The Economist (2022-02-26) Riva

24 The Economist February 26th 2022
United States

TheAmericanRescuePlan

Take the money and run

W

hen kay ivey, Alabama’s governor,

announced a plan to build two new

4,000-bed prisons, Democrats and pro-

gressive activists were unsurprisingly op-

posed. One objection was to how the con-

struction would be financed: $400m

would come from the state’s $2.1bn share

of funds from the American Rescue Plan

Act (arpa). This was intended partly to re-

lieve states from the economic and health

toll of the covid-19 pandemic.

Critics said the new prisons tackled nei-

ther. “This is a gross misuse of funds when

Alabama is at the bottom of the country in

providing health care,” says JaTaune Bosby,

executive director of the American Civil

Liberties Union of Alabama. Republicans

pushed the plan through in a special legis-

lative session focused on prison construc-

tion. Building is set to begin later this year.

Signed into law in March 2021, the

$1.9trn in stimulus from arpa(equivalent

to 9% of gdp) was predicated in part on the

belief that state and local governments

were in dire financial straits. In fact, tax re-

ceipts were recovering quickly even before

the law came into effect. As they now start

to prepare budgets for the coming fiscal

year, governors and state legislators are

finding creative ways to use the money—

for better and for worse.

Although some cash is being spent on

responsible investments that will yield

benefits for years, much is being used for

massive new infrastructure projects and

social programmes with long-term costs.

The indulging Democratic and Republican

governors are enjoying rising political for-

tunes. But the money will run out. For the

states, the fiscal high will be short-lived.

After a sharp contraction when the pan-

demic first hit America, state general funds

(mostly revenues from tax receipts) are

overflowing: many states are posting their

largest surpluses ever. Federal funds from

arpa, in the form of $350bn in direct trans-

fers and more than $300bn in aid to health

infrastructure, schools and transit agen-

cies, have given states unprecedented fis-

cal resources (see chart 1 on next page).

They have until 2026 to spend arpafunds

or lose them entirely, by which point many

budget analysts expect revenues will have

reverted to their pre-pandemic trend.

Though the law includes some rules for

how the money can be used, states have

been adept at deploying it as they see fit.

Start with the more responsible invest-

ments. Most states have stuffed away mon-

ey for a rainy day. The median state rainy-

day fund now stands at the highest level as

a share of spending in over three decades.

Unemployment-insurance trusts, deplet-

ed during covid, have been restocked (see

chart 2), though states have yet to use more

than $80bn in federal funds remaining for

that purpose. These sensible outlays will

help states weather the next storm. Many

have used arpato make one-time invest-

ments expected to bring long-term bene-

fits. Nearly every state is putting some

money towards clearing their collective

$873bn backlog in maintenance, cleaning

up pollution and replacing ancient com-

puters. arpalargesse has helped bolster

public-health systems and schools amid

the upheaval of the pandemic.

Many lawmakers are also giving money

back to their constituents rather than let-

ting it go to waste. Almost half of states

WASHINGTON, DC

Governors benefit politically today from spending federal money, but they are

creating liabilities for tomorrow

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