When we need emergency federal aid, we should use an old playbook

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What have we learned from the $3.5 trillion that the federal government passed out to ward off economic disaster in the pandemic? First, it was necessary. Second, it could have been done better. And third, an automatic revenue-sharing program would set up a better, faster, more effective response next time — if there is a next time.  

Here’s what’s beyond dispute: Massive federal fiscal aid worked. At first, the economy collapsed at a historic rate — but then it recovered, also at historic rates. Millions lost jobs but not incomes, homes or the means of survival. One can argue the details of scale and timing, but without a doubt, it worked. 

And yet, much of what was done was very imperfect. For example, the Payroll Protection Program (PPP) was supposed to save jobs, and it did. But less than 35 percent of the $800 billion spent provided wages to workers whose jobs would otherwise have been lost, according to an MIT study. Most of the funds ultimately went to business owners and their creditors. 

Moreover, there was fraud. The Secret Service recently estimated that $100 billion of federal relief was stolen mainly from newly created PPP and the economic disaster loan program

In March 2021, the American Rescue Plan Act sent $350 billion to state and local governments. But final federal guidance on how to spend those monies got released just last month. Delays in spending also plagued the $150 billion provided to state and local governments under the 2020 CARES Act.  

Meanwhile, tax revenues for many state and local governments have come in high, producing budgetary surpluses, without even accounting for American Rescue Plan Act funds. Some fiscally stressed governments are now planning to provide tax relief or to boost pension fund contributions. Others have explored using excess Rescue Plan funds to retire existing debt early. These are not bad things, but they too are grounds for improvement. 

The good news is that there is a way to avoid these issues in the future, and it uses a model we have used before. It’s called “general revenue sharing”. 

Between 1972 and 1986, the federal government provided funds to the states and localities by a revenue-sharing formula under the general revenue sharing program. First proposed in the Kennedy administration, it enjoyed bipartisan support from Republican and Democratic presidents and members of Congress. It was eliminated as part of the 1986 Tax Reform Act. 

Revenue sharing is based on the concept of “fiscal equalization” whose aim, according to the OECD, is to offset “differences in revenue raising capacity or public service cost” between central and decentralized levels of government. When economic crises hit, the federal government has much greater capacity than states and localities do. Revenue sharing helps make up the difference, automatically. 

Unlike the general revenue sharing program of the past, a revenue sharing program for federal emergency relief could be structured as an automatic program, avoiding annual appropriations. It would be deployed only in situations that states and localities cannot control — a pandemic or a global financial crash, for instance. Once the program was “triggered,” the federal government would provide unrestricted funds on a formula basis to support front-line workers such as teachers, first responders and other government employees. If a state wanted to provide greater aid to its private-sector businesses or employees (as was intended by PPP), it could use these funds to temporarily expand its unemployment assistance or state business loan programs.  

The economic effect would be counter-cyclical. Revenue sharing would automatically phase back down as the state and local economy improved. Thus, the program would aim to moderate economic declines and avoid over-stimulating the economy — another risk with the guesswork of appropriations programs in the midst of catastrophe. 

In recent decades, we have witnessed many events that required substantial federal fiscal aid. Some of these rescue packages were more regional and others clearly national in scope. We can safely expect that this problem is not going away, and we would be wise to prepare now for the next round.  

Martin Luby is an associate professor in the Lyndon B. Johnson School of Public Affairs at The University of Texas at Austin. 

James Galbraith is the Lloyd M. Bentsen Jr. chair in Government/Business Relations in the Lyndon B. Johnson School of Public Affairs at The University of Texas at Austin. 

Tags James Galbraith Martin Luby

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