsustainable and could collapse at any time. My question for this forum is: what are you doing to prepare for what is ahead? What’s the best portfolio for stagflation? Or high inflation? With the advent of cryptocurrencies, I’m seeing distraction away from the usual investment in precious metals. With real estate subject to massive government debt a la property taxes, that doesn’t seem like a good play. What era is most similar to what we can expect in the next 3-5 years? The 70’s? Early 80’s?… Read more »
The Chinese are going to kick are ass
Eh I’ve been to China, they aren’t going to kick our asses.
The Chinese ARE kicking our ass. Wake up !
When I retired 4 yrs ago at age 61, I developed my own hedge fund very simply based on El-Erian’s type of asset classes %s, AND very importantly, the conditions existing 1/1/17: 50% stocks, 25% fm two Corp bond index funds and 25% Hard/Real Assets including 5% gold IAU, 5% new digital gold GBTC, a Real Estate Index fund which I threw overboard even before the Virus, a commodities Index Fund GSG from Goldman Sachs, and BIP stock……all adding to 25% for the Hard/Real. I’ve rebalanced but generally don’t now mind 10% GBTC, it’s 13% of our total now. I… Read more »
Thanks Steve-oh! Sounds like you have some good strategies going. Good for you!
You retired?! Hell, we should have been bothering you much more with questions about pension accounting.
Gosh, I thought you knew, and YES, whatever help or Qs, please put forth !
I studied like a zombie in Dec 2016 my first month of “involuntary” retmt, a mass layoff at CBIZ Retirement Plans Division, and read the two great investment books by Meb Faber, and I decided on a modified Mohammed El-Erian approach as described above, adjusted for existing conditions back then and now. El-Erian was Bill Gross’ right-hand man at PIMCO for years, then became head of the $30B Harvard Endowment for a few years.
The amount of debt issued is unprecedented and related to the unusually ultra-low rate environment. It is a vicious cycle. The US response is indeed mind boggling. All this debt on top of an already unsustainable pile is bound to slow down growth and productivity going forward. The article is really relevant. Here’s a small technical point. The Federal Reserve suppresses interest rates and buys US debt on secondary markets so ‘cash’ is created but the debt is not truly (until the Reserve Act is modified…) monetized. The major money ‘creator’ is the Treasury (when it credits private bank accounts)… Read more »
Great to have your perspective here.
“The seeds for inflation are being planted but there may be a deep deflationary patch before the harvest comes.” All those Yellen Bux disappear as easily as they came. That’s your deflation. They don’t come back. We’ve already *had* the inflation. Look at the prices of all real estate, food, cars, education, health care, stocks, cryptos, collectibles, bonds, and until March of 2020, energy…… Everything has gone up in price. The only thing that’s gone down in price are consumer goods made with slave labor in China. Every other asset class and consumer good has increased in price. They can… Read more »
FYI the pressure is on to make social justice a focus of the Federal Reserve.
This is being partially being accomplished with Regional board members and staff sympathetic to the cause.
The Federal Reserve system is being transformed.
Money is a medium of exchange. It offers a quick, portable conversion mechanism between a (promised) time unit of one man’s labor and some unit of other man’s goods or services. When the supply of the medium of exchange is unlimited and obtainment is riskless, there is no incentive to commit the labor or exchange the owned goods for such a “valueless” unit of conversion. Labor and goods are valued according to need. In a complex economy, there is high need for goods and services of complex nature which exist only because compliance with societal laws demand administration of compliance;… Read more »
A barter system can more efficiently distribute goods and services??
If dems ram bailout thru Congress using reconciliation process then they can cut out any Republican decent and dish out aid to states & municipal using whatever criteria they want as upposed to strictly on population bases. Ive read about awarding aid based on # of unemployed, or in otherwords Illinois would be rewarded with more aid for keeping the state locked down vrs the great job a Florida’s done keeping their economy going during 2020. Also, another issue, there’s still $1 trillion in CARES ACT money that hasn’t been spent—a colossal mess….
Was watching wttw-chicago tonight last night(which is hard to watch because its all sjw- 24/7), but listened to interview on fed bailout with Illinois dem reps with Schneider, Casten & Krishnamoorhi (he’s the sponsor of $350 billion bailout). Listen at end to Casten spin absolute whopper lies about how all states have lost tons of tax revenue, etc…this is what’s being peddled to hapless public. Also interesting wttw couldnt get any Republicans to join in. https://news.wttw.com/2021/02/16/highlights-covid-19-relief-bill-progressing-house
It is not a bailout.
It is a patronage and attack fund to cross the chasm and crush political opposition in all aspects of society.
Interesting point, probably correct too! Liz Warren helped Obama decide how to spend the $1T “shovel ready” jobs money that Pelosi & Reid passed, and Biden as VP claimed he was gonna be “on top” of all the spending, accounting for ever dollar spent. They all lied thru yheir teeth, almost none spent for real jobs! Alot went to Wall St banks, state democrat pets like school systems, tc etc. Democrats spend money like they just dont care about taxpaying citizens and private sector. PS: They gave $50B to GM for newly issued stock, so that unions didnt have to… Read more »