Congress still needs to respond further to the COVID recession

BY STAN VEUGER AND JEFFREY CLEMENS

Friday‚Äôs data on the October employment situation provides a sobering reminder of the ongoing need for sound economic policy in response to the COVID-19 pandemic. Labor market indicators remain depressed. Notably, employment by state and local governments continues to decline even as other indicators continue on a tepid though steady recovery. From September to October, state and local government employment declined by a combined 130,000 (on a seasonally adjusted basis). 

The decline in state and local government employment reflects the accumulating effects of revenue shortfalls resulting from the pandemic, as well as the procyclicality of state and local government fiscal policy in the absence of federal support. As we have discussed elsewhere (in varying degrees of detail), revenue shortfalls lead state governments to lay off workers because they face balanced budget requirements and have insufficient rainy day funds to weather the pandemic.

How large are the shortfalls? Our estimates from early September suggest that the pandemic will suppress state government sales and income tax revenues by roughly $105 billion for the fiscal year extending from Q3 2020 through Q2 2021. Across all state and local government revenue streams, our rough estimate of the combined shortfall is roughly $240 billion. Congress should take up the task of developing an effective response to these developments when it resumes deliberations next week.

Learn more: Fiscal federalism and the COVID-19 shock in the US | New estimates of state and local government revenue shortfalls | Thinking about economic growth and the Biden tax plan

Stan Veuger is a resident fellow at the American Enterprise Institute.

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