Why the Government Is Good at Helping Banks but Not People

State capacity is downstream of ideological commitments: When we have political consensus, we have state capacity, and when we don’t, we don’t.

Illustration showing hand reaching up from a rectangular hole
Illustration by Daniel Zender / The Atlantic; Getty

We are really very good at helping banks. Last month, in no time at all, the federal government calmed a crisis that began at just a few institutions but threatened to spread throughout the financial system.

According to CNBC, within four days, banks had borrowed roughly $12 billion from a fund set up to give financial institutions access to favorable loans. Through more traditional borrowing routes, banks were able to acquire more than $300 billion. All this without endless political hemming and hawing from Congress, without the president’s signature, without action by state legislatures or governors, and without need for city councils or mayors to weigh in.

This wasn’t a fluke, as the economist and lawyer Natasha Sarin told me recently: When a bank is on the verge of failure, “the FDIC is incredibly efficient—we come in on a Friday afternoon and shutter the bank, and by Monday morning, the bank is sold to someone else.”

Thank goodness for that efficiency. Imagine the chaos if the stability of our financial system rested on a divided Congress, 50 states, and tens of thousands of localities coming together to take decisive action.

I should say, before an army of Silicon Valley Bank depositors floods my inbox, that the collapse of the banking system would implicate the well-being of regular people, not just of Wall Street. But watching our government spring into well-rehearsed action to arrest a financial crisis raises questions about why it fails to act so quickly to help individuals in crisis. When an American needs unemployment insurance or Medicaid or food stamps, the government doesn’t spring—it bumbles.

The process difference is hiding in plain sight: When we help banks, we tap a small group of highly specialized decision makers at the executive level who are empowered to act quickly. Conversely, when we set up social-welfare programs, we resort to federalism. In fact, whether we act at the federal level or through state and local institutions is a tell that gives away our level of political commitment. And that gets at the deeper why behind the government’s disparate performance: We can avoid financial crises because the argument for helping banks enjoys widespread support even across two very divided parties. No such consensus exists for helping struggling workers.

When SVB imploded, politicians took a back seat to bureaucrats who oversaw a pre-choreographed dance that would have looked very similar from administration to administration.

To help regional banks, the Treasury Department, without any formal input from the legislative branch, pretty much instantly made $25 billion available as a “backstop.” Compare that with the bureaucratic nightmare when that same department was charged with allocating $25 billion in rental assistance in December 2020 (and about $22 billion more a few months later).

Instead of relying on an existing national bureaucracy that any renter or landlord could easily access, or even building a new one, Congress chose to allow states, territories, and local governments with more than 200,000 residents to establish their own programs, resulting in the creation of more than 500 separate temporary entities. These programs overlapped across jurisdictions, began at different times, asked for different verification documents, had different procedures, and were significantly understaffed. As a result, they left many renters confused, disheartened, and ultimately without necessary aid. And legislators, in their zeal to allocate money by state rather than by renter in need, ended up over-allocating money to states with low renter populations and under-allocating to states that ran out of funds.

According to the National Low Income Housing Coalition, billions have yet to be allocated to renters in need. It’s been two years. To add insult to injury, fewer than one in five of those programs is still open and receiving applications. I suppose we don’t expect to ever need to do that again.

Of course, we do have an already existing rental-assistance program: vouchers, which have been perennially underfunded. (Just one in four voucher-eligible families receives assistance.) The choice to create duplicative, decentralized programs instead of investing in and shoring up this one is another tell.

Rent relief is just one example. Many programs meant to help vulnerable Americans—including unemployment insurance, Medicaid, and food stamps—are run through states, counties, and local governments. All of these could be administered nationally with straightforward and consistent requirements, but that is not the approach we choose. The result is massive geographic variation in what is available to struggling Americans, and underfunded, labyrinthine programs that serve just a fraction of eligible people and escape scrutiny from journalists, watchdog groups, and the federal government, all of which struggle to monitor hundreds of bureaucracies at a time.

As the coronavirus pandemic put millions out of work, state-unemployment websites sputtered and crashed under the pressure. Systems set up to root out fraudulent applications failed to accept the reality of mass unemployment and simultaneously failed to stop actual fraud. But problems with the unemployment-insurance system preceded COVID-19. Overly strict unemployment-insurance-eligibility requirements in many states excluded freelancers, stay-at-home parents reentering the workforce, and part-time workers.

