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The Money Machine That Can Save Cities The Money Machine That Can Save Cities
(about 4 hours later)
State and local budgets across the United States are beginning to buckle under the economic strain caused by Covid-19. Because the economy is in essence in a medically induced coma, sales tax revenue and revenue from other business taxes have dried up. That means the funds to take care of communities — to pay teachers, to support Medicaid, to hire emergency medical workers, to maintain roads, to build low-income housing — are also drying up. State and local budgets across the United States are beginning to buckle under the economic strain caused by Covid-19. Because the economy is essentially in a medically induced coma, sales tax revenue and revenue from other business taxes have dried up. That means the funds to take care of communities — to pay teachers, to support Medicaid, to hire emergency medical workers, to maintain roads, to build low-income housing — are also drying up.
Because 40 out of 50 states have laws mandating that both the state’s overall budget and the budgets of nearly all cities be balanced, state governments are already laying off employees and cutting services. More than 14,000 workers in state governments lost their jobs in March. Terrifyingly, those losses, counted by the Bureau of Labor Statistics only stretch through mid-March, before the shutdowns were nationwide. Because 40 out of 50 states have laws mandating that both the state’s overall budget and the budgets of nearly all cities be balanced, state governments are already laying off employees and cutting services. More than 14,000 workers in state governments lost their jobs in March. Terrifyingly, those losses, counted by the Bureau of Labor Statistics, only stretch through mid-March, before the shutdowns were nationwide.
Local officials were blindsided by this crisis and the costs it required to rapidly ramp up medical care and the social safety net. But so far Congress has allocated only $150 billion for state and local governments from the trillions of dollars its approved for pandemic relief. It is too little and often it’s arriving too late. Local officials were blindsided by this crisis and the costs it required to rapidly ramp up medical care and the social safety net. But so far Congress has allocated only $150 billion for state and local governments from the trillions of dollars its approved for pandemic relief. It’s too little and often it’s arriving too late.
The Federal Reserve knows this. And so, the central bank, with consent from Congress and in partnership with the Treasury, has joined the effort to shore up local and state finances by taking the unprecedented move of “backstopping the municipal bond market.”The Federal Reserve knows this. And so, the central bank, with consent from Congress and in partnership with the Treasury, has joined the effort to shore up local and state finances by taking the unprecedented move of “backstopping the municipal bond market.”
But what is the “municipal bond market” and what does “backstopping” it mean exactly? In municipal bond markets, state and local governments borrow money from small and large investors. This allows them to responsibly support and grow their communities while staying within their tight budgetary boundaries. There are short- and long-term loan markets. And the Federal Reserve is now backstopping the short-term market — which municipalities use to smooth out revenues — because investors, surrounded by uncertainty, have become much less willing to lend.But what is the “municipal bond market” and what does “backstopping” it mean exactly? In municipal bond markets, state and local governments borrow money from small and large investors. This allows them to responsibly support and grow their communities while staying within their tight budgetary boundaries. There are short- and long-term loan markets. And the Federal Reserve is now backstopping the short-term market — which municipalities use to smooth out revenues — because investors, surrounded by uncertainty, have become much less willing to lend.
The Treasury and the Fed have named it the Municipal Lending Facility, which may sound arcane and soporific. But as Congress fumbles, this facility — powered by the Fed’s unlimited ability to create money — may be the only lifeline that communities have left. Unfortunately, the program’s structure excludes too many communities.The Treasury and the Fed have named it the Municipal Lending Facility, which may sound arcane and soporific. But as Congress fumbles, this facility — powered by the Fed’s unlimited ability to create money — may be the only lifeline that communities have left. Unfortunately, the program’s structure excludes too many communities.
