Cities and States need Aid – But Also Oversight

Faced with staggering public health costs and cratering tax revenue as a result of the coronavirus, officials in both parties are demanding federal aid for state and local governments. Even Senate Majority Leader Mitch McConnell (R-Ky.), who called for allowing states to go bankrupt two weeks ago, has moderated his stance, conceding that aid is now “highly likely.”

Some proponents invoke Franklin Roosevelt’s New Deal as a model for this aid, asserting that nationally financed public works programs and relief during the 1930s restored cities to fiscal health after the Great Depression. A new round of federal aid, they argue, might do the same today.

A closer look at the consequences of federal aid to local governments beginning with the New Deal, however, reveals a very different lesson: that without robust democratic oversight and wise management at the local level, federal aid can exacerbate the fiscal problems it was meant to solve.

By 1933, more than 1,000 local governments were in default, and 3,000 more would join them by the end of the decade. In desperation, local officials looked to the federal government for aid — and aid they received. In 1933, the Public Works Administration received an initial appropriation of $3.3 billion (roughly $64 billion today), and in 1935, the Works Progress Administration (WPA) added a $4.88 billion budget (roughly $89 billion today) to fund unemployment relief and national infrastructure projects.