On March 12, President Biden signed into law another stimulus bill to address the enormous damage done to our economy through COVID-19. There are principled arguments for and against most details of the $1.9 trillion bill. I feel Congress could’ve passed a much smaller bill, maybe half the size, and put in place an automatic second payment should the economy remain at risk through mid-summer. I’d have liked to see fewer regulations tied to spending and I’d have directed a greater share of money to poorer households, among many other concerns.
I’m not alone in having these pretty reasonable objections. However, anyone arguing for a smaller stimulus must admit that one lesson of the Great Recession is the asymmetry of risk. Too little stimulus is far worse than too much. Moreover, at a time when the U.S. Treasury can borrow at a negative real interest rate, too much stimulus is a fairly low-risk affair.
But, this is not a column about the stimulus, or good faith arguments about fiscal policy. Thankfully, many lawmakers are offering substantive criticisms of the bill. Still many are not, and I write today to call out the worst of the bad faith arguments. The most noxious version of anti-stimulus argument is some version of “the economy is recovering well, and this stimulus is nothing more than a bailout of badly run states.”
Though many of us might feel as if this recession is over, it is not. Among the bottom third of earners, employment is now down 23 percent since January 2020. Fully one out of every three American families is facing labor market conditions that took almost three years, from October 1929 to Summer 1933, to achieve. For many American households, employment options are really no different than in the Great Depression.
At the rate of employment growth over the past quarter, we won’t hit 2019 employment levels until the summer of 2027. Worse still, this final statistic uses Labor Department estimates of unemployment, which likely understate labor market distress by 50 percent. Even after two historically large stimulus bills and record monetary policy easing, our economy appears several years away from full recovery.
Far worse than downplaying the generational damage of the COVID downturn is claiming that this stimulus somehow bails out a few, fiscally reckless states. That is a lie. Payments will mostly be directed to poorer states, without regard to state budget shortfalls. Indiana is a poor state.
In the first round of stimulus, the CARES Act, Indiana residents received some $8.4 billion, along with another $2.6 billion to state and city governments. Indiana’s elected leaders pride themselves on their fiscal probity. And, if the goal is solely a balanced budget and large reserve, they are right in doing so. But, without the CARES Act and later stimulus, Indiana would’ve faced its worst budget crisis in state history.
Between lost revenues and extra costs, the 2020 stimulus payments plugged a budget shortfall of close to $3.5 billion. That’s more than a billion dollars higher than our Rainy Day funds balance last January. This does not account for huge tax losses to local government. The stimulus passed during the Trump Administration kept Indiana from financial catastrophe.
Because of these stimulus payments, the dire need for fiscal relief to state and local governments has eased. What hasn’t changed is who will pay disproportionately for this new stimulus.
Residents of every state pay federal taxes, and in return federal tax dollars flow back to each state. But, only eight states pay more federal taxes than they receive back in payments. For every dollar Indiana taxpayers send to the federal government, we get $1.30 back. We are a top beneficiary of federal government largesse. Moreover, it is useful to compare ourselves to those eight ‘donor’ states who pay more than they receive in federal taxes.
Among those states, there are not only heavy federal tax payments, but these states tax themselves far more than do Hoosiers. While Indiana collects only $3,872 per person in taxes each year, the eleven ‘contributor states’ collect an average of $6,112 per person. These states also average population growth over the last decade of 6.6 percent, compared to Indiana’s 4.2 percent. These ‘donor’ states spend, on average, 43 percent more per K-12 student than does Indiana. As a result, they enjoy a much better educational attainment, and the typical resident earns 11 percent more per person than do Hoosiers.
Residents of these ‘donor’ states receive back from federal coffers $783 per person less than they paid in taxes last year. Folks from Indiana received a whopping $2,445 per person more in federal spending than they paid in. With the COVID stimulus, Indiana slid into the eighth most federally subsidized state in the union, stuck right between Missouri and Alabama. We are now ranked well ahead of Mississippi in the amount of federal support we receive.
It is simply untrue that these COVID relief or stimulus bills are bail-outs to irresponsible state governments. They are mostly wealth transfers from more affluent Americans to poorer ones. There’s no reason to feel sorry for anyone who is affluent enough to miss the stimulus payment. But, we must keep in mind that it is disproportionately they who will pay for it.
That Indiana ranks eighth among these poorer states is cause for reflection. Hoosier leaders are eager to claim credit for economic success. So, basic integrity requires accepting responsibility for our declining prospects as well. We’ve now slipped into the bottom of the pack, and are heavily reliant upon the goodwill and largesse of more affluent citizens around the nation.
Hoosiers would be far better off to acknowledge these unpleasant facts about ourselves and learn a few lessons from those states who’ve been more economically successful. We also need to be honest about what the COVID stimulus does, and does not do. Just a few legislators peddling bad faith criticisms of this legislation are enough to crowd out good faith disagreements. Today our Republic needs more principled, good-faith disagreements.
Michael J. Hicks, PhD, is the director of the Center for Business and Economic Research and the George and Frances Ball distinguished professor of economics in the Miller College of Business at Ball State University. Hicks earned doctoral and master’s degrees in economics from the University of Tennessee and a bachelor’s degree in economics from Virginia Military Institute. He has authored two books and more than 60 scholarly works focusing on state and local public policy, including tax and expenditure policy and the impact of Wal-Mart on local economies.