Supreme Court Justice Louis Brandeis famously called states “laboratories of democracy,” by which he meant that American local governments were free to undertake policy initiatives that might help determine what ideas work—and what don’t. The Biden administration’s American Rescue Plan will likely be the biggest funder of local government experimentation in the nine decades since Brandeis coined that phrase.
Far from an actual rescue for local governments suddenly flush with cash, the hundreds of billions of dollars that Washington is sending around America have unleashed a flood of ambitious ideas meant to transform communities through vague, speculative, and untested programs that local governments are often ill-suited to carry out. Many of these initiatives are just versions of decades-old programs, with a new spin but the same questionable incentives. At best, the result will be billions of wasted dollars, though we shouldn’t discount the government’s ability to make things much worse. In any event, this can’t be what Brandeis had in mind.
To understand where states and cities are headed, it’s helpful to think about how Biden’s plan evolved. When the economic lockdowns were imposed in the spring of 2020, local governments witnessed unprecedented collapses in tax collections. They began pleading with the Trump administration for aid to bolster their shrinking budgets. Washington responded by sending billions of targeted dollars to help with pandemic-related costs, including money for hospitals, schools, transit systems, child care, and disaster relief. The biggest part of the stimulus was aid to individuals and businesses via enhanced unemployment benefits and business loans. What local governments didn’t get, however, was unrestricted aid for their budgets.
Many mayors and governors spent the ensuing months complaining about their treatment from the Trump administration and lobbying for budget assistance. Trump balked at sending them money directly, though in December 2020 he signed a new $900 billion stimulus package extending federal benefits to individuals. By then, tax collections in many places were already bouncing back, killing any further talk of money to bolster spending by cities and states.
As a presidential candidate, Joe Biden sided with local governments in their budget pleas. One of his first legislative accomplishments on assuming office was the $1.9 trillion rescue plan, signed into law in March, which included some $350 billion for states, cities, and other types of municipalities. By then, stories about the significant rebound in local tax collections were so common that the Biden administration changed how it defined its “rescue” plan. White House officials admitted that the enormous chunk of money was meant to be a stimulus, to ensure that the painfully slow economic rebound that took place during Barack Obama’s presidency didn’t occur again. Though the Obama administration had passed a nearly $800 billion stimulus package of its own in 2009, it also raised taxes on high-income earners, small businesses, investors, and health-care companies, and significantly expanded business regulations—all of which stifled growth. With a similar agenda in mind for his presidency, Biden decided to go even bigger with stimulus.
The result might not be so stimulating. The Trump administration’s enhanced unemployment benefits, extended by Biden’s rescue plan until September, have proved so generous that many businesses and economists blame them for suppressing employment growth, as workers opt to collect benefits instead of getting back to work. The Biden administration has now given state governments the go-ahead to use stimulus funds to lure workers back with bonuses, even as the rescue plan pays them not to work. Connecticut is offering the long-term unemployed $1,000 if they get a job but is still paying generous jobless benefits. In California, the Biden stimulus, combined with the bullish stock market, has helped produce a $75 billion budget surplus—surely the biggest surplus any state has ever experienced. Governor Gavin Newsom is spending $12 billion of it in direct payments to state residents, on top of the payments provided to them by the relief bills in March and December 2020—even as the state struggles to get residents back to work. Even local Native American governments are getting in on the splurge. The Cherokee Nation, which received $1.8 billion from the Biden plan, is sending $2,000 to nearly 400,000 of its members. So far, this free money has mostly produced more cash in the bank, not economic stimulus. Last year, even amid double-digit unemployment, Americans’ savings rate increased to 17 percent of income, up from 7 percent in 2019.
Some cities are looking to use federal money to help fund the latest progressive idea for the poor: unrestricted annual payments to low-income households. Touted as universal basic income, the idea is to provide these households with a regular stipend that acts as a safety net. Milton Friedman once proposed something similar to replace welfare checks and the government social-services bureaucracy that accompanies anti-poverty programs. Today, cities including Chicago and Philadelphia are eyeing UBI payments not to replace the rest of the welfare state but simply to add to it, based on a pilot program in Stockton, California, that gives residents $500 a month. Chicago would spend $30 million to give monthly incomes to 5,000 low-income families as a form of “disaster relief” on top of the generous individual benefits the Trump administration had served up.
Some programs sound still more ambitious but lack details. Detroit plans to use stimulus dollars to create a $400 million fund with goals that include eliminating intergenerational poverty. The federal government has spent trillions of dollars over the last 50 years on just such a goal, to no avail. Do Detroit officials know something everyone else does not? It seems not: they plan to ask community residents how to spend the money. The idea is reminiscent of when President Richard Nixon took billions of poverty-program dollars and sent them to local activist groups based on the notion that they knew best what their communities needed. That money did many things, but reducing poverty was not one of them.
Local officials, who once spoke of needing this money to keep delivering basic services during the pandemic, now foresee the Biden dollars funding “transformational” programs. In a Zoom call last month hosted by the U.S. Conference of Mayors, city officials spoke of building community centers or offering incentives to lure businesses like supermarkets into low-income neighborhoods that need them. Yet these are precisely the kinds of projects that federal block-grant programs and empowerment zones have funded for decades to attract investment into underdeveloped neighborhoods. Collectively, such programs have rarely accomplished the overarching goals of dramatically improving neighborhoods—but the Biden rescue law provides a new funding source, albeit a temporary one, for more of the same.
With so much money floating around, anything qualifies as stimulus. Connecticut wants to spend $15 million in Biden money to send kids for free to museums, aquariums, and zoos during the summer. The state also proposes using stimulus funds to provide “safe, fun and healthy spaces for teenagers,” though what this would entail is not clear.
It can seem almost passé to complain about wasted federal money when Republicans and Democrats alike seem to have dismissed the idea that deficits and debt matter. The Trump administration, hardly filled with fiscal hawks, unleashed a torrent of spending with the enhanced unemployment benefits and business loans that states and the federal government were clearly ill-equipped to manage. The result: one report after another of massive fraud in both efforts. Now Democrats have devised a Great Society–style blowout that is unlikely to deliver much more of a long-term payoff than Lyndon Johnson’s original programs produced.
The Great Society did more than just waste money—outcomes among the poor, including employment and social mobility, declined during that period as incentives to work declined. The Biden money may produce similar results. Consider, for example, subsidized housing. California, among other states, is using the cash to make massive investments in government-bankrolled residential construction to offset housing shortages. The real problem, though, is that places like California have created so many barriers and added costs to building that the private housing market hasn’t been able to keep up with demand at affordable prices. Even government-backed “affordable” housing costs, on average, a whopping $750,000 per unit in California. At those prices, the Biden money will produce much less housing than it should. And when the cash is spent, California will still have a housing shortage and a market even more dominated by government-financed homes because the state didn’t address the causes of the problem.
Spreading federal government largesse around is easier than making painful reforms—but far less productive. It’s not a new lesson, but we’re about to relearn it.
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