WEBVTT - How To Stop The Fiscal Emergency Facing U.S. Cities And States 0:00:10.520 --> 0:00:14.400 Hello, and welcome to another episode of the Odd Lots Podcast. 0:00:14.440 --> 0:00:18.759 I'm Joe Wisenthal and I'm Tracy Allowin. Tracy, do you 0:00:18.800 --> 0:00:22.799 remember you said on a recent episode something akin to 0:00:23.920 --> 0:00:27.720 we finally covered all of the different aspects of this crisis. 0:00:28.360 --> 0:00:32.280 I knew you were jotting that down in your memory 0:00:32.320 --> 0:00:33.960 and it was going to come back to haunt me. 0:00:34.240 --> 0:00:36.720 I stand by it. I think we've hit the really 0:00:36.800 --> 0:00:39.960 big ones, but I know you're going to pull another 0:00:40.000 --> 0:00:42.400 one out of your pocket right now. I think of 0:00:42.560 --> 0:00:48.440 like twenty more to come. I said the major strains 0:00:48.840 --> 0:00:52.120 in the financial system. I caveated it. You can't say 0:00:52.159 --> 0:00:56.639 that there are forty major financial strains, but you're going 0:00:56.680 --> 0:00:58.880 to I think I think they're white. I think that 0:00:59.040 --> 0:01:02.720 might literally be already more major ones. But nonetheless, we 0:01:02.800 --> 0:01:05.800 definitely have not hit all the major ones, and so 0:01:05.840 --> 0:01:08.760 I think that today's episode will be one that I 0:01:08.800 --> 0:01:14.600 think sort of unquestionably counts as major even if you 0:01:14.640 --> 0:01:18.240 know the number of remaining ones are still TPD alright, 0:01:18.319 --> 0:01:21.080 fair enough, and I think I know which one it is. 0:01:21.280 --> 0:01:24.080 It has to be the UNI market, right, Yeah, so 0:01:24.160 --> 0:01:28.880 absolutely so. Due to the nature of the crisis that 0:01:28.920 --> 0:01:32.120 we're seeing we have a situation in which a lot 0:01:32.240 --> 0:01:35.200 of the costs, particularly on the public health side, are 0:01:35.280 --> 0:01:39.240 falling on state and local authorities. At the same time, 0:01:39.319 --> 0:01:42.680 their tax revenue is rapidly drying up because there's so 0:01:42.800 --> 0:01:46.520 little economic activity going on within these state and local 0:01:46.560 --> 0:01:50.040 taxing authorities. And so what is a major employer of 0:01:50.080 --> 0:01:53.040 many people all in a major source of economic stability. 0:01:53.160 --> 0:01:58.040 They're all simultaneously running into rapid budget problems. And we've 0:01:58.040 --> 0:02:02.840 already seen just in the early days, major wave of cuts, layoffs, 0:02:02.840 --> 0:02:08.640 and so forth from cities, towns, and states around the country. Yeah, 0:02:08.639 --> 0:02:11.280 and I think from a market's perspective, I remember seeing 0:02:11.280 --> 0:02:14.520 a couple of headlines that basically said we didn't have 0:02:14.600 --> 0:02:19.120 any new issuance new muni bond issuance in March, and 0:02:19.120 --> 0:02:21.120 we had a bunch of outflows, I think, the most 0:02:21.120 --> 0:02:24.320 outflows on record from muni bond funds. So really we 0:02:24.400 --> 0:02:28.040 have this big investor exodus. And as you point out, 0:02:28.080 --> 0:02:31.000 if tax receipts are expected to fall and at the 0:02:31.040 --> 0:02:34.800 same time states can't issue as easily as they once 0:02:34.840 --> 0:02:37.600 could in the muni bond market, then that all adds 0:02:37.680 --> 0:02:41.600 up to a pretty big financing crunch at exactly the 0:02:41.639 --> 0:02:45.040 time where you wouldn't want to get that right is 0:02:45.040 --> 0:02:48.840 a financing crunch, and then that leads to an economic crunch, 0:02:48.960 --> 0:02:51.560 because you know, we saw during two thousand and eight 0:02:51.600 --> 0:02:57.440 two thousand nine financing constrained municipal authorities. They had to 0:02:57.440 --> 0:02:59.600 cut a lot of spending for the same reasons as now, 0:02:59.680 --> 0:03:04.040 and it's them years and years to recover that law 0:03:04.040 --> 0:03:06.400 of spending. And so you know, when we think about 0:03:06.440 --> 0:03:09.480 the sort of longer term ramifications of this and the 0:03:09.560 --> 0:03:12.160 damage that these last several weeks will do to the 0:03:12.200 --> 