Federal bailout of states is the next crisis

The NYT reports that Treasury has put restrictions on the relief funds it sends to states prohibiting their use for non-pandemic expenditures. People are not happy about this:

“It is clear the revenue loss is going to be coronavirus related; it is just that the expenditures are not specifically for coronavirus,” said Senator Sherrod Brown of Ohio, one of 46 senators in the Democratic caucus who signed a letter made public Sunday urging the administration to revise the ban.

He’s got a point, and it’s going to be really driven home when states start to go bankrupt and seek federal bailouts. But for the pandemic, someone like Brown might argue, said states would not have gone bankrupt, at least not right now. But counterpoint:

“It’s not fair to the taxpayers of Florida,” Senator Rick Scott, Republican of Florida and a former governor of the state, told reporters in the Capitol on Monday. “We sit here, we live within our means, and then New York, Illinois, California and other states don’t. And we’re supposed to go bail them out? That’s not right.”

He’s got a point, too. The pandemic may be the immediate cause of bankruptcy, but the proximate cause is decades of mismanagement, especially of public pension systems. The pandemic should not be allowed to be a fig leaf covering up what would otherwise be an embarrassing bailout.

In my post arguing that the U.S. would not split up like the E.U. seems to be I said, “If (and when) California goes bankrupt, it knows the federal government will bail it out, so it’s not facing the same incentives as Italy or Spain.” Whatever Mitch McConnell’s posturing, the federal government will indeed bail out bankrupt states. I hope, though, that Congress has the fortitude to bailouts come with requirements for fiscal and pension reform. As usual, though, I’m not holding my breath.