- The CARES Act is a good first step, but Congress needs to further bolster state and local government aid to curb potential draconian measures to deal with budget fallouts
- The Great Recession’s lessons show that aid shortfalls then led to slashed state and local budgets, severely hampering the economic recovery
- Subsequent relief and recovery bills should include increased federal Medicaid matching funds, shown to have the greatest bang for the buck as economic stimulus.
The recently passed Coronavirus Aid, Relief and Economic Security (CARES) Act is an important step in the right direction toward providing economic relief during the coronavirus pandemic, but it contains some serious flaws, including inadequate aid to state and local governments.
The aid is both too stingy and too restrictive, providing insufficient relief to hold state and local budgets harmless against the effects of the crisis and forcing them to jump through bureaucratic hoops even to get this insufficient amount.
The lessons of the Great Recession tell us that this aid shortfall could carry serious economic ramifications.
Unlike the federal government, state and local governments must largely balance their budgets. This means that when revenues fall off a cliff because of lower incomes and spending during this economic crisis, state and local governments will face serious fiscal constraints, often leading to budget cuts that further depress demand in the economy. During the Great Recession, such budget cuts severely hampered the economic recovery.
The economic recovery also taught us what works: additional federal Medicaid matching funds. The American Recovery and Reinvestment Act of 2009’s enhanced federal Medicaid matching funds and helped to alleviate the budget constraints that state and local governments faced. Research has since shown that these increased federal funds stood out as providing some of the greatest bang for the buck as economic stimulus.
Sadly, the CARES Act does not include this simple increase in federal Medicaid matching funds, or any other mechanism that would cleanly deliver rapid aid to state or local governments. Some states, particularly those in the South, can unlock additional federal funding for public health by simply accepting the Affordable Care Act’s Medicaid expansion.
In any case, all states would benefit from provisions that injected additional federal Medicaid matching funds, helping to shore up their fiscal situations.
The CARES Act’s lack of guardrails for the large pot of money aimed at industry rescues, absence of economic conditions-based triggers, and inadequate support to state and local governments means there is still much to do if we’re to avoid staggering economic damage from the coronavirus pandemic.
A fourth legislative package aimed at relief and recovery is already necessary. A key component of that response must be substantial support to state and local governments, including additional federal Medicaid matching funds.