0:03:16.760 economy potentially for years to come, state and local finances 0:03:17.000 --> 0:03:20.320 is a huge problem that we're facing. Yeah, and I 0:03:20.360 --> 0:03:23.240 have to say, the only thing I really remember from 0:03:23.280 --> 0:03:26.519 the muni market is Meredith Whitney making that big call 0:03:27.040 --> 0:03:29.000 many many years ago. Do you remember that where she 0:03:29.480 --> 0:03:32.359 predicted a bunch of defaults, I think hundreds of defaults 0:03:32.360 --> 0:03:35.240 across the muni space, And of course that didn't come 0:03:35.240 --> 0:03:39.440 to pass. So I'm really interested in in returning to 0:03:39.520 --> 0:03:43.400 this topic. It's been a while. Yeah, the default didn't happen, 0:03:43.640 --> 0:03:46.600 It was more just played out on the real economic 0:03:46.720 --> 0:03:49.400 side and a slow return to hiring. So anyway, on 0:03:49.440 --> 0:03:53.200 today's episode, we're going to dive into the state, the 0:03:53.280 --> 0:03:57.360 state of state and local municipal finance, how much strain 0:03:57.440 --> 0:04:01.520 there on, what are the ramifications of a strain, and 0:04:01.600 --> 0:04:05.760 what can possibly be done to alleviate that pressure. And 0:04:05.880 --> 0:04:09.600 today we have three guests. This is a first time 0:04:09.600 --> 0:04:11.520 we've ever had this on the podcast where we've had 0:04:11.520 --> 0:04:14.320 three guests at once, so it could get a little crazy, 0:04:14.400 --> 0:04:16.160 but all three of them have been doing a lot 0:04:16.160 --> 0:04:18.920 of writing about this crisis and how it can be 0:04:18.960 --> 0:04:22.719 addressed from the sort of federal reserve side of what 0:04:22.720 --> 0:04:24.640 the Fed can do to help ease the problem, and 0:04:24.720 --> 0:04:28.159 what the Treasury can do. So I'm going to introduce 0:04:28.200 --> 0:04:31.719 our three guests today are Skanda Amarnav, director of Research 0:04:31.760 --> 0:04:35.880 and Analysis and employee America, Alex Williams, he's a grad 0:04:35.960 --> 0:04:39.880 student at the Levy Institute, and Yakov Fagan, he's an 0:04:39.920 --> 0:04:43.120 associate director of the Future of Capitalism Program at the 0:04:43.160 --> 0:04:46.760 Burgrowing Institute. I want to thank them all so, Sconda, 0:04:47.360 --> 0:04:51.800 thank you for joining us, Thanks sharing me on, Alex, 0:04:51.920 --> 0:04:57.320 appreciate you coming here, thanks for having me, and uh Yakov, 0:04:57.640 --> 0:05:01.200 thank you, thank you too. I want to introduce all 0:05:01.240 --> 0:05:03.839 three of you so that people could recognize your voices 0:05:04.920 --> 0:05:09.560 in advance. So, uh, to get started, Asconda, I'll start 0:05:09.600 --> 0:05:12.760 with you. Just talk to us a little bit about 0:05:13.320 --> 0:05:18.360 what we've seen so far from your perspective. Your talk 0:05:18.400 --> 0:05:20.360 to us about what you do with Employee America and 0:05:20.400 --> 0:05:23.919 how the initial wave of financing stress that we've already 0:05:23.920 --> 0:05:26.560 seen at the state and local level is sort of 0:05:26.680 --> 0:05:32.080 playing out in the economy. Sure, so employ America organization 0:05:32.279 --> 0:05:36.840 is focused on a combination of tighter labor markets sustainably, 0:05:37.200 --> 0:05:41.360 and to get there, obviously it requires fighting recessions aggressively 0:05:41.400 --> 0:05:44.800 and mitigating their costs. The costs of recessions aren't even 0:05:44.839 --> 0:05:48.120 just seen in recessions or the official and be our 0:05:48.440 --> 0:05:51.880 dates UM, especially when you think about like the weakness 0:05:51.960 --> 0:05:55.279 of the proprior business expansion, you think about the growth 0:05:55.400 --> 0:05:58.919 and the weakness in UM getting unemployment down. So we 0:05:59.000 --> 0:06:02.200 had high on the ployment for about three years and 0:06:02.240 --> 0:06:04.320 that was in large higher nine three years. I was 0:06:04.680 --> 0:06:07.679 longer than that, but we had state and local austerity 0:06:08.120 --> 0:06:12.760 UM that was helped sort of keep growth low and 0:06:12.839 --> 0:06:16.479 to keep unemployment high for a lot longer. And what 