Since I've pretty much proven that conversation of this important issue is not possible on any social media platform (I just loath how partisanship seeps into everything) I'm going to share an article and some thoughts here.

Here's Treasury Secretary Mnuchin talking about how poorly run states shouldn't be bailed out. From the article:

Treasury Secretary Steven Mnuchin said states that had poorly managed budgets before the Covid-19 outbreak sent their economies reeling should not be rescued by the federal government.

“This isn’t just going to be a federal bailout of the states,” Mnuchin said early Tuesday on CNBC. “States that had specifically large expenses because of the coronavirus, like New York and New Jersey, it was the right thing that the federal government gave them money.”

He said he approves of local governments using coronavirus funding to enforce public safety through law enforcement, but not for revenue lost because of the economic shutdown or “states that were mismanaged” before the pandemic hit. 

This follows on the report last week where Senate Majority Leader Mitch McConnell said states should be allowed to file for bankruptcy.

Please get beyond the partisan politics here (you can discuss the politics, which is fair game, but check your bias first because I'm bored with cable news talking points). 

I find this entire conversation fascinating. It's clear that states and local governments (lumped together as municipal governments in the bond market) have been poorly managed. As we've said many times, they are functionally insolvent, in some cases incapable of maintaining even their basic, critical infrastructure without outside assistance. 

What is missing from an analysis of "poorly managed" state and local budgets is just what the federal role has been in this. I've watched cities and states pursue policies that were blatantly reckless from a financial prism solely because they counted on increased federal assistance in the future. 

To what extent was that assumption reasonable? If you listened to federal officials -- elected and non-elected -- speaking in public and in private, you had reason to believe further assistance would materialize (especially if you could make yourself seem poorer and more in need of assistance -- that is not an exaggeration, it's a criteria).

Indeed, the way states and localities really look reckless over prior decades is if you don't count on federal money in the future. One of the difficult bridges I've had to cross in communicating Strong Towns insights to people is that there are any who see no problem because they have booked on their mental ledger an accelerating level of ongoing federal assistance. Take that assumption off the balance sheet and there should be abject panic.

The federal government -- totally non-partisan in this assertion -- has encouraged the recklessness they are now struggling with. Federal monetary and fiscal policies -- federal growth policies -- have rendered states and localities insolvent.

One small example: Federal highway funding pays 90% of new construction and a much smaller percentage (20% to 50%) of the cost of maintenance. 

Q: Why? 

A: Because new construction creates economic expansion, aka: GDP growth, as measured on spreadsheets in Washington DC. 

Is it any wonder states have a culture of building roads but not a culture of maintaining them? 

I write about the competing incentives between the state/local level and federal level at the end of Chapter 5 of my book, in an example of New Orleans and GDP growth from hurricanes Katrina and Rite. Spoiler: The hurricanes devastated the wealth of NOLA but were awesome for GDP growth.

I think there will be state bailouts, but they will be small when compared to the problems and they will be a pittance by the time they trickle down to the city government level. Local governments and local communities are on their own. The sooner we realize that, the better off we're going to be.