Reed Saxon/AP Photo
Unsanitized-081320
Forget about road construction, like this water main cleanup in Los Angeles in 2018, without state and local government aid.
First Response
Until my cunning plan to sue every corporation in America comes to fruition, the prospect of a bipartisan deal on coronavirus relief looks remote. There was a grim phone call yesterday that just reiterated the stalemate. President Trump said in his press conference yesterday that a deal “is not going to happen.”
This is particularly distressing for state and local governments, where the two sides are furthest apart. Initially Democrats sought $900 billion in new money while Republicans offered nothing; later the Republican offer came up to a token $150 billion. The only impact on state and local budgets in the Trump executive actions are additional costs to administer the new unemployment benefit.
State and local spending already fell 5.6 percent in the second quarter, and more than 1 million jobs have been cut through July. With no deal, we can expect cuts that could cancel as many as 4 million jobs and slash 3 percent out of GDP. It’s the kind of mindless austerity that held the recovery back after the Great Recession, layered on top of a continuing public health emergency. “Due to Congress’ inaction, the ability of state and local governments to deliver critical services to the American people is now in serious jeopardy,” read a statement from seven organizations representing states, cities, counties, and other local governments.
In the absence of Congress and the White House, the Federal Reserve has become the only game in town for state and local government. They have a Municipal Liquidity Facility, authorized in the CARES Act, which would give some relief with ongoing costs, while adding more borrowing. But to date, it’s been used exactly one time, by the state of Illinois, for $1.2 billion.
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One problem with the program is that it costs too much and leaves too many states and cities out; by one estimate, 255 municipal entities are eligible for the program, but 97 percent would be “functionally excluded” because the penalty interest rates make it cheaper for them to borrow on the municipal bond markets.
The Fed assisted with that earlier this week, lowering interest rates on short-term notes. But they did not do what several progressive House members requested: lower the rates equivalent to the federal funds rate (i.e. zero), extend the maturity to at least five years, and make smaller cities and counties eligible.
Keep in mind that the Fed has bought over 800 companies’ corporate bonds, because they had to keep their promises according to chair Jerome Powell, but the municipal lending is stuck on 1. Some regional Fed presidents have intimated that Treasury is holding up bigger changes on funds to which it contributed its CARES Act share. Others have said that states don’t need liquidity, they need grants, and the central bank’s hands are tied.
Darien Shanske, a UC-Davis professor of law and political science, figured out a way to untie those hands months ago. In a paper co-written with Indiana University’s David Gamage, Shanske lays out how there’s a way to avoid Treasury’s effective veto on the program by lending under the Fed’s Section 14 authority rather than the Section 13 authority being used now. Under those powers, the Fed can purchase six-month notes without needing an equity backstop from elsewhere. The way to extend the terms is to commit to re-purchase the notes every six months for twenty years, with a sliding schedule of repayment of principal. Most localities have a short-term borrowing exception that could make this work.
This sort of creates an operating deficit option in state and local governments for a period. And of course, if you can roll over the notes for 20 years you can commit to doing it for 100, or however long it takes to make these loans effectively grants. I offered a version of this option back in June, and now it’s become if anything more critical. Congress is not stepping in and millions of jobs are at stake. It’s time to unveil this option. Every day the Fed doesn’t is a choice.
Mail Pattern Boldness
The situation with the Postal Service has begun to hit a critical mass. Clearly the Capitol Forum’s reporting was correct, and there is a gouging in progress with the aforementioned state and local governments over postage for ballot delivery. Top postal officials are claiming that they’re just advising governments about the standard timelines for delivery on marketing mail relative to first class, but in the past, political mailings have been treated like first class mail, according to everyone involved with the process.
This is just a pretense to make ballot mailing less affordable and induce some states or localities to change their practices. California Secretary of State Alex Padilla explicitly calls them “proposed changes to postal service and pricing.” Anyone who doubted that this was happening should doubt no longer.
Meanwhile, mail sorting equipment is vanishing from post offices, and tens of thousands of letters are piling up even in relatively small communities. As far as the election is concerned, Trump openly admitted today that he’s holding up any funding to facilitate mail-in voting. “If we don’t make the deal, that means they can’t have the money, that means they can’t have universal mail-in voting,” he told Fox Business.
I don’t think strongly worded letters are going to cut it, at least not from one party. This is an attack on commerce in America, and a theft in progress of the vote.
Days Without a Bailout Oversight Chair
140.
Today I Learned
- Weekly jobless claims went under 1 million for the first time in five months. There are still 29 million taking unemployment benefits though, now without a $600 enhancement. (Calculated Risk)
- Yesterday was the deadliest for official listed fatalities since May. The data seem to presage a peak within days, but gaps in the stats make that uncertain. (Axios)
- Other exposures to different coronaviruses, like the common cold, could give people immunity. (Miami Herald)
- Frozen chicken in China imported from Brazil tests positive for COVID-19. (Reuters)
- Life in a coronavirus vaccine trial. (CNBC)
- That high school in Georgia (the one with the hallway photo) is still closed after more positive cases. (WSB-TV)
- Payouts for vaccines that don’t yet exist when the U.S. already paid for the R&D have shockingly not raised much anger. (Wall Street Journal)
- AMC Theaters going YOLO and opening up starting next week. (The Verge)
