In an op-ed published in The New York Times, Ben Bernanke argues that the US government should not repeat the mistakes made during the Great Recession. The federal government should provide more aid to state and local governments in addition to the social protection measures for the unemployed people. This is crucial to stabilize aggregate demand and restore full employment.
Many other states face ominous budgetary outlooks, too, implying the need for draconian reductions in essential services to state residents and large potential job cuts. Furloughs have already begun in New Jersey. Since February, state and local governments collectively have laid off close to 1.5 million workers.
We have been here before. I was the chairman of the Federal Reserve during the global financial crisis and the subsequent Great Recession. As part of the recovery effort, Congress responded with a stimulus package of nearly $800 billion. But that package was partly offset by cuts in spending and employment by state and local governments. Like today, with sharp declines in tax revenue as the economy slowed, states and localities were constrained by balanced-budget requirements to make matching cuts in employment and spending. This fiscal headwind contributed to the high unemployment of the Great Recession, which peaked at 10 percent in late 2009. Together with a subsequent turn to austerity at the federal level, state and local budget cuts meaningfully slowed the recovery.
In the current recession, unemployment rates have been much higher than 10 percent, and even with recent job gains the Congressional Budget Office estimates that, without further action from Congress, the unemployment rate at the end of 2020 will most likely be close to 11 percent. Those numbers are particularly dire for people of color. Black, Latinx and Native American communities not only face a far greater health risk from Covid-19; they also face higher rates of unemployment than white families. States and localities are in desperate need of additional federal intervention before the bulk of the CARES Act funding expires this summer. Budget gaps like the one in New Jersey cannot be closed by austerity alone. Multiply New Jersey’s problems to reflect the experiences of 50 state governments and thousands of local governments and the result, without more help from Congress, could be a significantly worse and protracted recession.
The CARES Act allocated $150 billion to state and local governments. This new aid package must be significantly larger and provide not only assistance for state and local governments but also continued support for the unemployed, investments in public health and aid as needed to stabilize aggregate demand and restore full employment.