0:06:16.560 --> 0:06:19.719 we're seeing now is state and legal government's already starting 0:06:19.720 --> 0:06:23.359 to announce a lot of job cuts similar to what 0:06:23.440 --> 0:06:27.240 we saw around two thousand nine, and part of that 0:06:28.200 --> 0:06:31.120 right now, it's these are not fully in motion just 0:06:31.279 --> 0:06:35.120 yet because states built up um rainy day funds over 0:06:35.160 --> 0:06:38.680 the past expansion and they're now running them down. But 0:06:39.160 --> 0:06:41.800 it's not gonna last that much longer just because of 0:06:41.800 --> 0:06:45.000 the scale of the shock. So you have states that 0:06:45.080 --> 0:06:48.280 are saved a lot, saved up a lot, didn't really 0:06:48.320 --> 0:06:51.720 spend much during the past expansion, but are still in 0:06:51.720 --> 0:06:54.520 a pretty fragile position in terms of being able to 0:06:54.560 --> 0:06:58.799 manage this shock because they are budget constrained, as you mentioned, 0:06:58.839 --> 0:07:02.279 and I think and it's just that they're not able 0:07:02.320 --> 0:07:04.200 to sort of finance their way through it the way 0:07:04.240 --> 0:07:07.280 the U. S. Treasury and the federal government can. So 0:07:07.640 --> 0:07:10.280 I have a dumb question, and this is partly because 0:07:10.720 --> 0:07:13.120 I'm outside of the US at the moment and I 0:07:13.160 --> 0:07:16.440 haven't been following a lot of these dynamics as closely 0:07:16.480 --> 0:07:18.280 as you all have. But there seems to be an 0:07:18.280 --> 0:07:22.400 assumption here that state governments are on the front line 0:07:22.520 --> 0:07:25.840 of the coronavirus pandemic as well as the economic fallout. 0:07:26.320 --> 0:07:30.280 Why is that the case? Should states actually be the 0:07:30.280 --> 0:07:33.520 first line of defense and what's the role of the 0:07:33.520 --> 0:07:36.160 federal government here? So so part of this is a 0:07:36.240 --> 0:07:39.640 sort of the vestiges of a more federalist system in 0:07:39.680 --> 0:07:42.480 the past. So a lot of administration still ends up 0:07:42.600 --> 0:07:45.440 occurring at the state local level, even though the financial 0:07:45.520 --> 0:07:49.640 levers are still controlled in d C. So there's some 0:07:49.840 --> 0:07:51.920 there's a bit of a mismatch there that that's going on. 0:07:52.080 --> 0:07:54.600 But UM, should more of that be done at that 0:07:55.120 --> 0:07:57.320 be centralized, I think for a lot of these types 0:07:57.360 --> 0:08:00.040 of coordination and collective action problems as we see it, 0:08:00.080 --> 0:08:05.000 sort of procuring the necessary equipment and those are all 0:08:05.040 --> 0:08:08.880 things that should clearly be centralized in some way. But 0:08:09.560 --> 0:08:11.440 the reality of this is just that there's a lot 0:08:11.520 --> 0:08:16.000 of safety net programs public services UM that are typically 0:08:16.000 --> 0:08:19.360 in higher demand during a crisis like this in terms 0:08:19.360 --> 0:08:22.880 of the public health crisis and the economic crisis, and 0:08:23.200 --> 0:08:26.120 those are still connected at the state, state government level, 0:08:26.200 --> 0:08:28.960 the local government level, and yet they don't really have 0:08:29.040 --> 0:08:33.559 the flexibility precisely when you need it UM. So that's 0:08:33.600 --> 0:08:35.520 kind of what and so it ends up being collateral 0:08:35.559 --> 0:08:38.440 damage in the process is there's a lot of UM 0:08:38.559 --> 0:08:42.600 cuts to UM Andrew Cuomo had mentioned, had announced very 0:08:42.600 --> 0:08:47.000 recently the Governor of New York cuts to medicaid, um 0:08:47.080 --> 0:08:51.520 hiring freezes, plans for big expensure cutbacks in the coming year. 0:08:51.840 --> 0:08:53.600 So you've already started to see a lot of these 0:08:53.600 --> 0:08:57.320 announcements come out um that they're going to have to 0:08:57.080 --> 0:09:00.040 take an act to other types of economic activity a 0:09:00.280 --> 0:09:05.200 public sector performs. Yeah, I just want to add in that. 0:09:05.800 --> 0:09:08.480 You know, yes, it might be better that certain things 0:09:08.480 --> 0:09:11.000 are centralized, but