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Federal Policy is a Local Job

In his remarks on job creation a few days ago, President Obama slid in a mention of additional federal relief funds to states and localities to prevent layoffs. That’s particularly welcome news since, as previously noted in this space, a little-noticed local government fiscal collapse is likely to set in soon, once the effects of real estate devaluation are reflected in local tax collections.

But the federal government needs to pay careful attention not only to sending more money, but to shoring up the capacity of state and local entities--particularly local entities--to spend the money well. In our federalist system, federal power generally plays out through local action and implementation, and the recovery is no exception. For federal investments to work there needs to be capable people in place to implement those investments at the state and local level. If that doesn’t happen, because of budget cuts or lack of capacity, federal efforts falter. (State and local capacity and capability also affect the private sector’s ability to get things done--ask anyone who’s waited weeks for a license or permit or tried to get a clear a title to an abandoned property.)

This is well illustrated by what’s happening in transit systems across the country. The stimulus package provides $8.4 billion to be spent on transit this year. This money will buy new buses, rail cars, and pay for construction projects. Because of a federal rule, federal funds, including Recovery Act funds, can’t be spent on operating funds for transit systems in big cities. So, even as transit systems fatten their fleets, they are making other cuts: laying off drivers, increasing fares, and cutting services. St. Louis had to suspend nearly half of its bus service and one-third of its rail service, and laid off nearly one-quarter of its staff, even though in 2008 ridership on the region's buses grew by almost nine percent, one of the largest gains in the nation over that time.

This dynamic plays out at the municipal level as well. A good chunk of local government jobs are hanging by a thread. Falling property values could create a local budget gap as large as $19.8 billion--and this excludes declines in sales and income taxes (which have dropped by $3 billion, according to Census data).  Local governments could also lose out as states cut their own budgets and their transfers to municipalities. (Bruce Katz’s testimony before the Senate Banking subcommittee on Economic Policy has more details on the local crisis and federal responses.)

If localities make cutbacks, that increases the unemployment rolls and stalls local spending on construction, procurement, and other areas that directly affect private sector firms. Layoffs also strip out the people implementing Recovery Act programs like the Energy Efficiency and Conservation Block Grants, granting the small business licenses, doing the real estate inspections, and issuing building permits--all the daily work that keeps other public investment and private enterprise moving forward. The economy doesn’t need more layoffs or delayed capital projects just as the recovery is starting to take hold. Our colleague Mark Muro has offered some ways for the feds to give localities fiscal stability.

The federal government also needs to make sure that it doesn’t overlook the need to bolster local capacity. Some municipalities and counties lack the staffing and experience to design and implement various federal programs. The federal government needs to put in place a national network of firms, non-profit organizations, and individuals that can provide technical assistance to make sure our national project of economic renewal can reach its fullest potential, along the lines of what HUD has started to do regarding neighborhood stabilization funds.

Washington gets all the attention because it’s the engine for counter-cyclical spending--local and state governments generally have to balance their budgets. But the focus on the feds distracts us from the reality that all policy happens in particular places, and those places need to be strong, effective, and able to the jobs Washington assigns them.