Skanda Amarnath, Yakov Feygin, and Elizabeth Pancotti on Municipal Bond Market Intervention and the CARES Act as Responses to COVID-19

Episode Summary

Executive Summary: The episode examines how COVID-19 exposed weaknesses in U.S. state and local finances and unemployment insurance systems. Guests argue the Fed should backstop municipal borrowing to prevent procyclical layoffs and service cuts, while the CARES Act’s unemployment expansion broadly helps workers but still leaves gaps and administrative bottlenecks. The conversation links both proposals to risk-sharing and a more effective optimal currency area.

Main Topics: Fed support for state and local debt (Priority: 5/5): Skanda Amernath and Jakov Fagan argue the Federal Reserve should use its legal authority to buy short-term municipal debt and stabilize state/local borrowing during the pandemic, preventing austerity and preserving essential services. Procyclical state and local budgets (Priority: 5/5): The guests explain that states and municipalities face falling tax revenues in recessions, lack sovereign-style flexibility, and often respond by cutting jobs, infrastructure, and services just when demand rises. History of Federal Reserve muni-market involvement (Priority: 4/5): Jakov traces how the Fed originally held municipal debt collateral, retreated after World War I and by the 1950s mostly limited itself to Treasuries, arguing today’s proposal is a partial return to earlier practices. CARES Act and unemployment insurance expansion (Priority: 5/5): Elizabeth Pankati details how UI works, how the CARES Act expands eligibility and benefits, and why the legislation was necessary to rapidly support displaced workers, gig workers, and caregivers. Administrative capacity and implementation delays (Priority: 4/5): The episode emphasizes that state UI systems and federal payment infrastructure are strained, meaning even good policy can reach people slowly because of outdated software, overwhelmed call centers, and missing banking/tax data. Policy design tradeoffs and incentives (Priority: 4/5): The guests discuss moral hazard concerns, balanced-budget rules, special districts, work-sharing programs, and the need to balance speed, coverage, and incentives in crisis policy. Optimal currency area and risk-sharing (Priority: 4/5): David Beckworth frames the discussion around how better fiscal backstops and labor market support would improve U.S. regional risk-sharing and make the dollar zone function more like an optimal currency area.

Key Arguments: State and local governments are structurally procyclical: they lose revenue in downturns and are forced to cut spending when public demand is highest, deepening recessions. The Fed already has some authority to buy short-term municipal debt under Section 14, and emergency lending under Section 13(3) could support broader state and local borrowing with Treasury authorization. A Fed muni backstop could lower borrowing costs, improve liquidity, and let states finance essential services rather than cutting teachers, police, infrastructure, and public health. Historically, the Fed did purchase municipal debt and has come full circle by moving from municipal support to Treasuries-only operations and now potentially back again. The CARES Act meaningfully improves unemployment insurance by extending duration, increasing weekly benefits, and expanding eligibility to freelancers and gig workers. Even with these improvements, many vulnerable people will still fall through the cracks because of slow payments, lack of bank accounts, tax-filing gaps, and overburdened state agencies. Work-sharing programs and eliminating work-search requirements would better preserve jobs and reduce administrative strain while keeping workers attached to employers. Stronger state-level fiscal backstops and UI systems would improve national risk-sharing and make the U.S. more resilient to asymmetric regional shocks.

Data Points: Recording date: March 27, 2020 - Host notes the episode was recorded before the Senate bill was finalized and aired on April 1. Airing date: April 1, 2020 - The discussion is framed as timely because policy could change before publication. Treasury-funded Fed facility under Senate bill: $45 billion - Described as Treasury money made available to back Fed lending facilities. Potential leverage of that facility: about $4.5 trillion - Guests explain the Treasury amount could be leveraged by the Fed into much larger lending capacity. Typical state UI replacement rate: about 50% of previous wages - Elizabeth explains how most state unemployment insurance systems replace only part of lost earnings. Mississippi UI maximum: $235 per week - Used to illustrate wide variation in state UI generosity. Massachusetts UI maximum: $823 per week - Used as the highest-state example in the episode. Average UI maximum: $450 per week - Host and guest discuss the middle-of-the-road state maximum. Standard UI duration: 26 weeks - Most states provide this baseline duration before federal extensions. Great Recession UI extension: 99 weeks - Elizabeth notes that federal extensions during the recession brought benefits up substantially. CARES Act weekly UI supplement: $600 per week - Federal top-up to unemployment benefits during the pandemic. CARES Act duration extension: 13 weeks - Adds weeks to standard state UI eligibility. Georgia UI duration: 13 or 14 weeks - Example of a low-duration state program. Montana UI duration: 30 weeks - Example of a state with longer-than-average standard duration. Worker coverage under expanded UI: Gig workers, freelancers, self-employed, and some caregivers - CARES Act broadens eligibility beyond traditional wage earners. Low-income direct payment: $1,200 checks - Discussed as part of emergency cash support, though delayed for some recipients. Call center staffing at Massachusetts UI office: 50 normally, 300 temporarily, need 400-500 more - Illustrates severe administrative strain on state UI systems. State/local share of government spending: about 70% - Jakov notes the broad importance of state and local government in public spending. All state governments: 50 states are investment grade - Used to argue Fed support would not necessarily be directed at insolvent states. Federal aid to states in bill: $150 billion - Mentioned as likely insufficient relative to the scale of the crisis. Potential benefit cap mentioned in alternative UI plan: Up to $75,000 annual income - Elizabeth references an alternative proposal to top replacement rates to 100% for workers up to this income. Commercial Paper Funding Facility duration: about 18 months - Used as a precedent for time-limited emergency Fed facilities.

Pivotal Quotes: "The Fed can and should support state government efforts to respond to COVID-19 right now." — Skanda Amernath / article title cited by host: Introduces the municipal bond proposal and its emergency rationale. "We want to close the option of buying state and local government debt when we exit the national crisis." — Jakov Fagan: Explains the proposal’s off-switch and why Fed support should be temporary and crisis-bound. "We probably shouldn't tell people with coronavirus to write cover letters from hospital beds or to attend job fairs right now." — Elizabeth Pankati: Argues for suspending work-search requirements during the pandemic.

Implications: The episode argues that crisis policy should prevent state austerity, preserve jobs, and speed aid delivery. If adopted, Fed muni support and better UI design would reduce regional inequality, improve risk-sharing, and strengthen the U.S. monetary union.