Businesses are already asking governments to stop austerity

After decades of antipathy towards taxes and bureaucracy, companies are increasingly campaigning for better-funded regulators and local government.

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For much of the past decade, property developers and builders in Philadelphia have been doing something that appeared irrational: they lobbied the city government to spend more on the Department of Licenses and Inspections, the agency that regulates their business.

Industry groups aren’t known for seeking funds to bolster the bureaucracies that oversee them. But in Philadelphia, as in a growing number of local, provincial, and national governments, years of budget cuts, fiscal crises and negligible tax increases have made it hard to do business.

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Leo Addimando is the head of the Building Industry Association, the largest residential development trade group in Philadelphia. “In my business, we are experiencing major delays in reviews of our plans from various municipal agencies,” he says. “It’s a function, ultimately, of city agencies being understaffed for years because they're underfunded.”

In the decades after Ronald Reagan and Margaret Thatcher initiated the widespread deregulation of many industries, a generation of businesses benefited from tax breaks, lowered levies and other reductions in their obligations to the state. But their descendants are discovering that a prolonged lack of investment in the public sector has its own cost.

In Philadelphia, as in many US city and state governments, economic recovery has been years behind that in other parts of the country. Even before the pandemic struck, the city’s local government workforce (including school and public transport employees) had still not regained the level of employment it had before 2008. And now state capacity is about to take another blow. Addimando says bureaucratic response times are getting worse, as municipal government services contract under the stresses of the Covid-19 economic crisis.

“It's getting worse, and it will continue to get worse,” says Addimando. “I don't see how the federal government doesn't provide direct subsidy to both municipalities and small businesses.”

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Addimando isn’t an aberrant voice in the American business community. Although Republican Party politicians such as Senate Majority Leader Mitch McConnell and Donald Trump have denounced the idea of providing aid to state and local governments, many industry groups have rallied around the idea. On the national level, even notably conservative institutions such as the US Chamber of Commerce have called for immediate federal action to support local government.

During the first six months of the pandemic, the $2.2trn Cares Act delivered a powerful economic stimulus to the US economy. But even as the initial shock has worn off, and deficit hawks and scolds begin to re-emerge, there seems to be a broad consensus outside the Republican Party that a pivot towards austerity would be bad for business.

In July, the Chamber of Commerce wrote to US political leaders, warning that “state and local outlays and employment will have to be quickly cut, deepening and lengthening the economic downturn”, if the federal government did not help to replace the hundreds of billions of dollars local government has lost in business receipts.

What many business groups have begun to realise is that a government small enough to drown in a bathtub, in the words of an infamous Republican operative, doesn’t just mean lower taxes. A state undermined by conservative economic policy is also unable to properly maintain the transportation infrastructure needed to move goods, educate the workforce of the future, or clean up the brownfield sites that are needed for new developments.

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Austerity also subdues the wider economic growth upon which businesses depend. In the aftermath of the Great Recession of 2008, for example, experts at think tanks, in academia and international institutions such as the International Monetary Fund and the World Bank called for governments to trim their debt loads. Western governments made a quick move to budget cuts and other austerity measures.

“If economic growth is your benchmark, then in the period after 2010 a lot of countries look very feeble,” says Jonathan Davies, professor of policy studies at Leicester Castle Business School. “In Britain, growth was absolutely anaemic between 2010 and 2019. The government's wager was that austerity would stimulate investment by reducing the public burden on business. That unambiguously did not work.”

Many of these powerful national and international institutions had begun to change their tune by 2013, as the devastation caused by austerity policies in countries such as the UK and Greece became clear. Even in the United States, public budget cuts at the state and local level are widely seen as having impeded economic recovery and undermined federal stimulus efforts.

This year, as the Covid-19 pandemic swept across the globe, key policymakers at central banks and international institutions such as the IMF quickly called for huge government intervention and haven’t stopped demanding greater fiscal stimulus. Many right-wing politicians have embraced the idea that the economy needs public-sector help, at least in theory; Boris Johnson even claimed his spending plans were a successor to Roosevelt’s New Deal, although they were 200 times less ambitious and his Chancellor has since embarked on a return to austerity.

“In this extremely nasty economic downturn it's obvious that deficits are not the most pressing risk, even if you're someone who worries about debt,” says Devin O’Connor, deputy director of economic research at the bipartisan Committee for Economic Development in Washington, DC. “It seems clear [...] that underinvestment in state and local government slowed the recovery last time. A public sector job lost is the same as a lost job elsewhere in the economy.”

This doesn't mean business groups are unambiguously in favour of greater government spending. The Chamber of Commerce and other business associations aren’t calling for tax increases, and they aren’t recommending replacing lost state and local funds completely. Individual industry groups will naturally seek to maximise their own narrow interests; Philadelphia’s property developers may want better-funded local government, but they’ve also sought to preserve tax breaks for their industry.

There is also a scepticism, in industry circles, about how governments spend their funds. The top-line returns on infrastructure spending are substantial, but that doesn’t mean that Alaska's “bridge to nowhere” or the grotesquely overblown costs of mass transit projects in the US make for a good return on investment.

“A lot of business leaders don't trust the public sector to spend money wisely and make good investments,” says Devin O’Connor. “They think throwing money at the problem is not going to solve it and they would rather have the lower revenue burden, if they think they aren’t going to get good quality services.”

These kinds of tensions play into the hands of many Republican politicians, who are perhaps the world’s most determined deficit hawks. Despite the chorus of calls for state and local aid, GOP leaders have strongly resisted providing federal assistance.

Now that Joe Biden has won the presidential election, and while Democrats are likely to not have full control of Congress, many American political observers believe the Republican Party will call for austerity as a strategy to undermine their political foes.

“We should be able to have genuine bipartisan dialogue to make government more efficient, more effective,” says Timothy Bartik, senior economist with the Upjohn Institute for Employment Research. “But it's hard to do in a context where essentially one political party has the opinion that no matter how low our taxes are, they should be lower, and that there's really no need for government spending.”

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Back in Philadelphia, business groups continue to advocate for increased state capacity for those parts of the municipal bureaucracy that affect their bottom line. In industries that rely on inspections and permits, it is better to have an efficient civil service than a cash-strapped one.

“It would be unfair to say that the main problem is simply that city governments aren't funded, it's more nuanced than that,” says Addimando. “Getting quality people to work in city government is hard, because they don’t pay as much, and there are various union and other kinds of regulated positions that mean you don’t always get the most qualified candidates.”

But despite Addimando’s frustrations with how city money is spent, or who gets hired, he does not see austerity and budget cuts as an answer. Instead, he warns that a sustained lack of action could have very serious consequences for local government and for business.

“If they don't get serious and provide direct subsidies,” he says, “it's going to be a tragedy.”

Jake Blumgart is a staff writer for City Monitor.

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