this is the system we live in 0:09:11.160 --> 0:09:14.000 with the United States, and there are some advantages to 0:09:14.080 --> 0:09:20.640 governmental redundancy, especially in a world in which regional cycles 0:09:20.679 --> 0:09:25.240 are very disconnected in the United States between various regions 0:09:25.320 --> 0:09:29.880 and are driven by global shocks more generally. But a 0:09:29.960 --> 0:09:32.800 particularly perverse sort of aspect of the way that it's 0:09:32.760 --> 0:09:35.720 set up now is is Scanta mentioned, you know, cuts 0:09:35.720 --> 0:09:38.680 to Medicare and custom Medicaid right now, These programs at 0:09:38.679 --> 0:09:41.160 the federal level are actually set up to be mechanically 0:09:41.200 --> 0:09:45.200 pro cyclical at this point, where if a state government 0:09:45.240 --> 0:09:48.559 cuts its Medicare funding or its Medicaid funding, those are 0:09:48.559 --> 0:09:51.560 funded at the federal level through matching grants. So every 0:09:51.600 --> 0:09:54.240 dollar that they cut due to lost tax revenue or 0:09:54.280 --> 0:09:57.800 excess take up in other spending programs loses them an 0:09:57.840 --> 0:10:02.520 additional dollar of federal spending on those programs, which is like, 0:10:02.559 --> 0:10:04.640 there are lots of these sorts of little things, you 0:10:04.640 --> 0:10:08.440 know in this system of distributing, you know, federal abilities 0:10:08.440 --> 0:10:11.320 to state levels that you know have these sorts of 0:10:11.320 --> 0:10:15.640 perverse outcomes. So yeah, I want to go back to 0:10:15.760 --> 0:10:19.360 what you were just saying about the sort of governmental 0:10:19.520 --> 0:10:22.160 redundancy and the appeal of that. Like, we have this 0:10:22.440 --> 0:10:26.079 federal system of states have a lot of autonomy, cities 0:10:26.120 --> 0:10:29.040 have various authorities. We have it's a very it's not 0:10:29.160 --> 0:10:31.920 like other countries where maybe it's sort of all run 0:10:32.000 --> 0:10:35.280 down by one sort of centralized chain of command. That's 0:10:35.320 --> 0:10:38.480 our political system. What in a crisis like this, what 0:10:38.520 --> 0:10:42.760 do you see as the sort of advantages versus disadvantages? Well, 0:10:43.400 --> 0:10:45.720 I think we all know about the disadvantage, and I 0:10:45.760 --> 0:10:47.920 do think kind of from my point of view, it's 0:10:47.920 --> 0:10:52.040 still more disadvantage than advantage. But on the other hand, 0:10:52.120 --> 0:10:55.520 we when we've seen that the federal government, for whatever 0:10:55.559 --> 0:10:59.480 reason you attribute to it, hasn't been very swift in 0:10:59.520 --> 0:11:03.440 respond to this. But you've also seen that some of 0:11:03.440 --> 0:11:07.720 the states, particularly you know, especially up in Washington here 0:11:07.760 --> 0:11:11.760 in California, have been much faster at responding to this 0:11:12.440 --> 0:11:15.200 than the federal government. And you know, God, you know, 0:11:15.280 --> 0:11:17.200 God help us. If they hadn't been right, it could 0:11:17.200 --> 0:11:20.719 have been much much worse. So there is always some 0:11:20.800 --> 0:11:24.480 advantages to redundancy. But one one of the problems that 0:11:24.520 --> 0:11:26.480 I point out in the in the working paper that 0:11:26.480 --> 0:11:28.079 I put out though, is that the last sort a 0:11:28.120 --> 0:11:31.160 couple of months, you know, because of that governmental redundancy, 0:11:31.200 --> 0:11:33.840 the problem is is that there's redundancy in you know, 0:11:33.960 --> 0:11:38.880 ability to execute policy, but not inability to provide financing. 