The Fed has so far limited total lending through the Municipal Lending Facility to $500 billion. And while states can use it, only counties with more than two million residents and cities with more than one million residents qualify. That means that the Federal Reserve isn’t helping countless small and midsize cities. Among them are the 35 with the highest percentage of black residents, including Detroit, New Orleans, Baltimore and Atlanta.The Fed has so far limited total lending through the Municipal Lending Facility to $500 billion. And while states can use it, only counties with more than two million residents and cities with more than one million residents qualify. That means that the Federal Reserve isn’t helping countless small and midsize cities. Among them are the 35 with the highest percentage of black residents, including Detroit, New Orleans, Baltimore and Atlanta.
“In communities where residents are more likely to be black or Hispanic, residents are also more likely to be low-income, to have relatively worse health before the virus and to have jobs that do not allow working from home,” Leah Brooks, a professor of public policy at George Washington University, told me. “This trio of factors makes black and Hispanic communities particularly vulnerable.”“In communities where residents are more likely to be black or Hispanic, residents are also more likely to be low-income, to have relatively worse health before the virus and to have jobs that do not allow working from home,” Leah Brooks, a professor of public policy at George Washington University, told me. “This trio of factors makes black and Hispanic communities particularly vulnerable.”
New research confirms this racial divide, as do conditions on the ground: New Orleans expects a $100 million budget shortfall next year, and Detroit expects to be twice as deep in the red.New research confirms this racial divide, as do conditions on the ground: New Orleans expects a $100 million budget shortfall next year, and Detroit expects to be twice as deep in the red.
The exclusionary structure of the Fed’s Municipal Lending Facility also means that rural America is left behind. Sioux Falls, South Dakota — which is one of the country’s biggest coronavirus hot spots because of an outbreak at a local Smithfield pork processing plant — is one of many such areas left out.The exclusionary structure of the Fed’s Municipal Lending Facility also means that rural America is left behind. Sioux Falls, South Dakota — which is one of the country’s biggest coronavirus hot spots because of an outbreak at a local Smithfield pork processing plant — is one of many such areas left out.
Barbara Bry, a councilwoman in San Diego, which hasn’t been excluded from the Fed program, told me the city is still “facing a very challenging financial outlook.” The mayor, she said, is projecting a $250 million revenue shortfall.Barbara Bry, a councilwoman in San Diego, which hasn’t been excluded from the Fed program, told me the city is still “facing a very challenging financial outlook.” The mayor, she said, is projecting a $250 million revenue shortfall.
Even the loans from the $500 billion pool for those places that do qualify are quite risky for many municipalities because the money must be repaid in two years. (The airline industry, meanwhile, is being made whole with little sacrifice, and other bailed-out corporations have twice as much time as municipalities to repay their loans). Communities need grants, with no obligation to repay, and they need them now.Even the loans from the $500 billion pool for those places that do qualify are quite risky for many municipalities because the money must be repaid in two years. (The airline industry, meanwhile, is being made whole with little sacrifice, and other bailed-out corporations have twice as much time as municipalities to repay their loans). Communities need grants, with no obligation to repay, and they need them now.
It’s heartbreaking for me to see the Treasury and the Fed neglect low- and moderate-income communities again, because I am intimately familiar with how they did the same thing in the Great Recession.It’s heartbreaking for me to see the Treasury and the Fed neglect low- and moderate-income communities again, because I am intimately familiar with how they did the same thing in the Great Recession.
My first year as a forecaster and expert on consumer spending at the Federal Reserve Board was 2008. It was baptism by fire for a newly minted economist. I saw how as the year went on the Federal Reserve took bold actions to bail out banks and corporations, especially when equity markets were crashing that September. Then I watched as the Fed’s balance sheet took on trillions of dollars in low-interest loans for Wall Street while homeowners floundered. During the Great Recession, the Fed never showed up to help. And Congress stepped back too early from its increased stimulus funds to states.My first year as a forecaster and expert on consumer spending at the Federal Reserve Board was 2008. It was baptism by fire for a newly minted economist. I saw how as the year went on the Federal Reserve took bold actions to bail out banks and corporations, especially when equity markets were crashing that September. Then I watched as the Fed’s balance sheet took on trillions of dollars in low-interest loans for Wall Street while homeowners floundered. During the Great Recession, the Fed never showed up to help. And Congress stepped back too early from its increased stimulus funds to states.
