Federal Reserve Aid to State and Local Governments

September 18, 2020

testified today to the Congressional Oversight Commission regarding federal and Federal Reserve aid to state and local governments. The commission was set up to examine a $500 billion pot of money set aside by Congress to aid businesses and the states during the crisis.

I made two general points:

First, with the economy rebounding, state and local tax revenues likely won’t fall as much as previously thought. Indeed, state and local revenue losses continue to be overestimated by most commentators. Further aid from Congress or the Fed is not needed.

Second, the Fed’s program of direct lending to state and local governments undermines market discipline and risks politicizing the Fed. There is no market failure here that needs federal intervention. State and local governments can and should borrow from regular credit markets.

My testimony starts at about 1:30 on the video. My views and analysis were in sharp contrast to the other four panelists, so I appreciate Senator Toomey for the invite and his openness to hearing a contrasting perspective.




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