As policymakers grapple with the coronavirus economic downturn, the response to the Great Recession of 2008 looms large. Many analysts believe the scale of Washington’s aid to state and local governments a decade ago was too meager, hobbling not just local economies, but the broad national recovery as well.
Back then states and local authorities deferred spending on all kinds of big-ticket items, from new buildings, roads and tunnels, to enterprise software systems and computer equipment, municipal vehicles, and much more.
The chart above shows net capital formation, as taken from the Federal Reserve’s Flow of Funds report. Spending peaked at the end of 2007 and didn’t bottom for another six years. As of the most recent update, it still hadn’t recovered to that 2007 level, meaning there’s a roughly 13-year backlog.
Earlier in May, MarketWatch spoke with the financial manager of the city of Napa in California about the legacy of the Great Recession. “Decisions were made to focus on the day-to-day service issues instead of infrastructure, but we never caught up and those issues hit us smack in the face,” he said.
Part of the economic rationale for sending fiscal aid to states and municipalities in the wake of the pandemic is that the research and analysis since the Great Recession shows the recovery was in the past ten years was slow because of a lack on infrastructure spending at the local level, said Steve Blitz, chief U.S. economist for TS Lombard. “You don’t want to repeat that mistake again.”
Despite the new flood of federal money making its way downhill, “there is a cloud in the silver lining,” Blitz told MarketWatch.
“As a municipal government, you have to be very wary of expanding your capital plant and maintaining your capital plant, especially in a period of inflation,” he said. That is, governments must budget not only for the cost of building a new building or buying a new computer system, but ongoing upkeep and repairs to those capital expenses. “You have to be careful that your tax base can maintain it into the future.”