As a result, the cuts to state and local government budgets were historically severe (and worsened by the takeover of many state legislatures by “small government” Tea Party conservatives). So even before Covid-19 many states and municipalities were still in bad shape. Which meant teachers, firefighters and other public servants were underpaid, student debt soared as public higher education was cut and roads went unrepaired.As a result, the cuts to state and local government budgets were historically severe (and worsened by the takeover of many state legislatures by “small government” Tea Party conservatives). So even before Covid-19 many states and municipalities were still in bad shape. Which meant teachers, firefighters and other public servants were underpaid, student debt soared as public higher education was cut and roads went unrepaired.
For decades, the Federal Reserve has not fulfilled its mandate for full employment. But now it has a chance for redemption — to end its habit of prioritizing Wall Street over Main Street.For decades, the Federal Reserve has not fulfilled its mandate for full employment. But now it has a chance for redemption — to end its habit of prioritizing Wall Street over Main Street.
These critiques are not meant to undermine the good the Federal Reserve has done so far. Lending directly to states and cities at all, even in the limited fashion pursued so far, is a big move that puts the Fed deep into uncharted territory. Never before has the central bank made loans directly to Main Street. But these unprecedented times call for even more unprecedented actions.These critiques are not meant to undermine the good the Federal Reserve has done so far. Lending directly to states and cities at all, even in the limited fashion pursued so far, is a big move that puts the Fed deep into uncharted territory. Never before has the central bank made loans directly to Main Street. But these unprecedented times call for even more unprecedented actions.
The officials and staff members at the Federal Reserve, many of whom I personally know, are good and capable — albeit highly risk averse — people. They earnestly don’t want to take the financial risk of picking winners and losers at the state and local levels.The officials and staff members at the Federal Reserve, many of whom I personally know, are good and capable — albeit highly risk averse — people. They earnestly don’t want to take the financial risk of picking winners and losers at the state and local levels.
After all, they are not elected, and voters who may disagree with their actions don’t have a direct way of holding them accountable. Still, the populist rise of Occupy Wall Street, the Tea Party and calls to “end the Fed” were partly a result of the Fed bailing out Wall Street and doing too little for people.After all, they are not elected, and voters who may disagree with their actions don’t have a direct way of holding them accountable. Still, the populist rise of Occupy Wall Street, the Tea Party and calls to “end the Fed” were partly a result of the Fed bailing out Wall Street and doing too little for people.
For the sake of self-preservation as well as the country’s well being, the Fed must go further this time. So it’s good news that, after hearing criticism from the local officials, the Fed is reconsidering the limited scope of the Municipal Lending Facility.For the sake of self-preservation as well as the country’s well being, the Fed must go further this time. So it’s good news that, after hearing criticism from the local officials, the Fed is reconsidering the limited scope of the Municipal Lending Facility.
Even if Congress fails to provide the needed grants to states and cities in follow-up relief packages, the Fed can gain authority from Congress to lend to more municipalities, possibly without any obligation to repay. If the Fed doesn’t, the devastation of the Covid-19 crisis may put a wide range of American institutions — not just the Fed — deeply at risk.Even if Congress fails to provide the needed grants to states and cities in follow-up relief packages, the Fed can gain authority from Congress to lend to more municipalities, possibly without any obligation to repay. If the Fed doesn’t, the devastation of the Covid-19 crisis may put a wide range of American institutions — not just the Fed — deeply at risk.
Claudia Sahm, the director of macroeconomic policy at the Washington Center for Equitable Growth, was an economist from 2008 to 2019 at the Federal Reserve.Claudia Sahm, the director of macroeconomic policy at the Washington Center for Equitable Growth, was an economist from 2008 to 2019 at the Federal Reserve.
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