If all goes as planned, in just a few weeks, life will begin looking normal once again. Shuls will conduct regular minyanim. It may be possible to work and to shop without a mask. And it may even be possible to go to a baseball game. But don’t be fooled into thinking that we will emerge from this crisis stronger or even the same as before. We won’t - and major changes could lie directly ahead.
The reason for these changes: money, or more precisely: a shortage of it.
Deficits in cities, states, and towns across the country – not to mention the federal government - are growing exceptionally fast and have reached unprecedented levels, and economists are sounding the alarm bell.
Deficits are not new. Long before most people ever heard the words “coronavirus” cities and states were trying to cope with huge shortfalls in revenues. But in the last two months, these have grown by leaps and bounds.
Out-of-control budget problems surfaced several months ago, when cities and states were forced to spend many billions on expensive medical equipment, hire many additional personnel, and pay hefty overtime bills.
At the same time that state income tax revenues were plunging, payments needed for unemployment insurance were reaching all-time highs, exacerbating the problem.
Of course, tax revenues will increase as the economy opens, but they will not recover completely because of a lingering fear of gathering in crowds, financial pressures that are limiting people’s ability to spend money, and because many high-income individuals are fleeing high-tax states and moving to low or no state tax states.
The bottom line: Budgets in cities, states and towns across the country are completely wrecked, and deficits are continuing to soar. Clearly, this situation is not sustainable.
Governors and mayors are required by law to balance their budgets. So what options do they have in the current environment? There are several, but none is appealing.
One is raising taxes – a choice that is never popular with the electorate, and one that would be even more distasteful now given all the financial hardships so many people are experiencing.
Another possibility is cutting various services and assistance programs states provide - also difficult to implement because, as various observers have pointed out, once social programs are introduced, the public wants them to continue.
A third possibility is for Washington to launch a massive rescue mission. But this also is problematic, given the government’s own mushrooming deficit and its reluctance to support states with policies it opposes. For example, President Trump recently said he would not assist states that permit mail-in voting.
A Friend In Need
Everyone may have to compromise, because the need to fund budgets is urgent. Consider the following. Arizona’s projected $1 billion surplus has turned into a $1.1 billion deficit. Texas’s revenues have dropped by well over $1 billion, because of the steep recession and weakness in the oil market.
Taxes in New Jersey plunged 60 percent in April. Governor Gavin Newsom of California said California needs a $1 billion bailout package. Think that’s something? You ain’t heard nothin’ yet. Governor Andrew Cuomo said New York needs a $61 billion federal rescue plan.
Although these deficit numbers were compiled very recently, they have surely become worse since then because of the ongoing weakness in economies across the country. And while these numbers speak volumes about what’s going on, they don’t describe how desperate some states are for money.
One of these is Illinois, whose credit rating is just above junk. On May 20, it successfully raised $800 million in the bond market, which it needed for both construction projects and pension plans. But it had to pay an interest rate of 5.65% to raise those funds - five times the rate states with an AAA rating pay.
According to Zero Hedge, Illinois will end up paying $450 million more in interest costs over the 25-year life of the bond than if it would were a AAA-rated state. Other states with huge deficits are facing comparable predicaments.
These high deficit numbers also don’t reflect the emotional pain and stress so many people are experiencing because their wallets are empty now and they can’t make mortgage payments that are due. In addition, they are helplessly watching their businesses slide towards bankruptcy and either have already lost their jobs or anticipate they soon will.
Josh Goodman, state economic development officer at Pew Charitable Trusts, estimates state budget shortfalls could total more than $500 billion.
The New Normal
Everyone is anxiously waiting for a resolution to the corona crisis, but it’s important for them to understand that when we reach that point business won’t go back to the way it was for a very long time; maybe it never will.
Having experienced this crisis, many more people may place greater importance on being practical than on having fun. Already it’s apparent that industries including airlines, lodging, and entertainment will be sharply downsized.
And at some point, cities, states, and even the government may be forced to rethink the virtues of endless spending and borrowing. Hindsight, as they say, is 20-20. Nevertheless, had governments been more cautious when passing budgets and had their balance sheets been stronger, they arguably would have been better able to deal with this crisis. Nor would there be so much concern about the economic consequences if there is a second wave of the virus or if interest rates increase and the already humongous payments on debt skyrocket.
Unfortunately, when this crisis is over, it won’t really be over. These problems didn’t begin in March or February or back in November; they began years ago, when borrowing was not limited to emergency situations but became a way of life. Unfortunately, all the borrowing may turn out to be a lot more costly than we ever imagined it to be.