My wife is a pediatric audiologist, and you know what I do for a living if you are reading this. She views the current situation through a healthcare lens, whereas I see the world in economic terms. So, it is no surprise we have differing views on when ‘we’ should reopen the economy, just like, I suppose, the rest of the country.
There has been much discussion, a lot of it critical, about Gov. Brian Kemp’s decision to start reopening some of Georgia’s economy this weekend. This past Monday, he tweeted: “Due to favorable data & more testing, gyms, fitness centers, bowling alleys, body art studios, barbers, cosmetologists, hair designers, nail care artists, estheticians, their respective schools & massage therapists can reopen Friday, April 24 with Minimum Basic Operations.” I am not 100% sure what he means by ‘Minimum Basic Operations,’ but the intent is clear: Georgia needs to get folks back to work.
Laughingly, Dr. Deborah Birx, the Administration’s Coronavirus Response Coordinator, said (about the decision to reopen barbershops and tattoo/body piercing parlors): “If there’s a way people can social distance and do those things, then they can do those things. I don’t know how, but people are very creative.” Either that or you would have to have an extremely long needle.
Although I am naturally inclined to sympathize with Gov. Kemp, I found it amusing the third business he mentioned in his tweet/plan was bowling alleys. While I understand the sport is experiencing a bit of a resurgence in popularity after a couple of decades of decline, I wasn’t aware it was a significant economic engine in the Peachtree State. Personally, I honestly can’t remember the last time I went bowling, but can tell you the measurement is in years, not months or weeks. Apparently, that would make me something of an outlier in what surely must be a bowling crazy state, a real outcast. You know, kind of like the type of person who can’t spell David Gilmour’s name correctly. (Many thanks to all who pointed that out to me).
I will be blunt: we are in a lose/lose situation in reopening the economy ‘too soon.’ Clearly, we could see resurgence in infections or, better put, never flatten the proverbial curve. That would lead to more deaths and more stress on the healthcare system. No one wants that, not even Brian Kemp. However, the longer ‘we’ stay in some form of lockdown, the greater the potential for structural damage to our nation’s economy…stemming from a wholesale financial collapse in state and local governments.
Unlike the Federal government, states, counties, and municipalities don’t have the ability to print money or create it out of thin air. They also don’t have their own central banks which help finance bloated deficits. No matter how you slice or put it, states, counties, and municipalities simply don’t have the wherewithal to flood their economies with cash the same way the Feds can. Finally, also unlike the Federal government, while still somewhat rare, counties and cities can declare bankruptcy.
In our current state of lockdown, state and local governments aren’t collecting sales taxes. They aren’t getting usage fees. Heck, they aren’t collecting the same amount from the parking meters. In no uncertain terms, at the local level, revenue is scarce and ‘rainy day’ funds are depleting.
Consider this from a good article at nbcnews.com by Allan Smith, entitled: “Financial doomsday: State, local governments face layoffs, service cuts, projects derailed.”
Linda Bilmes, a professor at the Harvard Kennedy School and a leading expert on public budgetary and financing issues, told NBC News that the nature of the crisis prevents states from raising new revenue in traditional ways.
“Can you increase property taxes, retail taxes, income taxes, special investments? Can you increase service fees? Well, no,” she added. “Nobody’s using services, toll roads. Can you expand the number of fees? Can you increase traffic violations? Well, nobody’s driving.”
These governments will need to instead lay off or furlough workers, reduce benefits, cancel projects, defer construction and maintenance, and more.
“But the problem is that by doing all of those kind of things and canceling a lot of those kind of capital projects, those are the things that create employment and activity in the community and in the economy,” Bilmes said, adding, “It’s certainly capable of derailing a recovery or creating a second wave of recession.”
She didn’t even mention the pension plan problems. Oof. The poisonous brew of historically low interest rates and negative stock returns will make already problematic unfunded pension liabilities that much worse, way worse. Frankly, it will be (if it isn’t already) a hole many jurisdictions simply will never be able to fill, given current projected benefit obligations and the realistic potential for a sharp increase in government coffers AND a sharp increase in plan assets. While I don’t have all the numbers, consider this little snippet from the Southern Illinoisan website from/in Carbondale which posted today:
“Illinois has $138 billion in unfunded public employee pension debt. Under the U.S. Constitution, states are prevented from filing bankruptcy. Illinois’ constitution has a pension protection clause that treats pension benefits as a contract. The state’s Supreme Court has ruled the clause prevents public pension benefits from being diminished.”
Hey, that is just one state. The website us.pensiontracker.org (Stanford Institute for Economic Policy Research) estimates ‘Pension Debt United States Public Employee Pension Systems,’ total pension debt (unfunded liability), to be $4,726,504,919…at least when I visited the site at 1:00 pm CDT on April 23, 2020. Going out on a very short limb, I would argue the potential for deterioration in state & local government finances in 2020 is significantly greater than the alternative.
But, hey, $5 trillion is a drop in the bucket compared to the $24+ trillion, and counting, Washington has accumulated over the years, right? No argument. However, the biggest difference here is Washington has a much greater ability to finance its deficit than the ‘other guys.’ It isn’t even close thanks, again, to its ability to print money or create it out of thin air AND its central bank which has significantly helped to finance the national debt. Then there is the whole army thing and all of that.
I don’t see any way around this problem with state & local finances. It is going to get worse before it gets better, and it won’t get better until we can get the economy back to some sense of normalcy. If not normalcy, then at least not operating at something like 60-70% capacity, or thereabouts. Even 80% would be an improvement, let alone 90%. Whatever the new normal will be is better than lockdown, at least when it comes to economic output and local government finances.
This, then, takes me back to the top.
My wife and I do not agree with Gov. Brian Kemp’s attempt to reopen Georgia’s economy. By that, I mean she is against it and I am, mostly, for it. My reasoning is simple: Kemp knows his state’s finances better than I do, and is undoubtedly extremely concerned about the growing tide of red ink that is his budget. While Georgia’s pension plan isn’t the biggest culprit, he knows negative stock returns and discounting future benefit obligations at all-time low interest rates will put an even greater strain on resources. Something will ultimately have to give. Do you attempt to reopen your economy or do you remain ‘closed’ until further notice, understanding every day you do means fewer public jobs and services in the future?
Like I said earlier, it is a lose/lose situation. Open up the economy too soon and more people will die. Leave it shutdown, and you are dead in the water. Yuck.
I hope this finds you and your family safe and as happy as you can be.
As always, nothing in this newsletter should be considered or otherwise construed as an offer to buy or sell investment services or securities of any type. Any individual action you might take from reading this newsletter is at your own risk. My opinion, as those of our investment committee, are subject to change without notice. Finally, the opinions expressed herein are not necessarily those of the reset of the associates and/or shareholders of Oakworth Capital Bank or the official position of the company itself.