Local and state actors have been taking stock of what the current moment in Washington means, assessing regional exposure to the effects of federal agency restructuring, spending cuts, workforce reductions and radical shifts in trade, immigration, health and science policies.

For the most part, a broad array of federal grantees, borrowers and recipients are responding to the immediate impacts. Yet the interconnectedness of city and metropolitan regional economies — and the public, private and civic institutions that drive them — means that there will be longstanding, reverberating effects, with multiple, domino-like second and third order effects.

The nation has entered a game of complex, multi-level chess for which there are no precedents or rules and few guardrails. The exercise in federal dismantling will necessitate constant vigilance and an iterative set of countermeasures. Some are instinctive for locals, but others will need to be learned through evolution and experimentation and then scaled and replicated across geographies.

A waterfall of impacts

Federal retrenchment has immediate direct effects, intermediate indirect effects and longer-term structural effects — all of which are compounding. We separate these into three orders of effects:

• Immediate fiscal and operational impacts (first order),

• Intermediate tax and economic shocks (second order), and

• Long-run structural implications (third order).

First order effects

First order effects are the immediate fiscal and operational impacts of federal retrenchment in spending and workforce reductions. The immediate effects include paused energy projects, closed federal offices, housing subsidy program reductions and freezes, medical research cuts, and more.

As we have written about recently here and with partners, local actors and stakeholders should be leveraging stress test models to assess and understand their exposure to federal funding shifts.

While evident in every metropolitan area, the magnitude of first order effects vary substantially depending on local market structure and dependence on federal investment. In New York City, for example, the Comptroller and Independent Budget Office have raised red flags around the risks of federal funding cuts to local residents, the city’s operational budget, and a broad array of public, private and nonprofit actors in the local economy.

The nation has entered a game of complex, multi-level chess for which there are no precedents or rules and few guardrails.

In cities like Boston, the threat is greatest around the universities and research hospitals that anchor the regional economy, with implications for ongoing and future research efforts, international students and their hiring of employees.

At the individual and institutional level, growing issues with income transfers and entitlements, like Social Security, Medicaid and the Supplemental Nutrition Assistance Program will leave many recipients unable to afford basics and many providers stuck with demands but no funding.

For communities along the border with Canada and Mexico, where economies are not just linked, but interwoven — tariffs are already having a dramatic effect, above and beyond the effects of federal capital shocks, for grain importers, manufacturers and those in hospitality.

While workforce and funding shifts are happening across the board, they emanate within vertical, agency and programmatic silos. The sheer volume and variance of the changes underway challenge the sheer ability of local actors to understand what is happening to whom and when.

Second order effects of federal pullback

First order effects will cascade into greater effects. State and local tax revenues will be affected by lost income and lower consumption. Delayed or terminated benefits, grants or contractor payments have broad implications for individuals, employees, contractors and service provisions. The list of these second order effects goes on and on. We are learning the hard way the outsized role the federal government plays in our lives.

Maryland, because of federal personnel and contracting cuts, is expecting a $280 million reduction in tax collections over the next two fiscal years (compared to their December estimates). In New York City, the Independent Budget Office, in a February report, noted that federal funding risks to both the State and City will create budget gaps for both, with compounding effects, likely adding pressure on the City to plug the gap. The report also notes that those departments that receive a large amount of federal funding, like the City’s Department of Education, also receive a large amount of state funding, thus magnifying their exposure and financial pressures.

In Alabama, potential cuts, estimated around $70 million per year, in NIH funding to the University of Alabama-Birmingham could have an economic impact across the state of just under $1 billion. The NIH funding supports approximately 17,000 jobs directly and indirectly in Alabama.

These reports may just be from New York City, Alabama and Maryland, but downstream impacts will affect all states and localities, much like the distribution of federal spending and personnel.