0:11:39.360 --> 0:11:42.080 So you have the situation where you know, these states 0:11:42.080 --> 0:11:44.480 know that if they enact these broad lockdowns like that's 0:11:44.520 --> 0:11:48.400 going to you know, essentially wreck their finances and so 0:11:48.880 --> 0:11:51.280 all of you know, one way of looking at basically 0:11:51.280 --> 0:11:54.520 what happened through January, February and March is that you 0:11:54.640 --> 0:11:56.960 basically had a whole bunch of these different state governments 0:11:56.960 --> 0:12:00.319 effectively playing chicken, where the you know, sooner they locked 0:12:00.360 --> 0:12:02.960 things down, the sooner they'd lose revenue and the less 0:12:02.960 --> 0:12:06.040 money they'd have to treat the aftermath. But the later 0:12:06.120 --> 0:12:08.360 they waited, they had more revenue, they'd have, but the 0:12:08.400 --> 0:12:10.400 worse of an outbreak they'd have. So it's this kind 0:12:10.440 --> 0:12:14.120 of you know, sort of distributed game of chicken. Because 0:12:14.160 --> 0:12:17.880 of this non integration of you know, budgetary and political abilities, 0:12:19.640 --> 0:12:23.840 it's a perverse incentive system for dealing with something like 0:12:23.880 --> 0:12:27.880 a pandemic. But since you mentioned that working paper, maybe 0:12:27.880 --> 0:12:30.240 we should talk a little bit about what you think 0:12:30.400 --> 0:12:34.600 would actually start to solve the problem of UM this 0:12:34.679 --> 0:12:37.640 sort of financing crunch in the muni market or in 0:12:37.760 --> 0:12:43.600 the state financial system. So I'm gonna let Yakov and 0:12:43.640 --> 0:12:46.520 Scanada talk about the community market because they, you know, 0:12:46.559 --> 0:12:49.880 are done more of the work there. But the proposal 0:12:49.920 --> 0:12:52.600 that I put forward basically looks at the fact that 0:12:53.120 --> 0:12:57.960 UM states have a you know, states tax revenue elasticity 0:12:58.040 --> 0:13:01.800 with respect to GDP. So basically, how much the state 0:13:01.800 --> 0:13:05.240 tax revenues grow as GDP grows is just around one 0:13:05.480 --> 0:13:07.960 or just a little bit below one in the long term, 0:13:08.000 --> 0:13:10.600 so states face a shrinking tax base, you know, long 0:13:10.679 --> 0:13:13.200 term without raising tax rates. But at the same time, 0:13:13.800 --> 0:13:16.680 in the short run, they have a very high elasticity 0:13:16.720 --> 0:13:20.040 with respect to unemployment. So if you know, unemployment falls 0:13:20.080 --> 0:13:22.120 by one point, you know, tax revenues will fall by 0:13:22.200 --> 0:13:24.800 one point five points or one point eight points. And 0:13:24.880 --> 0:13:28.240 so what I sort of did with this thesis was 0:13:28.280 --> 0:13:29.800 to come up with a sort of you know, you 0:13:29.840 --> 0:13:32.080 guys have had Claudia Sama on talking about the Som 0:13:32.200 --> 0:13:36.040 rule for recessions and for getting money out uh, and essentially, 0:13:36.400 --> 0:13:39.080 you know, state governments are subject to these same constraints 0:13:39.120 --> 0:13:42.120 because their balanced budget constrained entities. So the idea was 0:13:42.200 --> 0:13:44.760 essentially to take that and then move it over to 0:13:44.920 --> 0:13:49.280 the space of tax revenue replacement per unit unemployment. And 0:13:49.360 --> 0:13:51.280 so the idea was that it would create sort of 0:13:51.280 --> 0:13:55.520 an autonomous financing facility that didn't require you know, specific 0:13:55.640 --> 0:14:01.040 legislative discursements, that would support state revenues during a downturn 0:14:01.160 --> 0:14:04.079 that generally is you know, not caused by anything that 0:14:04.160 --> 0:14:06.360 happened in the states. The states, you know, are subject 0:14:06.360 --> 0:14:09.840 to regional and national and global trends much of the movement, 0:14:09.840 --> 0:14:12.400 and state level unemployment is not caused by state level 0:14:12.440 --> 0:14:15.679 policy per se. And so the idea behind this proposal 0:14:15.720 --> 0:14:18.080 would be that you know, for every you know, when 0:14:18.080 --> 0:14:20.440 you have something like the SOMB rules, so if unemployment 0:14:20.440 --> 0:14:22.960 goes up half a percentage point, over its three month 0:14:23.000 --> 0:14:26.200 moving average. Anytime that is triggered, it looks at that 0:14:26.880 --> 0:14:28.640 like it looks at the past a year or so 0:14:28.800 --> 0:14:31.440 of unemployment and takes that as a baseline, and for 0:14:31.560 --> 0:14:36.120 every percentage point that unemployment goes above uh that baseline rate, 0:14:36.520 --> 0:14:39.640 this facility would essentially transfer eight percent of the previous 0:14:39.760 --> 0:14:43.840 year's tax receipts like for that period to that state 0:14:44.200 --> 0:14:47.280 as a block grant um for the states to basically 0:14:47.360 --> 0:14:51.320 use for general revenue. Part of this is because states historically, 0:14:51.480 --> 0:14:54.000 when they are trying to close budget gaps, have you know, 0:14:54.160 --> 0:14:58.600 undertaken sort of more aggressive financing maneuvers, things like securitization 0:14:58.640 --> 0:15:02.040 of future revenues or things like privatization of existing services. 