Federal Funds

Is Another Round of Economic Stimulus Needed?

Congress continues to debate whether more stimulus is needed to aid state and local governments from the economic recession caused by the COVID-19 pandemic. However, federal policymakers should avoid another bailout until states have been able to utilize all relief funds that have been appropriated by Congress.

 

History has proven stimulus spending does not work to revitalize the economy and the national debt is becoming a danger to both our economy and security. Finally, Iowa taxpayers should not be forced to bailout states such as Illinois, California, and New York that have followed poor economic policies. These states are pushing for additional federal stimulus in hopes to bail out their miss management from poor policy and runaway spending.

 

Democrats in the United States House of Representatives released a $2.2 trillion COVID-19 relief package. Some of the key provisions of the $2.2 trillion proposal include $436 billion in aid to state and local governments and restoring the $600 weekly jobless benefit, which before it expired had discouraged many workers from returning to work. $238 billion of the aid would be directed toward the states but would be apportioned by each states unemployment rate. This means that states with higher unemployment rates, especially those states that are still shutdown, would be given greater aid then states such as Iowa, whose unemployment rate continues to decline. The Democrat plan would also create another round of direct stimulus to individuals with $1,200 per person and $500 per dependent.

 

It is not just the Democrats that are considering further relief. Senate Republicans have supported an additional $300 billion in relief and President Donald Trump has hinted at asking for $1.5 trillion in additional aid.

 

What is often forgotten is the escalating national debt caused by out-of-control government spending. Federal spending continues to grow from $4.5 trillion in Fiscal Year 2019 to $6.6 trillion in Fiscal Year 2020. Deficits and the growing national debt of close to $27 trillion is a significant problem that can no longer be ignored. Recent debt projections show that the size of the debt will exceed 104 percent of Gross Domestic Product (GDP) by 2021. It is estimated that the COVID-19 pandemic alone could add $6 trillion to the national debt.

 

President Herbert Hoover stated, “blessed are the young for they shall inherit the national debt.” This is just one consequence of the national debt. The result of this debt will lead to massive tax increases to service the debt and austerity-style budget cuts. Future generations should not be shackled with this enormous level of debt.

 

It is estimated that Congress has approved more than $3.6 trillion in COVID-19 relief. This does not include the stimulus provided by the Federal Reserve. A large portion of Congress’s COVID-19 relief was the Coronavirus Aid, Relief, and Economic Security (CARES) Act. The CARES Act provided over $2 trillion in economic relief.

 

Iowa received $1.25 billion in CARES Act funds. It is estimated that Iowa has received $4.5 billion in total federal relief. Governor Kim Reynolds has allocated federal relief dollars to support the unemployment trust fund, public education, aid to farmers, small businesses, housing assistance, and numerous other areas. Iowa government agencies such as the Department of Health and Human Services, Department of Public Health, and other agencies have also received funds.

 

A recent report issued by the United States Department of the Treasury Office of Inspector General reported that many states still have not spent their allocated dollars under the CARES Act. At the time of the report, Iowa has spent $578,010,726 or 46.2 percent of the $1.25 billion received from the CARES Act. Iowa has allocated an estimated $125 million toward local government relief.

 

As a result of these federal dollars and Governor Kim Reynolds management of the pandemic, Iowa’s economy is starting to improve, and the unemployment rate continues to fall. Nevertheless, COVID-19 is still impacting Iowa’s economy. Governor Reynolds and the legislature have been working to control spending in Iowa. Prior to the COVID-19 emergency, Iowa was in a strong economic position with healthy and stable revenue growth. This included $800 million in reserves and a $400 million surplus. By March, all of this changed as the pandemic triggered an economic downturn and revenue uncertainty. In May, the Revenue Estimating Conference (REC) revised revenue estimates and the legislature passed a “status quo” Fiscal Year (FY) 2021 budget of $7.78 billion, which was only $26.6 million higher than FY 2020.

 

According to the Council of State Governments recent reportCOVID-19: Fiscal Impact to States and Strategies for Recovery, Iowa is one of the few states to have actually balanced their budget. This report examined the fiscal conditions of each state. Iowa was one of the best states in terms of fiscal stability and resiliency. By focusing spending on priorities, the legislature was able to enact a prudent budget, which currently has an estimated surplus of $311 million along with a $800 million “rainy day” fund. As of June 24, Iowa’s budget reserves are at their statutory maximums.

 

“Conversely, states that did the hard work and reduced spending growth during the longstanding pre-COVID economic expansion, created rainy day funds, and reduced liabilities, clearly do not need (or want) as much federal aid,” wrote Jonathan Williams, Chief Economist at the American Legislative Exchange Council.

 

In October, the Revenue Estimating Conference, which forecasts revenue estimates for Iowa, will meet and provide an update on revenue projections. It is still too early to determine the total impact of COVID-19 on Iowa’s economy, but Congress should not rush another stimulus package until the existing federal aid has had time to work.

 

Chris Edwards, Director of Tax Policy studies at the Cato Institute argued that with the economy starting to recover “state and local tax revenues likely won’t fall as much as previously thought.” “Indeed, state and local revenue losses continue to be overestimated by most commentators. Further aid from Congress or the Fed is not needed,” stated Edwards.

 

“It is undoubtedly true that many states and cities have accumulated financial challenges — like massive unfunded pension liabilities and other debts — over many years, if not decades, of irresponsible policy decisions. However, just because you federalize a problem does not magically make it disappear,” noted Jonathan Williams.

 

The problem for many states is the failure to address spending. “Make no mistake: State and local governments do not lack revenue. They lack spending restraint,” stated Williams.

 

Further, economic stimulus spending does not have a good track record in producing recovery. “The Great Recession policies demonstrated the inability of government spending programs to boost private activity or increase total output. The private sector, not Washington, must lead the economic recovery,” stated Adam Michel, Senior Policy Analyst with the Grover M. Herman Center at The Heritage Foundation.

 

During the Great Depression, President Franklin D. Roosevelt’s New Deal failed at economic recovery. Henry Morgenthau, who served as President Roosevelt’s Secretary of the Treasury, in 1939 described the failure of the New Deal spending programs. “We have tried spending money. We are spending more than we have ever spent before and it does not work,” stated Morgenthau. Further, Morgenthau noted that “after eight years of this Administration we have just as much unemployment as when we started…And enormous debt to boot!”

 

Iowa is following a path of fiscal prudence and when the legislature conveniences in January 2021, policymakers again will need to be cautious and to keep spending levels low. Another stimulus would only punish Iowa taxpayers while irresponsible states such as Illinois, New York, California, among others would reap the benefits for their reckless tax and spending policies.

 

These states have demonstrated they not only have over promised on pensions, but that it is not possible to tax and spend their way to prosperity. Jonathan Williams correctly argues that what is truly needed by these states is real budget reform. “However, if states expect a future federal bailout, what incentive do they have to undertake some of the heavy lifting that it takes to enact big-picture reforms like creating a priority-based budget or enacting institutional spending limits to protect taxpayers from the next economic crisis?” asked Williams.

 

Another round of economic stimulus is not needed at this time. Congress needs to allow the trillions in federal relief to work before authorizing additional taxpayer dollars and driving the nation deeper into debt.