Senate Majority Leader Mitch McConnell (R-KY) voiced a very controversial opinion regarding COVID-19 relief spending on Wednesday. The controversial Senator stated that he’d sooner like to see cash-starved states declaring bankruptcy than receiving federal aid. Speaking on Hugh Hewitt’s radio show, McConnell spoke out against federal aid spending.
“My guess is their first choice would be for the federal government to borrow money from future generations to send it down to them now so they don’t have to do that. That’s not something I’m going to be in favor of,” McConnell said on the conservative radio show.
During an interview on the prominent conservative radio show, McConnell explained his reasoning. “I would certainly be in favor of allowing states to use the bankruptcy route. It saves some cities,” McConnell explained. “And there’s no good reason for it not to be available.” McConnell argues that he is against federal deficit spending.
States are quickly seeing their cash reserves vanish in the face of the pandemic. Due to mandatory lockdowns, states are not drawing in the tax revenue they usually do. It’s impossible for them to continue marketing small business owners when lockdown orders keep them closed.
This, combined with the need to keep first responders on payroll and increased spending on hospitals, has depleted most treasuries. States are now on the verge of economic collapse short of federal intervention.
States are not like the federal government. When they need to spend money, they have to have it available in their treasuries. Generally, states can’t deficit spend, and they have little credit to tap into for loans. Since they are subservient to the federal government, they can’t independently borrow money from foreign governments.
This means that when states want to increase spending, they have to raise taxes. They need to have money to spend it. When they run out of money, things get ugly, fast. State employees are unable to draw pay. State-funded programs close. Right now, programs like unemployment and Medicaid are in high demand. States running out of money would be catastrophic.
During the 2008 financial crisis, some firms floated the idea of states declaring bankruptcy. However, the idea was roundly criticized by economists.
The concept of individual states declaring bankruptcy could upend the national economy. The bond market would be thrown sideways, and states would face untenable interest rates.
In short, McConnell’s showing his lack of understanding, or care, for the economic situation facing most states.
