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Remaking US Institutions Post Crisis

Below is the Nowak Metro Finance Lab Newsletter shared biweekly by Bruce Katz


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April 16, 2020

​(co-authored with Luise Noring and Andrew Petrisin) 

History teaches us that crises lead to institutional transformation. The United States is no exception and has a long history of new federal institutions being created in the aftermath of crises: The New Deal in response to the Great Depression, the Homeland Security Administration after 9/11, and the Consumer Financial Protection Bureau following the housing crash of 2008/2009.

In a recent article, Carl Hulse of the New York Times explored how this crisis might drive a similar wave of institutional creation and reform at the federal level. The title of his piece — “Does a Department of Pandemics Sound Odd?” — reveals his timely focus on how the failure to prepare for and respond to the most significant public health crisis in U.S. history will inevitably drive institutional change.

But the magnitude of this crisis extends far beyond the realm of public health. The crisis has been exacerbated by a broken social contract. What we are seeing is the result of 40 years of persistent undermining of our safety net system; it has taken a global pandemic to begin to seriously consider sick leave policies, universal basic income, nutritional assistance, public healthcare, and additional employment protections. We need to rebuild, or perhaps build for the first time in decades, a sound social contract that invests in Americans throughout the socioeconomic spectrum and moves away from decades of market fundamentalism.

And we need to do so in a way that reflects the racial and ethnic disparities that poison our country. Whether it is the increased mortality rate of COVID-19 patients who are people of color (e.g. 70% of deaths in Chicago have been Black) or the inability of minority owned businesses to access capital, the structural racism of our institutions is front and center. We can’t think about what comes next without recognizing the color of everything.

The nation needs a radically changed vision around growth, inclusion and sustainability, delivered not just through policy change but via institutions and institutional connections that can maximize the contributions of all levels of our government and all layers of our society.

Five separate but related observations of institutional deficiency inform the reform that must occur:

  1. “Localism in Transition”: As a country, we have moved beyond pure federal power and national mobilization of the mid-twentieth century but have not yet perfected the mechanisms of 21st century New Localism. Throughout this crisis, cities have shown their ability to problem solve on the quick, through networks of public, private and civic leaders and organizations. Yet this networked governance is still ad hoc, insufficiently resourced and structured. Local public agencies in most cities neither have the staff nor the standing to perform their herculean tasks at the scale that is needed. And the ability for an effective response tried in San Francisco or Cincinnati to be quickly adapted by other cities is still hampered by the absence of intermediaries of strong capacity (although Accelerator for America is an early model of what is possible). We are stuck in the middle of a transition, caught off guard, and need to move toward a new model quickly.
  2. “Closest to the Problem, furthest from the capital”: It follows that those closest to the problem should have more access to the capital and tools to address it. Right now, we have undercapitalized local institutions that have acute understanding of the minutiae of local problems (which naturally vary per locality), and well-capitalized federal institutions that can at best apply “one-size-fits-all” solutions. While local business support funds have been deployed within days and weeks, they have raised (perhaps) $500M compared to $350B of SBA funds that are struggling to get to those most in need. Federal government solutions have scale in their favor. But a crisis like this needs a broader set of distribution channels and products that are aligned with the needs of underserved businesses and communities. We need a more balanced distribution of capital to activate the full potential of the federal republic and our broader society.
  3. “Blunt tools, Nimble problems”: Our instruments to address this crisis are outdated. In particular, the federal government has blunt tools including industry bail out, payroll tax relief, SBA disaster relief (which we’ve seen deployed in the third relief package) mostly forged for different crises including natural disasters and traditional contractions, which are either of high impact over a short period of time, or of lower impact over a long period of time. We are facing an acute crisis with the clearest end in sight being a vaccine that is 12-18 months away. For this, we have limited tools. We need to develop new ones, both to address this current crisis and to rebuild better than before. As noted above, we need to capitalize institutions closer to the problem at hand; however, not without developing new tools and instruments for these institutions to use.
  4. “Apolitical Crisis, Political Response”: While there will always be a political response to crisis, we need our institutions, crucially in these scenarios, at arms-length from self-serving politicking and short termism. We see it now in discrepancies in aid given to states and infighting over critical PPE as healthcare workers are dying. We need effective institutions guided by, but not driven by, political concerns. We need a revolution in long termism in both our governance and financial systems, and we need to routinize, scale, and depoliticize the capitalization and operation of appropriate new institutions to do so. We know an apolitical response is possible; we see it currently in the steady operation of the Federal Reserve.
  5. “Conference Call Federalism”: We have no institution to coordinate responses between layers of government, much less the private or civic sectors. This is being felt at all levels of government. As Mayor Berke of Chattanooga, Tennessee recently wrote in The HillRight now, I am making the best decisions possible about public health and business closures… with little guidance from the federal government beyond the White House daily briefings.” We must reimagine the necessary coordination and connections that need to be made between the different layers of government and private and civic sectors to more tightly bind federalism and localism. Conference calls with governors and daily White House briefings are not enough — we need an institutional response.

