Money  /  Comment

Cities and States Need Aid — But Also Oversight

Federal funding during and after the New Deal ended up hurting cities because of who spent it and how.

Faced with staggering public health costs and cratering tax revenue as a result of the coronavirus, officials in both parties are demanding federal aid for state and local governments. Even Senate Majority Leader Mitch McConnell (R-Ky.), who called for allowing states to go bankrupt two weeks ago, has moderated his stance, conceding that aid is now “highly likely.”

Some proponents invoke Franklin Roosevelt’s New Deal as a model for this aid, asserting that nationally financed public works programs and relief during the 1930s restored cities to fiscal health after the Great Depression. A new round of federal aid, they argue, might do the same today.

A closer look at the consequences of federal aid to local governments beginning with the New Deal, however, reveals a very different lesson: that without robust democratic oversight and wise management at the local level, federal aid can exacerbate the fiscal problems it was meant to solve.

By 1933, more than 1,000 local governments were in default, and 3,000 more would join them by the end of the decade. In desperation, local officials looked to the federal government for aid — and aid they received. In 1933, the Public Works Administration received an initial appropriation of $3.3 billion (roughly $64 billion today), and in 1935, the Works Progress Administration (WPA) added a $4.88 billion budget (roughly $89 billion today) to fund unemployment relief and national infrastructure projects.

The WPA — which ultimately employed around a third of all unemployed Americans — and other New Deal programs did produce 124,000 new bridges, 350 new airfields and more than 40,000 new public buildings, including schools, hospitals and civic centers. But these improvements often came with unforeseen costs.

Fatefully, rather than create a system of truly public works with nationally uniform administration, the WPA built on a foundation laid by the Hoover administration that had routed emergency financing through local private banks. As Hoover’s system of limited loans became Roosevelt’s system of massive grants, local business elites maintained their roles as administrators. Indeed, many even helmed local New Deal agencies themselves: The director of the Seattle WPA was also the leader of the local Chamber of Commerce and a real estate developer in his own right, while Cleveland’s WPA director for much of the 1930s was a former railroad executive and close ally of the city’s Chamber of Commerce.

This structure enabled Roosevelt and local business boosters alike to frame public employment and works programs as bolstering U.S. federalism, not overturning it.

The problem? It often empowered the very bankers and developers whose business practices — in particular overheated real estate speculation — had helped trigger and accelerate the Depression in the first place. Thanks to the New Deal, they now had new powers to administer vast sums of federal aid.

Unsurprisingly, many chose to use it to boost the values of their own faltering real estate investments and businesses. Everything from small-scale street-paving operations in Queens to bridges in Cleveland or suburban lakes and park systems in New Jersey were designed to salvage and reinvigorate local property and business values — and, for a time, it worked.

Neither federal nor local officials objected, because they assumed that this publicly subsidized growth would eventually benefit government budgets via increased property tax revenue, which fit with their goal of restoring local governments to solvency and self-sufficiency. This did not always happen, however.

The New Deal-financed bridges, tunnels and highways that undoubtedly generated employment and economic growth in the short run also siphoned taxpaying residents and businesses away from downtowns and toward new suburban subdivisions beyond city limits. Even where suburban-style development remained within cities’ municipal boundaries, sprawling new subdivisions saddled cities with costs for expensive new schools, parks and infrastructure. Inefficient land use and real estate speculation had contributed to the Depression, and now federal aid was relighting these fiscal time bombs and dropping them on local governments all across the country.

Post-World War II urban renewal projects, while often focused on city centers, expanded the unanticipated and mounting fiscal costs of ill-conceived federal aid that prioritized the input and interests of business elites. These demolition, clearance and redevelopment programs destroyed thousands of small businesses — then, as now, the economic lifeblood of many cities and communities. They also disproportionately devastated African American neighborhoods as well as working-class white and immigrant communities. Where renewal projects failed to attract new private development, cities were left with vast stretches of vacant land — land now effectively removed from city tax rolls.

From the 1940s through the 1960s, while federal aid was plentiful to begin clearance projects or for the construction of new public works such as bridges or sewage plants, financing for their staffing and maintenance remained a local responsibility. As suburbanization accelerated, many cities faced worsening economic conditions again by the late 1960s, and these costs helped bust already strained city budgets.

This contributed to cities taking on significant debt, a good deal of which officials imagined repaying with the tax yields generated by the urban renewal projects and other federally backed growth schemes. When this revenue failed to materialize, many cities found themselves facing down fiscal crises and debt burdens in the 1970s that echoed those of the 1930s.

The result: Programs intending to solve local government funding problems actually hurt the fiscal health of cities in the long run.

Even where programs were successful, the undemocratic operation of federal aid often entrenched and accelerated racial and class disparities within cities. Out of the 255 playgrounds built with WPA funding in New York City, for instance, only one was located in predominantly African American Harlem. Employment discrimination on federal construction projects was also rampant. The new suburban subdivisions promoted through New Deal aid also were largely off limits to nonwhites, thanks to both private discrimination and publicly sanctioned and underwritten “redlining,” which made it nearly impossible for African Americans to get standard mortgages, entrenching both segregation and predatory lending.

This dispiriting history doesn’t lessen the need for aid to states and localities today. Given the projected drop-off in state and local tax revenue from the coronavirus pandemic, such aid will be essential to our national economic recovery.

Yet the lesson of the New Deal aid to states and cities is that how aid is spent is as important as providing it. Without more robust targeting of aid to working people and small businesses as well as creating structures for meaningful democratic accountability and wise planning, those with access and capital will find a way to enrich themselves at the expense of our communities’ fiscal health. As the philosopher John Dewey complained in 1935: “Take the measures of the New Deal that are intended to improve present conditions. You will not find one that is not compromised, prejudiced, yes, nullified by private monopolization of opportunity.”

That lesson continues to resonate as cities have financially struggled thanks to inefficient suburban development, real estate speculation (as in 2008) and the wasteful government subsidies that have accelerated these practices since the 1970s.

We can’t afford to choose between robust democratic accountability and fiscal resiliency. We have to choose both — or get neither.