0:15:02.360 --> 0:15:04.280 But when you're in a financial crisis, or when you're 0:15:04.320 --> 0:15:07.120 in a crisis that has financial dimensions, even that sort 0:15:07.320 --> 0:15:11.000 of really aggressive dealmaking basically becomes impossible and you just 0:15:11.040 --> 0:15:14.320 need something in order to stop the bleeding basically. And 0:15:14.360 --> 0:15:17.080 so a big blanket policy like this that gives states 0:15:17.080 --> 0:15:19.360 wide latitude to deal with the causes of the crisis, 0:15:20.000 --> 0:15:21.840 I think would go a long way towards remedying the 0:15:21.920 --> 0:15:38.120 sort of perverse incentive system. Well, why don't we talk 0:15:38.200 --> 0:15:42.280 about from more of the market side. I mentioned that 0:15:42.320 --> 0:15:46.000 we've seen record outflows from a bunch of muni bond funds. 0:15:46.400 --> 0:15:49.200 We've seen strings in the market. I think almost no 0:15:49.400 --> 0:15:53.040 new issuance in the month of March. What would help there, Well, 0:15:53.800 --> 0:15:57.160 Scanda and I argue that what would really help there 0:15:57.160 --> 0:16:00.360 would be of the Federal Reserve intervene much it does 0:16:00.400 --> 0:16:03.800 in other markets and backstop the market and purchase some 0:16:03.920 --> 0:16:08.640 municipal bonds. I just just attack on there. At Yakoff's point, UM, 0:16:08.880 --> 0:16:11.800 we've seen already that they've been willing to engage in 0:16:11.840 --> 0:16:17.320 direct purchases for UM investment grade corporate funds, including buying 0:16:17.760 --> 0:16:21.600 the l q D E t f UM. So I 0:16:21.640 --> 0:16:25.040 think in this situation, given the sort of public interest 0:16:25.120 --> 0:16:30.880 need alongside UM, the AH the same sort of budget 0:16:30.880 --> 0:16:33.800 constraint financial constraint problem that sort of emerges in these 0:16:33.840 --> 0:16:38.880 types of crises, UH direct purchases of investment grade UM 0:16:38.960 --> 0:16:41.240 state and local government debt. It's a little harder because 0:16:41.240 --> 0:16:43.200 the market is more fragmented, but it's something that we 0:16:43.800 --> 0:16:46.920 I think at least at an additional degree of freedom 0:16:46.920 --> 0:16:51.920 to the more comprehensive fiscal solution that Alex is proposing 0:16:51.920 --> 0:16:55.960 in his working paper. So let's let me ask you 0:16:56.080 --> 0:16:59.520 further about that scondin then others can take it, because intuitively, 0:17:00.400 --> 0:17:04.720 it's okay, the FED, in theory, could buy municipal debt 0:17:04.760 --> 0:17:08.679 directly or the secondary market from the states or the 0:17:08.720 --> 0:17:13.080 towns to backstop their finances, and technically from a um 0:17:13.520 --> 0:17:16.320 from a mechanical standpoint, it's clear how the FED could 0:17:16.359 --> 0:17:18.440 do that because it creates money. On the other hand, 0:17:18.960 --> 0:17:22.919 there are obvious concerns about sort of democratic accountability that 0:17:23.040 --> 0:17:25.760 sort of reminds me of in Europe when they're like, well, 0:17:25.800 --> 0:17:28.600 if we just started back stopping all the debt from 0:17:28.600 --> 0:17:32.920 the different countries, then what is to limit their spending 0:17:33.080 --> 0:17:35.840 going forward? And things like that, and so the you know, 0:17:35.960 --> 0:17:39.960 Draggy and the Eurozone crisis proposed proposed that thing. We're like, okay, 0:17:40.000 --> 0:17:42.919 you can get back stopping from the ECB, but you 0:17:42.960 --> 0:17:46.960 have to submit to certain conditions regarding your spending. How 0:17:46.960 --> 0:17:51.159 should the FED navigate