By: John C. Lesher
I’ve written about the virus itself in five prior blogs, but now it’s time to evaluate ancillary matters—very serious ancillary matters: who pays for all this and where does the money come from?
Economies are circular things that depend on a form of velocity—the velocity of money. I earn money and save some, but spend most of it on necessities and taxes. If I am lucky enough to have surplus income after those required expenditures, I use my disposable income on luxuries. I go to the movies, take a vacation, go out to dinner. At each step of this spend-the-income process, the money I distribute pays another person’s salary or pays for some good or service. The money representing those salaries and goods and services is, in turn, spent by the recipients and also taxed—the same dollar gets spent and taxed multiple times.
The more often and faster we Americans spend our dollars the faster money gets circulated and the Velocity of that money goes higher. More velocity means more jobs, but also more tax revenue to fund government. But what if some crazy, totally unanticipated happening throws a wrench into the smoothly running gears of our economic system? Something that stops monetary velocity cold?
Well, it happened. So now what? Washington has passed relief legislation totaling trillions of dollars for individuals and small businesses, but relatively little of that is directed at state government. Our federal constitution gives the federal government—and only the federal government—the right to print those Federal Reserve Notes we love to fold and put into our pockets. State and local governments are completely dependent on tax revenue generated from some combination of federal distributions, property taxes, fees, sales taxes and income taxes. The obvious problem is that when people lack employment, state and local economies sink rapidly.
State and local tax receipts have been eroded dramatically by the Coronavirus, but the typical government is reluctant to lay off the multitude of teachers, police officers, firefighters, judges, prison guards, etc., that provide services to civilians. States also contribute large sums for numerous other things we never see, but take for granted: Medicare/Medicaid payments, highway upkeep, health and pension contributions and aid to education are a few among many. State monetary reserves are eroding rapidly; significant curtailment of state aid to individuals and local communities and/or large scale layoffs of service personnel are disturbing possibilities. We can live with potholes, but police and fire protection are basics.
The money machine of Washington must turn its attention to the states. My suggestion is to go to the New York City playbook from the mid-1970’s. The City was effectively bankrupt and a rescue package was assembled by leading Wall Street investment bankers, led by Felix Rohatyn of Lazard Freres. Rohatyn’s creation was the Municipal Assistance Corporation (foreverafter, The MAC). It issued long-term bonds whose proceeds paid off the City’s short term debt, jawboned banks into lowered interest payments, required unions to accept wage freezes and benefit cuts, forced the City into fiscal prudence and successfully lobbied Washington for aid from the federal government of approximately 20% of the face value of the bonds issued. The City also ceded certain taxing authority to the State of New York and those “temporary” taxes remain in effect today.
A duplicate of the MAC program does not neatly fit into the needs of our states stemming from the Coronavirus. However, it gives a view from 30,000 feet of how an aid package could be implemented. Perhaps the federal government could set up a lending facility administered by the regional Federal Reserve banks that would lend money on very favorable terms to the states. Loan forgiveness over time would be part of the package, but only if a borrowing state adopted certain standards of fiscal restraint.
We have to get the country back to work and to our new normal, whatever that is. While doing so we must not lose sight of the fact that government and the services it provides through our tax dollars must be an equal partner in this recovery.