Red states will soon come to blue states for bailouts. Democrats should remember what happened to Europe

In the short-term, hard-hit states like New York needed help. But that's all about to change

The coronavirus pandemic has wrecked the economies of US states. Already there is substantial discourse surrounding the need for the federal government to coordinate “bailouts”. Indeed, automatic stabilisers such as federal unemployment payments have already kicked in, with some 26 million new applications for unemployment benefits.

In the short-term, states such as New York which have been most adversely affected by this virus will require the most assistance. However, in the mid to long-term, as the whole US economy settles into a sort of induced hibernation, all states are likely to require help.

It has long been the case that blue states have subsidized the state budgets of red states, whatever Mitch McConnell says. This presents a challenge to the traditional Republican claim to be the party of fiscal responsibility, with the low income tax rates offered by Republican lawmakers being paid for by the financial prudence of Democratic politicians. The tax structure of blue and red states will exacerbate this issue as lockdowns continue. Of the ‘Big Four’ (California, Florida, New York and Texas), the two red states are likely to see their state finances thrown into the greatest turmoil. This is because Texas and Florida make up their state budgets with sales taxes (and no one is buying anything) while California and New York rely on taxes on incomes (which will decline during coronavirus, but will not drop off altogether since most high earners are able to work from home).

A few financially reckless states turning to their more thrifty peers for a bailout is somewhat reminiscent of the Eurozone crisis of the early 2010s. The major difference is that while southern European states ran up large and unsustainable debts in order to finance public spending, Republican states have used federal aid to allow for low tax rates without taking too large a cut out of public services. However, while states can’t really go into debt (meaning they can’t declare bankruptcy, again in spite of McConnell’s current proposal), the response to the shortcomings of Republican state legislators and governors will mirror the aid given to southern European states during the Eurozone crisis.

The real difference will likely be in how bailouts are portrayed in the US. While southern European economies have endured unfavorable comparisons to more financially stable northern European countries, Republicans have long falsely claimed that it is in fact red states which fund the financial recklessness of blue states. For a long time, this narrative was left unchallenged; however, in the current situations, Democrats and in particular Gov. Andrew Cuomo have publicly hit back whenever it’s been wheeled out to appease (or rile up) Republican voters. There’s a chance people will start to see beyond the spin and that the narrative may soon completely collapse.

If Democrats are going to start claiming the role of the fiscally responsible party, there are a number of lessons they might learn from the Eurozone crisis. For one, the bailouts given to southern European states came with the condition that countries receiving aid would have to get their finances in order, mainly by cutting government spending. If Democrats demand that red states get their houses in order (which does seem reasonable), it is likely that Republican legislators will cut public services rather than impose income taxes. Such cuts to state spending would place the burden of financial stability on the shoulders of the poorest, while state legislators would be safe in the knowledge that they could blame Congress for such cuts. What’s more, the spending cuts implemented across the EU following the last recession only worsened that crisis.

The main lesson Democrats should learn from the Eurozone crisis, though, is not from the bailouts for southern European states but from the response to the austerity measures that went with them. In the later half of the 2010s, resentment in many European countries gave way to outright rejection of the European Union project. These frustrations have gradually led to a lessening of the fiscal restraints pushed for by Germany and other northern European countries. The coronavirus pandemic seems to have completely undone them. While it may be fiscally prudent for Democrats in Washington to tie bailouts to demands for financial reforms, this will likely lead only to short-lived reforms as red state politicians inevitably lead a backlash against such measures.

Instead, Democrats should seek to change the narrative surrounding state finances. Democrats need to more forcefully show that the tax structures of blue states lead to greater stability than the system favoured in red states. They should also use this as an opportunity to show that a system which favors public services funded by income taxes is not only possible but practical — especially in unforeseen situations and emergencies.

When red states come cap-in-hand to Congress in the coming months, Democrats should take the opportunity to demonstrate the fiscal security offered by a progressive system. That way, the entire country benefits — and their own party may well also get a boost in the November election.