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Covid’s Impact on State and Municipal Budgets

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interview

Covid’s Impact on State and Municipal Budgets

City Talk August 31, 2020
Covid-19
Economy, finance, and budgets

Photo: Manhattan InstituteSteven Malanga is the senior editor of City Journal, the George M. Yeager Fellow at the Manhattan Institute, and the author of Shakedown: The Continuing Conspiracy Against the American Taxpayer. This is the first of a two-part conversation.

How will this period affect state and municipal budgets?

State and local budgets have already been under stress for a decade. There’s a larger problem beyond the pandemic, though: states and localities have transitioned over time to increasingly more progressive (and hence volatile) forms of taxation, leading to sharp revenue declines during lean times. The recovery of state and local tax revenues from the 2008 recession, for instance, was the worst in the post-World War II era. Whereas state revenues had never fallen from one year to the next between 1950 and 2000, since 2000 we’ve seen three years when revenues have declined from one year to the next—and when 2020 is over, we’ll almost certainly see another. This is because, as states and localities have switched to progressive tax regimes, they’ve made their revenues more and more sensitive to economic downturns. The problem is that every recovery then begins from a lower tax base and takes longer to materialize, and governments must take extraordinary measures, like service cuts or the assumption of more debt, to continue operating. This volatility helps explain why we saw such extreme reductions in government workers, especially at local levels, after the 2008 recession—cuts that have never completely been reversed. And now we’re likely to see new rounds of reductions.

Volatility is the enemy of local government. Officials must continue to provide services in a recession; indeed, in some respects, demand for services grows greater in difficult times. Yet as long as governments rely on forms of taxation that are so sensitive to downturns, they will continue facing this problem. This is one reason why it’s becoming common for states and localities to ask for federal aid and bailouts during recessions—as they did after 2008, for instance, when the Obama administration provided money for schools to cushion the blow from that downturn. We see it again now in the demands from states and municipalities for up to $1 trillion in budget aid. They argue that we’re in an unprecedented situation with Covid-19, but as I and others were writing even before the virus struck, many places were unprepared for the next recession, whenever it came. Short of changing again how states and cities tax people, the only solution is for them to begin putting more money aside during the good times.

What is an overlooked trend in America?

When it comes to urban America, one overlooked and, to my mind, increasingly disturbing trend is the rise of anti-gentrification—the notion that we somehow have to stop neighborhoods from changing and growing. The policies being discussed to accomplish this, if enacted, will almost certainly freeze neighborhoods and create stagnation, even as other communities that resist engaging in these practices grow and move forward.

Since the 1950s, cities around the country have striven to rehabilitate neighborhoods. In the name of urban renewal, civic leaders have tried a host of solutions. Some turned out to be ineffective (at best), while others were simply wrongheaded and did more harm than good. But we’ve also discovered successful strategies, such as the ones that led to the restoration of civic order and the lowering of crime during the 1990s and 2000s.

But as many places have revived, activists have balked at these changes. Inevitably, more attractive areas bring new residents, higher property values, and increased rents. New businesses move in, offering better products and more jobs. And yet, even though studies have shown that gentrification doesn’t displace residents to a great degree, anti-gentrification attitudes have grown rapidly around the country, and some communities are starting to reject commonsense changes that might make things better. New housing projects, parks, and better retailers are suddenly a sign that something is going wrong. Communities are enacting policies to discourage gentrification—which really means discouraging further investment in the community—including rent control or rent-review boards for residents and businesses, the establishment of land trusts and other types of public ownership of land that make future investment impossible, and zoning regulations that inhibit new development. The sponsors of such proposals somehow believe that they can find a perfect balance that renews and uplifts communities without changing them much. At the very least, their ideas seem naive, amounting to extraordinary control by government of the way neighborhoods evolve.

Almost certainly, the result will be economic and cultural stagnation that does enormous harm, that substitutes government-approved projects for private investment, and that allows only those amenities deemed “appropriate” by government planners. Worryingly, these trends have accelerated in the wake of the cultural reevaluation taking place in many cities after the death of George Floyd in Minneapolis and the ensuing protests and riots. Suddenly, anti-gentrification is a component of racial equity—while community improvements, by contrast, smack of white privilege.

While calls to defund the police are troubling because of the implications for civic order in urban communities, the growing anti-gentrification movement seems like an effort to end community development and renewal, to lock neighborhoods and their residents into place, in a bizarre rejection of the optimistic view that the places where we live can and should get better over time.

What's on your summer reading list?

My reading list has been influenced to some extent by the pandemic. I wasn’t in the mood for a lot of bleak reading, so I’ve been spending time rereading classic comic novels like Lucky Jim, the Kingsley Amis tale of a hapless lecturer in a local university in England, a story that illuminates the pretensions and anxieties of the local professorate. That inspired me to reread Richard Russo’s novel Straight Man, a laugh-out-loud-funny story of the temporary chair of the English department at a small, underfunded public college in Pennsylvania. It’s a novel that comically (some might say tragically) anticipates what colleges have become today—a nest of ideologically driven, small-minded professors largely concerned with protecting their own jobs and academic turf.

I’m also reading a biography of the Duke of Wellington, The Iron Duke. I’ve become interested in him because I’ve read a series of historical novels about the Napoleonic Wars, including the well-known Aubrey–Maturin novels of Patrick O’Brian, which describe the maritime war, and then the Richard Sharpe novels of Bernard Cornwell, which are about the English army during that period. Wellington, of course, is a major figure especially in the Cornwell books, and characterizations of him are intriguing, which sent me to the biography of him. Cornwell, by the way, is also the author of the Last Kingdom series of historical novels about the reign of Alfred the Great and his efforts to expel the Danes from England and unify the country, which have been made into an enormously popular Netflix series.

Photo by Spencer Platt/Getty Images

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