Where do we go from here?

In many ways, this unprecedented crisis has shown the limits of both the old and the new.

The federal government still plays unique, critical roles, both on responding to the health crisis and mitigating the harm of economic contraction. On both fronts, the federal government sets a foundation, upon which other layers of government and private and civic stakeholders can build. Without this foundation, local, state and corporate action will be less than perfect, either bound by geography, sector, or scale. We need a renewed federal platform.

On the local front, we are still living in a 20th century world, where too few private or civic intermediaries are equipped to capture, codify and then scale innovations quickly. It’s still every locality on its own, leading to high inefficiency of scaling solutions and radical regional disparities.

All of this occurs within the context of a public sector that has been degraded for decades, a safety net that has been systematically undermined and a technology sector that has not been fully deployed.

We have much work to do. We need a suite of institutional responses at each level of government alongside private and civic sectors to address the institutional deficiencies noted above. We are thinking about system reform through four lenses. Models on all these levels abound.

Intra-local Networked Governance: We must professionalize and make permanent the local networked governance (public, private, civic) response to the immediate COVID-19 crisis and continued aftermath of stresses.

Exemplar Model(s): The networked models in Indianapolis and Pittsburgh, profiled in The New Localism, deserve close consideration. But we are also looking closely at the Danish cooperative model for inspiration around how we deal with the collapse of Main Street small businesses. These cooperative models were invented in the wake of state bankruptcy of Denmark in the 1850s (again, reform happens in the face of crisis). We will also need to consider public asset corporations pioneered in Northern Europe, which we will need for inclusive growth in the years and decades ahead as capital consolidates and land is transferred to public land banks.

Inter-Local Intermediaries: We must build intermediaries to scale local innovations across cities by quickly collecting and translating information, codifying norms and providing technical guidance as trusted advisors to local stakeholders.

Exemplar Model(s): At the inter-local level, we are paying close attention to models like Sweden’s Kommuninvest, which gives cities a collective platform on financing. Cities and counties need to aggregate their collective market power to ensure that financial products and routines are constructed in their own image, rather than dictated by large financial institutions. Every city “on their own bottom,” no matter how large the city, cannot restore the balance between cities and capital. But collective power can. It can also grow capacity that can be used to capture financial or policy innovations when they occur and replicate them with speed across cities.

Inter-Governmental Alignment: We must rethink and rebuild institutions to enable a cohesive inter-governmental response from municipal, county, regional, state, and federal governments. We need coordinating mechanisms from cities to the beltway, and back again.

Exemplar Model(s): At the federalist level, we note that the United States had an Advisory Commission on Intergovernmental Relations, which lasted from 1959 until 1996, when it collapsed due to rising partisanship. Federalism works best when it has well-oiled feedback loops, where decisions at all levels and at all times (not just periods of crisis) can be informed by knowledge and expertise. The recently proposed “Main Street Local Relief Program” is an early effort to do just this, using the targeted focus of local relief funds to inform federal policy in real time.

Successful inter-governmental alignment in Denmark is largely due to the institutional innovation of KL - Local Government Denmark that demonstrates how municipalities gain increased political and fiscal power through inter-municipal self-governance at the local, state and national levels. Thus, rather than each city engaging in budget negotiations with state government, KL engages on behalf of all municipalities with the political weight of a supertanker. The same goes for labor market negotiations that are conducted between KL and one trade union, both of them representing the aggregated power of their constituencies. It makes for more effective negotiations and more impactful outcomes.

Federal Government Retooling: We must equip federal agencies and departments with modern tools that can evolve more quickly to take advantage of financial and technological innovations.

Exemplar Model(s): At the federal level, we would not stop with a “Department of Pandemics” or other institutional reforms on the public health front. We believe the Small Business Administration needs a fundamental overhaul. It simply does not have the data, products, partnerships, delivery system or technology enabled by the 21st century. The result: Main Street small businesses that politicians and business leaders extol in rhetoric are systemically starved for capital that is appropriate to their size.

In summation, institutional transformation post crisis is embedded in the American experience. The COVID-19 crisis has found our institutions and institutional connections wanting across multiple areas of social and economic life. This time it won’t be sufficient to consolidate agencies and move bureaucratic boxes around in Washington; what we must conceive and demand is a full-fledged national response that remakes our federalism and empowers our localism.

NOTE: This is the first in a series of policy briefs dedicated to raising ideas and models for institutional transformation. Our aim is to lay the foundation for conversation and action regarding rebuilding institutions more holistically, inclusively, and effectively — fit for purpose in the 21st century. This builds on the City Cases pioneered by the Nowak Metro Finance Lab at Drexel University over the past year, in close collaboration with Accelerator for America.

Luise Noring is an Assistant Professor at the Copenhagen Business School.
Andrew Petrisin is an Associate Consultant at WSP.