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Local Governments Face Big Problems

December 14, 2020

There is a budding issue in local and state governments. See, the economic balance that we saw in the summer seems to have run its course. I think we know why – the growth was mostly artificial, generated by money consumers received from government and central bank programs which have expired or soon will.

Now, politicians can’t seem to craft a new deal, and the prime sticking point is aid to state and local governments.

Republicans oppose it and the only way things will change is if Democrats win the Georgia Senate runoff in January. Meanwhile, unemployed people and small businesses can’t afford to wait.

Still, even if Congress passes a smaller package soon to help citizens and businesses, U.S. states are almost certainly going to face a large budget shortfall due to COVID-19’s effect on the economy. States will have to choose between raising taxes and cutting spending to close the gap. You’d think most states would choose to cut spending, given their worsening pension liabilities.

According to Moody’s Analytics, U.S. states could face an aggregate budget shortfall of up to $430 billion in 2020-22. Nevada, Louisiana, and Florida face the greatest gaps, while Illinois is the most indebted state, with $230 billion in pension liabilities.

This is a problem on several fronts. Those states must raise taxes or cut spending. But if they do, people could leave, making it everyone’s problem because the money governments spend goes to workers who are also consumers.

While perhaps not in the local community, somebody manufacturers police cars, fire trucks, and stoplights. So, if spending disappears, so do jobs, and not necessarily in the same location. This sets us up for a potentially nasty and prolonged trickle-down effect that could last a while.

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