that issue now such that it 0:17:51.280 --> 0:17:58.040 can backstop state and local authorities without necessarily UM writing 0:17:58.080 --> 0:18:00.360 them a blank check? I think so one of the 0:18:00.400 --> 0:18:03.439 parameters to the proposal Yakov and I had put together 0:18:03.560 --> 0:18:07.040 a few weeks ago, was to make it sort of 0:18:07.040 --> 0:18:10.840 time dependent. I think there were aspects of the as 0:18:10.880 --> 0:18:15.719 of the drug EASA UM yes M proposal in one 0:18:15.760 --> 0:18:18.240 sense that helped make sure there was access to financing, 0:18:18.240 --> 0:18:20.760 but there was also sort of the pitfall that it 0:18:20.800 --> 0:18:24.640 also encouraged a lot of austerity that we can which 0:18:24.640 --> 0:18:27.760 is the exact opposite of which is, yeah, the exactly 0:18:27.760 --> 0:18:30.440 opposite if we anter something about the big picture UM 0:18:30.680 --> 0:18:34.560 problem that we really don't want to UM to exacerbated. 0:18:34.560 --> 0:18:36.960 Aside from sort of the pro pro cyclical aspect of 0:18:37.040 --> 0:18:40.320 st local government spending is we want these governments to 0:18:40.359 --> 0:18:43.560 spend what's necessary for the public health response, not to 0:18:43.600 --> 0:18:47.920 sort of meet arbitrary budget constraint that could be loosened 0:18:48.320 --> 0:18:51.240 with the right policies in place of the Federal Reserve 0:18:51.240 --> 0:18:53.920 of the federal government. So in this case, I don't 0:18:53.920 --> 0:18:55.960 think that the answer is to sort of make them 0:18:56.000 --> 0:18:59.800 commit to some austerity policy for the receivable future. What 0:19:00.320 --> 0:19:03.280 should be this should be constrained in our proposal is 0:19:03.920 --> 0:19:06.480 make it sort of the timeline should be consistent with 0:19:06.480 --> 0:19:10.000 the national crisis. Right that these is uh like the 0:19:10.000 --> 0:19:15.000 FEDS ability to effectively lend to state governments should be 0:19:15.480 --> 0:19:19.080 something that's available for a limited time, right, So, just 0:19:19.119 --> 0:19:22.000 as the commercial paper funding facility and two thousands, eight 0:19:22.000 --> 0:19:26.760 and nine was actually was open till February UM, so 0:19:26.800 --> 0:19:29.760 the really book ended the worst parts of the financial 0:19:29.800 --> 0:19:33.520 crisis and gave some time for corporations to roll over 0:19:33.600 --> 0:19:37.359 short term debt until we had gotten through the coverst 0:19:37.400 --> 0:19:40.560 period of the global financial crisis in the Great Recession. 0:19:40.920 --> 0:19:44.280 Something similar could be calibrated here in terms of making 0:19:44.920 --> 0:19:50.239 financing available to the state governments. For we call it 0:19:50.760 --> 0:19:55.080 approximately twelve months from the worst point in terms of 0:19:55.080 --> 0:19:57.680 the economic impact from this crisis. So we could take 0:19:57.680 --> 0:20:00.280 the peak on employment rate, or we could take um 0:20:00.320 --> 0:20:04.200 some other economic parameter or public health parameter, or even 0:20:04.680 --> 0:20:06.439 I think one of the things that's also missed in 0:20:06.480 --> 0:20:09.159 these in these discussions about you know, moral hazards for 0:20:09.200 --> 0:20:13.280 providing financing facilities for subnational entities in the US is 0:20:13.720 --> 0:20:17.399 the fact that in the Eurozone, these balanced budget requirements 0:20:17.440 --> 0:20:20.600 are centralized and centrally enforced. They are they are the 0:20:20.640 --> 0:20:23.919 monstric treaty saying you know, this is the space that 0:20:23.960 --> 0:20:26.800 your budgets are allowed to be in. UH in the States, 0:20:26.800 --> 0:20:31.200 in the us. By contrast, they are entirely enforced and 0:20:31.320 --> 0:20:33.719 acceded to at the local level. There are aspects of 0:20:33.760 --> 0:20:38.199 the state constitutions rather than anything in federal law. So 0:20:38.280 --> 0:20:41.840 you wind up having this situation where, um, on the 0:20:41.880 --> 0:20:44.240 one hand, the states are saying, yes, we are doing 0:20:44.240 --> 0:20:46.520 this on purpose, you know, and