When programs are subjected to the input of tens of thousands of politicians, implementation is extremely slow. This would be true whether or not those elected officials were committed to getting aid to people quickly. But in reality, fights over social welfare in this country have always been hotly contested. And it is because of that indecision that programs for people in need are defaulted to states and localities, where there are fewer resources.

As the political scientist Jamila Michener wrote in Fragmented Democracy—which documents how federalism affects Medicaid programs and, by extension, recipients—“the widespread acceptance of a strong federal role in helping people living in poverty has been spotty and begrudging. Civil War pensions, the broad-based federal assistance program for men who had served in the Civil War (and their dependents), proved temporary and pyrrhic, as they later became political fodder for those who (successfully) sought to eliminate social assistance programs for adult men in the post-Civil War generation.”

Michener notes the pattern of the federal government stepping in tentatively to help marginalized individuals during times of crisis, and then stepping out again. Even after the Great Depression forced the feds to commit to a larger role in welfare policy, we continued off-loading more controversial programs for the poor onto states and localities. Consider that Old Age insurance (better known as Social Security) is funded by payroll taxes, collected and administered at the federal level. By contrast, aid for children—for instance, through Temporary Assistance for Needy Families—is run through the states. The reason for the difference is as obvious as it is bleak: There is insufficient political will to provide assistance to the poorest among us. We even continue to debate whether free school lunch for children is worth public support.

Political scientists use the term state capacity to refer to whether the government can accomplish what it tries to do. Developing nations that struggle to effectuate political priorities through weak or underfunded institutions are said to suffer from insufficient state capacity.

Recently, many policy makers and researchers have taken to blaming lack of state capacity for America’s ills, including our inability to efficiently help individuals in crisis. When thousands of Alaskans were stuck without food stamps because of a backlog, state workers pointed to “chronic understaffing.” In a 2021 report, the Niskanen Center lamented the federal government’s lack of state capacity, noting that the U.S. bungled its public-health response to the pandemic compared with poorer countries in East Asia. The report said that our inadequately staffed federal workforce, the underpayment of taxes by the wealthy, the federal government’s outdated information technology, and burdensome environmental regulations have constrained the country’s state capacity.

But arguments about state capacity strike me as missing the point. America is a wealthy country. In this, we have no peers: As of 2021, we had 31.45 percent of the world’s wealth; the next-closest country was China, clocking in at just 18.36 percent. No other country breaks into the double digits. Nor do we lack a well-educated workforce. All of the so-called barriers to improving state capacity are ongoing choices the government is making, not the product of technical or material constraints.

Just look at how weakly the federal government responded to the 2008 financial crisis compared with the 2020 pandemic-induced recession. To counter the effects of the pandemic, the U.S. spent nearly $5 trillion and even disbursed a significant amount of direct aid to residents in the form of stimulus checks. The results spoke for themselves. This shift in policy didn’t come from increased staffing levels since the Great Recession; it was the result of a significant change in policy makers’ views about the role of the federal government in responding to emergencies.

“What is broken here is the politics,” the political scientist Pavithra Suryanarayan told me. “The U.S. is still a pretty high-state-capacity place. What is repeatedly a theme is how politics gets in the way of it. When there is political will, the U.S. can respond very swiftly to problems.”

Putting state capacity at the center of the conversation assumes that the government isn’t able to do things it is actively trying to do. But that’s not what is happening. Even with the existing staff levels, regulations, tax receipts, and outdated tech, the government manages to do a lot. What it does and does not do is really a matter of priority. For instance, natural-gas pipelines are permitted much faster than crucial renewable-energy infrastructure is.

One regulation that obstructs the federal government’s ability to set up national social-welfare programs is the Privacy Act of 1974, which bars federal agencies from sharing important information with one another and thus hinders our ability to respond to the opioid epidemic, fight COVID-19, and advance crucial research—unless, that is, agencies would like to share information pertinent to a law-enforcement request or in service of debt collection. Here again is evidence that action or inaction reveals our priorities, not our capacities.

State capacity is downstream of ideological commitments: When we have political consensus, we have state capacity, and when we don’t, we don’t. Widespread bank failure is unacceptable, but widespread homelessness? Millions without health care? A dysfunctional unemployment-insurance system? These are the failures we accept. Our hands aren’t tied behind our back. We’re holding them there.