The American economy is in bad shape. Unemployment is at 8.4%, more than 1 million people are losing their jobs every week and retail sales appear to be slipping again after crashing this spring. According to a new Federal Reserve survey, 23% of households report that they are “just getting by” financially, or worse.
“The COVID-19 pandemic is causing tremendous human and economic hardship across the United States and around the world,” the Fed reported on Wednesday, as Chairman Jerome Powell pledged a sustained commitment to supporting economic recovery.
The central bank will have to be creative, because Congress has abandoned the field. On July 31, the last of the support for households and small businesses that lawmakers approved in the spring expired. Senate Republicans have decided to let us fend for ourselves.
But despite the Fed’s insistence on sustained economic support, Powell and the central bank have left one of their most powerful tools to rot during the pandemic: a $500 billion fund to help state and local governments weather the storm, which Congress authorized in March. Like other Fed rescue programs, the idea was for the fund to provide loans on generous terms ― only to governments, instead of corporations. These funds, in turn, would prevent them from having to make layoffs and cut public services amid a historic loss of tax revenue caused by the pandemic.
To date, only the state of Illinois and the New York Metropolitan Transit Authority have drawn from the fund ― for a combined $1.65 billion, or about a third of a single percentage point of the amount available. That’s because the Fed, after weeks of debate and delay, decided to make funds for the program available only at punitive rates. It’s cheaper for governments to get money elsewhere.
State and local governments employ about 16 million people nationwide. Everyone relies on the services they provide, which account for a whopping 10% of the country’s total economic output ― from park maintenance to public schooling to firefighting to public transportation to basic road repair ― and on and on.
According to the progressive Center on Budget and Policy Priorities, state and local governments are facing a massive fiscal crunch from the collapse of tax revenue during the pandemic ― all told, the hole is expected to be at least $555 billion, excluding the shortfalls for tribal governments and U.S. territories.
It is frankly astonishing that at this stage of the crisis, the Fed would continue to deny aid to what may well be the most imperiled sector of the economy, effectively overruling a congressional authorization through bureaucratic maneuvering.
This is all the more astonishing given how creative the Fed has proved to be in living up to other aspects of its legal mandate to secure maximum employment. The Fed purchased billions of dollars in corporate debt over the summer ― a relatively small dollar amount that nevertheless demonstrated to financial markets that the central bank was willing to take new steps to help should it be necessary. More recently, it has openly embraced a higher inflation target, signaling to the world that it will seek slightly higher inflation ― 2% and a bit more ― as an acceptable price of stronger economic growth and higher employment.
All of this combined with the 0% interest rates, a $700 billion round of quantitative easing and trillions of dollars in purchases of mortgage-backed securities ― tactics that were innovative in the response to the 2008 financial crisis, but which Powell has now cemented as de rigeur crisis-fighting.
Such creativity has been welcome. Without it, the economy would have collapsed even further in March and April, and it would have climbed back even more slowly than it has in the months since. High interest rates make it harder for businesses of all sizes to stay afloat, and businesses pay people to work. Making it cheaper and easier to borrow money is almost always a worker-friendly policy.
The Fed’s most reliable tools benefit the economy primarily by helping some of its most powerful actors, specifically large corporations that borrow money for their operations and the large banks that make money by providing their financing. For central bankers around the world, such support has long been considered apolitical ― they’re just doing they’re jobs making sure the wheels don’t fly off.
But when it comes to supporting another critical sector of the economy ― state and local government ― the Fed’s generosity disappears. Though they don’t usually say so in public, central bankers have long objected to such ideas because they consider it political. Financing governments, they reason, is a political choice to be decided by taxpayers, not central bankers in Washington.
All this sounds very humble and democratic, the kind of qualities we generally like in our leaders. But taxpayers are also voters, and voters are represented by members of Congress. Congress created the Fed and delineates its powers, and Congress decided in March that the Fed needed to help state and local governments. That’s why it explicitly authorized a fund at the central bank to provide aid.
At a Thursday meeting of the Congressional Oversight Commission for the coronavirus rescue, Commissioner Bharat Ramamurti pointedly questioned Fed official Tim Hiteshew about the central bank’s inaction on state and local government relief. Why was Phillip Morris able to take advantage of Fed programs to borrow money at 0.75% while the state of Kentucky was offered 2% ― more than double ― even though Kentucky’s loan would be repaid sooner?
Hiteshew resorted to boilerplate. “We agree with you that state and local governments cannot cut their way out of the steep decline in revenues and the rapid decline in revenues that we’ve seen,” he said. “But neither can they borrow their way out of it.”
And this again carries some rhetorical appeal, which is way Hiteshew said it instead of saying, “We don’t want to do what Congress asked us to do.” It would, after all, be nice if the federal government just did the sane thing and approved a load of direct cash to help keep state and local governments afloat. But the federal government didn’t do that ― it authorized the Fed to figure it out. Hiteshew’s testimony was essentially a declaration that the Fed has decided to shirk that particular duty.
Hiteshew’s pushback, moreover, assumes away much of the Fed’s authority. Yes, saddling local governments with debt could force more painful decisions later ― but not necessarily. A lot of things that are hard during a once-in-a-century crisis will not be so difficult later, once the crisis has passed. If it wanted to, the Fed could provide governments with all-but-zero-interest loans at extremely long durations ― say, 25 or 50 years ― to ensure that state and local governments get through the next few budgeting cycles without laying people off.
The Fed routinely devises inventive new ways to make money cheaper for large corporations. Why stop there? The central bank’s congressional mandate is to ensure maximum employment, not maximum private-sector employment.
Zach Carter is the author of the New York Times bestseller “The Price of Peace: Money, Democracy, and the Life of John Maynard Keynes,” available from Random House wherever books are sold.
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