there's been studies showing 0:20:46.520 --> 0:20:48.879 that this affects muni bond yields in those states, you know, 0:20:48.920 --> 0:20:51.560 in this way and that way. Um, But it's the 0:20:51.560 --> 0:20:54.240 states saying that they're going to do it. But then 0:20:54.240 --> 0:20:57.960 the states also putting themselves in a position basically where 0:20:58.359 --> 0:21:02.280 it's impossible for them to sue basically like an anti 0:21:02.320 --> 0:21:05.359 correlated capital structure, So there's no way they can set 0:21:05.440 --> 0:21:09.959 their sort of financial house so that their financing costs 0:21:10.000 --> 0:21:14.399 get lower when there's a crisis. Because the financing costs 0:21:14.480 --> 0:21:19.200 are done, they're displaced entirely to basically capital accounts. Because 0:21:19.240 --> 0:21:22.199 these states with balanced budgets that only obtains for the 0:21:22.240 --> 0:21:25.960 general revenue account, anything that they do to sort of 0:21:26.000 --> 0:21:29.080 like build infrastructure or do a wide variety of other things, 0:21:29.320 --> 0:21:31.879 they can essentially move off budget in a way that 0:21:32.119 --> 0:21:34.520 like you see, you saw that we talked about the 0:21:34.600 --> 0:21:36.760 mundy blow ups that didn't happen. But one of the 0:21:36.760 --> 0:21:38.439 things that did happen is there were a lot of 0:21:38.440 --> 0:21:42.359 off budget enterprises that did blow up. The Detroit Water 0:21:42.400 --> 0:21:44.320 Authority was a very big one that went on for 0:21:44.359 --> 0:21:47.760 a long time because they had a complicated UH swaps portfolio. 0:21:48.200 --> 0:21:51.920 But states, you know, progressively do that when they securitize 0:21:51.960 --> 0:21:54.200 or when they privatize their revenues in order to make 0:21:54.280 --> 0:21:58.000 up for shortfalls in their general revenue account in a 0:21:58.040 --> 0:22:01.640 given period. They do it by pushing things into these 0:22:01.680 --> 0:22:04.199 capital accounts and into these off budget enterprises that are 0:22:04.240 --> 0:22:07.600 themselves fragile but which operate in the muni markets. So 0:22:07.640 --> 0:22:11.440 backstopping those muni markets does provide a kind of secret 0:22:11.520 --> 0:22:16.160 quasi backstop for you know, state's attempts to relieve themselves 0:22:16.160 --> 0:22:18.840 of their self imposed burden, which is sort of a 0:22:18.880 --> 0:22:22.440 different overall environment from the Eurozone of member states trying 0:22:22.480 --> 0:22:25.399 to deviate and spend more. Yeah, it could just quickly 0:22:25.440 --> 0:22:28.160 tack onto what Alex was saying here. Um, so there 0:22:28.160 --> 0:22:30.720 are balanced budget laws and rules, but as he's just 0:22:30.760 --> 0:22:35.000 pointed out, for each state, there are exemptions in various 0:22:35.040 --> 0:22:39.679 ways in terms of how to adhere or not adhere 0:22:39.720 --> 0:22:42.639 as much to them. Um And I think that sometimes 0:22:42.680 --> 0:22:44.840 it gets lost in this discussion because there's an assumption 0:22:44.880 --> 0:22:47.320 that there is a law and it is airtight, and 0:22:47.359 --> 0:22:49.879 that these states have to just start slashing spending as 0:22:49.920 --> 0:22:53.080 soon as tax revenue falls, and there are ways to 0:22:53.480 --> 0:22:57.920 um manage and maneuver around it that we're probably less 0:22:58.600 --> 0:23:01.439 there was probably less political willingness to explore them in 0:23:01.960 --> 0:23:05.320 the early tens in a way that I think now 0:23:05.600 --> 0:23:09.120 just because of the nature of this, should be explored 0:23:09.160 --> 0:23:13.480 more aggressively. There's also exemptions for certain types of natural disasters, 0:23:13.480 --> 0:23:17.960 exemptions through different types of what they are called the 0:23:18.280 --> 0:23:22.560 special districts that allow for certain types of certain parts 0:23:22.560 --> 0:23:26.199 of the state government to issue debt and not be 0:23:26.359 --> 0:23:30.679 constrained by these sort of arbitrary balanced budget laws and rules. 0:23:31.640 --> 0:23:35.240 M I'm curious, but why did the FED not buy 0:23:35.400 --> 0:23:38.960