The Economist - USA (2022-02-26)

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

4,000­bed  prisons,  Democrats  and  pro­

gressive  activists  were  unsurprisingly  op­

posed. One objection was to how the con­

struction  would  be  financed:  $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 covid­19 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 financial straits. In fact, tax re­

ceipts were recovering quickly even before

the law came into effect. As they now start

to  prepare  budgets  for  the  coming  fiscal

year,  governors  and  state  legislators  are

finding  creative  ways  to  use  the  money—

for better and for worse. 

Although  some  cash  is  being  spent  on

responsible  investments  that  will  yield

benefits  for  years,  much  is  being  used  for

massive  new  infrastructure  projects  and

social  programmes  with  long­term  costs.

The indulging Democratic and Republican

governors are enjoying rising political for­

tunes. But the money will run out. For the

states, the fiscal high will be short­lived.

After a sharp contraction when the pan­

demic first hit America, state general funds

(mostly  revenues  from  tax  receipts)  are

overflowing: 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  fis­

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  pre­pandemic  trend.

Though  the  law  includes  some  rules  for

how  the  money  can  be  used,  states  have

been adept at deploying it as they see fit.

Start with the more responsible invest­

ments. Most states have stuffed 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.

Unemployment­insurance  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  one­time  invest­

ments  expected  to  bring  long­term  bene­

fits.  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

public­health  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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