What the COVID-19 crisis means for state and local government finances

April 28, 2020 - Liz Schondelmayer

The COVID-19 crisis has brought about a lot of uncertainty. Economically speaking, many wonder what impact the virus will have on the country and on individual families. A major part of this conversation is how state and local governments will be affected, according to Michigan State University economist Ron Fisher.

Fisher, together with Michigan State University alum and California State University researcher Robert Wassmer, published an article in Tax Notes State comparing the current situation to the Great Recession of 2007-09 and making research-based policy recommendations about how the federal government can best support local and state entities. 

The uniqueness of our current situation, coined a “viruscession"

Fisher and Wassmer call our current economic situation a “viruscession” - meaning it is a recession brought on by government responses to the novel coronavirus strain, COVID-19. 

“Our current economic situation wasn't caused by underlying problems or conditions, it was caused by a policy response to try and stop a pandemic,” explains Fisher. “It's an entirely different type of economic downturn or recession than we've ever seen before."

Though the current situation shares many aspects in common with the Great Recession, such as a dramatic increase in unemployment and a subsequent decline in income, the policy response is vastly different. “The big difference with the current situation is that the people who have lost their jobs are still getting paid. We increased employment compensation to $600 a week, and people are receiving the financial payments from the federal government, $1200 per person.”

However, spending patterns are still vastly different due to the shelter-in-place orders. According to Fisher, people are spending less on nonessential and entertainment costs, but are spending more on home renovations, groceries and utilities.

Knowing what we don’t know: Why the viruscession is plaguing state and local governments with uncertainty

This viruscession is especially difficult on state and local governments. According to Fisher, though the impact is less obvious than that on the entertainment, hospitality and travel industries, the budget strains of increased spending to counteract the viruscession and a decrease in revenue - estimated by Fisher to be at least $150-200 billion total - may be devastating.

If state and local governments struggle financially, the overall national economy will as well. “People sometimes miss that state and local governments are incredibly important economically,” notes Fisher. “They employ more than 20 million people nationwide. That's 1 in 7 workers. They not only provide crucial public services -- hospitals, education, police & fire, water & sewer, transit, and more -- but they also buy private goods and services”

This is why, according to Fisher, the federal government should help state and local governments sooner rather than later. Says Fisher: “During 2007-09’s Great Recession, the federal government did adopt a major program to assist state and local governments, but they didn't do it until a year after the Recession started, and the aid was spread out over 5 years.” 

“We can't do that in this case. The state and local government  federal support has to come sooner, and it needs to be more concentrated.”

More uncertainty stems from the fact that the economic downturn is due to an unpredictable public health crisis. As Fisher explains, changes in the Michigan economy are driven largely by what is happening in the U.S. (and world) economy. Therefore, there is little state and local governments can do to change the course of the underlying economy - the best they can do is stabilize the direct impact on their citizens. 

“What's going to happen to the underlying economy depends on policy decisions taken by the government,” he says. “We don't know how long the Shelter-in-Place orders will continue or what actions the national government and Federal Reserve might take, and those policy decisions depend on  forecasts by health experts about how the virus is going to proceed and how quickly medical remedies can come.”

This is why economic forecasts and the fiscal implications for state and local governments for the future remain so debated among economists. “There are just too many variables and too much uncertainty, and we don't have good past data we can reference,” explains Fisher. 

Keep up with the latest COVID-19 updates and find MSU community resources here.