“…a lot of the answers are going to come from mayors, from communities, from states that aren’t captive to some wacky ideological project.” — Pete Buttigieg

The interconnectedness of regional economies ensures that local effects will spillover and compound across geographies. For example, research that happens in one geography catalyzes large-scale investment in another. Illustrative of this, research on fusion energy at MIT set the stage for the first grid-scale fusion power plant which will be built in Chesterfield County, Virginia.

The impacts will be felt for individuals directly too. Per a January survey, delays for Social Security payments will leave many elderly individuals unable to afford the basics, potentially increasing demands on community service providers.

Assessing the compounding and reverberating effects, both regionally and nationally, will be challenging. It is unclear what the full effect is of the administration’s early efforts, or what it will amount to given payment timelines and judicial opinions on contract and grant decisions as well as executive actions. The impacts of reduced employment on local and state revenue generation will be delayed, and difficult to ascertain with certainty, given that withholdings are submitted on a quarterly basis, creating a data lag.

Cuts to income transfers, entitlements, education and housing will lead to increased demand for local provisions of benefits and services, all of which will come in parallel with increasing fiscal pressures on local as they seek to understand and respond to federal cuts.

Third order effects of federal funding cuts

The immediate and compounding effects of federal retrenchment will continue to persist and result in broader structural factors like inflation, shifts in sectoral performance and new patterns of industrial geography, capital investment, migration and more.

The impact of gyrations in trade and tariff policies have already driven stock market turbulence, with implications for the asset bases of large institutional entities, corporations and philanthropies. Investor confidence and certainty, fundamental to long-term growth and local and metropolitan progress, has dropped precipitously given the radical swings in policy.

We are learning the hard way the outsized role the federal government plays in our lives.

Dynamic trade policies will have long-lasting implications, halting momentum fueled by supply-side subsidies from the CHIPS Act and Inflation Reduction Act for large scale manufacturing of semiconductors and clean energy products.

Beyond the direct fiscal and monetary implications, cuts to federal spending and workforce around research funding will have long-lasting consequences for America’s position as the world’s leading innovation economy. Innovation has been built on universities that can drive economy-shaping research while also training the next generation of disruptive innovators. Undermining the higher education institutions that train young scientists and engineers, and inform their future projects, will create a generational gap, at minimum, in the pipeline of talent. Beyond losing the country’s edge in innovation, the attacks on the country’s R&D backbone, and science writ large, alongside harsh immigration enforcement, will push international students who have come to the U.S. elsewhere to competing countries.

In many respects, the long-term effects are already here. As Neel Patel recently observed in The New York Times:

Many young researchers say they are having to choose between staying in the United States and staying in science. America shouldn’t take scientific progress in medicine, artificial intelligence, and more for granted. If the youngest, brightest minds aren’t soon reassured that the United States can support their work — and that scientific inquiry will be protected from political interference — they will walk away.

Responding to cascading effects

The cascading of effects cannot be wholly avoided or softened — the train is already in motion. As one of us recently wrote (Defederalizing the Republic – The New Localism), “the centralization of power of the Trumpian kind, ironically but inexorably, leads to a decentralization of responsibility. Some level of government or sector of society … must now do the work of the nation.”

Like the classic trolley problem, there are no clean solutions and tradeoffs abound. The only clarity is that local, regional and state leaders are now compelled to discern the level of exposure, devise and define options, and then steward their economic ecosystems through turbulence.

Shortly after the election, former Transportation Secretary Pete Buttigieg said, “in moments like this, our salvation really will come from the local — the local and state bodies, we would like a little more consistency in federalism, but a lot of the answers are going to come from mayors, from communities, from states that aren’t captive to some wacky ideological project.”

American government has largely been defined by two principles and their inherent tensions — separation of powers and federalism. In this moment, with checks and balances in tatters and federal retrenchment continuing, federalism must have a second life.

Chaos is upon us and will continue to fester across reverberating orders of effects. As the federal government steps back, it is incumbent on the nation, one of empowered locals, to lead the response.

Bruce Katz is the Founding Director of the Nowak Metro Finance Lab at Drexel University. Benjamin Weiser is a Research Officer at the Nowak Lab.

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