On Additional Stimulus, Try a Little Federalism

On Additional Stimulus, Try a Little Federalism
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With the lame duck session of Congress beginning, federal policymakers are reviving stimulus negotiations that stalled before the election. Differences between the sides remain significant, with House Democrats insisting on over $2 trillion in new spending while Senate Republicans propose around $500 billion in additional aid. It’s uncertain whether negotiators will reach an agreement before the end of the year. But if they do, lawmakers should avoid more one-size-fits-all federal policy, especially since economic conditions have improved significantly in many states. They should try a little federalism instead.

A key set of issues involves whether to revive $600-per-week federal unemployment bonuses that expired in July, as well as extend other temporary unemployment benefits scheduled to expire in late December. For example, Democrats insist on reviving $600 bonuses in all states, while Republicans have offered $300 add-ons in all states instead. But neither of those approaches makes much sense in the real world, where state recoveries vary widely.

As the chart below shows, September unemployment rates ranged from a low of 3.5 percent in Nebraska to a high of 15.1 percent in Hawaii.

States by Monthly Unemployment Rates, April and September 2020

Source: US Department of Labor.

Most current state unemployment rates are also dramatically improved from the height of the lockdowns in April. Only five states still have unemployment rates above 10 percent, compared with 45 states in April. One in four states in September had an unemployment rate below the “high unemployment” threshold of six percent, compared with no states in April. And that’s before we learn on Friday about the significant state unemployment rate declines that occurred in October, when the national unemployment rate fell from 7.9 to 6.9 percent.

Federal lawmakers should recognize those differences and respect the wisdom of state lawmakers to design policies that best suit local circumstances. A good way to do so would be to offer states flexibility over any additional federal unemployment aid.

How would that work? Assume federal policymakers agree on providing an additional $150 billion in federal unemployment benefits nationwide in early 2021. Each state could have the option to spend their share either as Washington directs — on uniformly bigger, longer, and more widely available benefits — or instead as they see fit to help the unemployed given local needs. So instead of increasing all benefit checks by a Washington-prescribed $600 per week, one state might use some of those funds to retrain workers for in-demand jobs. Or instead of extending benefits by 33 weeks where unemployment is low, another state might use federal funds to prevent rising taxes on jobs that would harm job creation and wage growth.        

This approach has worked before. In 2002 following the 9/11 attacks, Congress gave all states a share of $8 billion in federal unemployment funds along with the flexibility to spend that money as they saw fit to best help the unemployed. The nonpartisan Government Accountability Office reviewed states’ responses and found some states increased benefits or improved benefit administration. But fully 30 states used the money to prevent hikes in state payroll taxes on jobs, which otherwise would have occurred as state trust funds depleted.

Given the epic scale of unemployment benefit payments this year, states are facing even greater payroll tax hikes this time to rebuild their trust funds and repay federal loans in the coming years. Some tax hikes will start in January, harming job creation and wage growth just as the economy emerges from the coronavirus recession.

If the post 9/11 experience is any guide, offering states this flexibility would enhance job creation, both by preventing higher taxes on jobs and by stimulating more job creation by employers. Allowing this flexibility may also make it easier to reach a bipartisan compromise on federal relief, improving the odds unemployed workers get additional help where it is most needed. Some still will object to letting individual states choose the best form such additional relief should take. But those arguments assume Washington lawmakers know local needs better than their state counterparts. They don’t. Letting state policymakers make better decisions with additional stimulus funds makes far more sense, especially as more state economies continue to recover.

Matt Weidinger is a Rowe Fellow in poverty studies at the American Enterprise Institute.

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