Economic recovery depends on COVID recovery
Without federal coronavirus relief, gov’t austerity layoffs could ‘drag down the economy’ in a ‘vicious cycle’
The Chicago Theater marquee is dark and State Street deserted during the worst of the pandemic economic lockdown in March. (Wikimedia Commons/Dinfinite2011)
By Ted Cox
University of Illinois at Chicago policy experts warned Wednesday that any economic recovery is dependent first on stemming the coronavirus pandemic, but in the meantime state and local governments could “drag down the economy” with austerity layoffs producing a “vicious cycle” driven by diminishing tax revenues.
Joined by Chicago First Ward Ald. Daniel La Spata, a UIC master’s candidate in public policy, they made a compelling case for additional federal coronavirus relief in a webinar titled “Coronavirus, Its Disparate Economic Impact, and Silver Linings.” But the emphasis was on the economic crisis, with precious few silver linings to be found.
David Merriman, of UIC’s Institute for Government and Public Affairs, dismissed conservative charges that it was mitigation efforts to stem COVID-19, not the pandemic itself, that caused the economic collapse. He cited surveys compiled by the U.S. Census Bureau which found that small businesses in states across the Midwest all had similar trajectories on when business declined and revived — no matter when state stay-at-home orders were imposed or lifted, or even in states like Iowa that never imposed a lockdown. Rather, it was consumer concerns about COVID-19 that persistently affected economic activity.
“What we’re going to have to do is deal with the disease,” he said. “It’s the disease, more than any kind of policy choices that we can make, that is going to restrict economic activity.
“The recovery of the economy is going to be very largely related to the recovery against the disease and the progress that we can make respective of COVID-19,” he said. “The real concern is what happens moving forward?”
“State and local governments have been clobbered because of their reliance on certain taxes that have in many cases dried up,” said Michael Pagano, dean of the College of Urban Planning and Public Affairs at UIC. He said the CARES Act pandemic relief package approved early on by Congress had been three times the size of the relief provided by the Bush and Obama administrations during the Great Recession a decade ago, but that additional COVID-19 relief provided under the HEROES Act was essential to fund state and local governments and stave off an even worse economic crisis.
Amanda Kass, associate director of the Government Finance Research Center at UIC, pointed out that, even with that federal stimulus, it took the U.S. economy over a decade to fully recover from the Great Recession. The economic collapse brought on by the COVID-19 pandemic, due to lockdown measures to mitigate the spread of the coronavirus this spring, has seen an even more severe drop in sales and income taxes, she added, and could still get worse if cash-strapped state and city governments adopt austerity measures in response. Kass said public-sector layoffs could “drag down the economy” in a “vicious cycle” driven by diminishing tax revenues prompting still more layoffs.
Pagano endorsed the estimated $500 to $800 billion provided to state and local governments in the HEROES Act passed by the U.S. House in May, but that has gone nowhere in the Republican-controlled Senate, which has failed to act on any additional coronavirus relief. Kass cited how Senate Majority Leader Mitch McConnell of Kentucky had suggested states file for bankruptcy rather than be bailed out by the federal government.
“There’s been very little thus far” in the way of genuine relief for states and cities, Kass said. The CARES Act stipulated that its aid to the states had to be spent directly on efforts to stem the pandemic.
She projected a 13 percent drop in state tax revenues across the nation over the next fiscal year, and spending cuts would likely be passed on to cities in what she called “a kind of one-two punch.”
According to Kass, Illinois already borrowed $1.2 billion from the Municipal Liquidity Facility, a $500 billion fund set up by the CARES Act to provide aid to states and large cities, but at harsh interest terms that thus far have prompted only one other government entity to draw on it. She said Illinois was expected to borrow another $5 billion to make up for an estimated 7 percent drop in revenues this fiscal year, on top of a 4 percent shortfall in the fiscal year that ended June 30.
Kass criticized the fund, saying, “Its main purpose was to stabilize the municipal bond market,” not provide actual COVID relief to states and cities. She added that its high population requirements for cities had also made ineligible cities with large African American communities, including Atlanta, Detroit, and Memphis — all of which are going to be reliant on their already cash-strapped states for relief without an additional federal package.
Kass warned that “ruptures in work” and conventional commuting to offices caused by the pandemic threatened to cause permanent changes in commercial real estate and the property taxes it produces for cities.
“We know what follows when we pass these kinds of budgets. We know that a reduction of public services, public personnel, has long-term costs and immediate costs for the rest of our cities and states.”
Chicago Ald. Daniel La Spata (Zoom)
La Spata said the Chicago City Council was being told to prepare for a protracted recovery that could see economic activity remain at the current level. He said “a once-in-a-generation economic collapse” was combining with a once-a-century pandemic and the worst social unrest in a half-century for a triple whammy that made additional federal aid critical. Without it, he added, the administration was saying it has no choice but to make cuts — especially as Kass pointed out that the city already faces a fiscal pinch with the obligation to make increased pension payments in 2022.
“I would argue that this is really setting up aldermen and the public to expect an austerity narrative,” La Spata said, “to be willing to expect that kind of budget.” He added that Chicago does have a minimal rainy-day emergency fund, but “we have been told now is not the time to go to the rainy-day fund.” If not now, he wondered, “When is the time?”
He added, “We know what follows when we pass these kinds of budgets. We know that a reduction of public services, public personnel, has long-term costs and immediate costs for the rest of our cities and states.”
La Spata posited solutions, saying, “We have refused to tax those who can afford to pay their fair share,” as with the progressive state income tax on the ballot this fall. On a city level, he added, Chicago has to draw on areas of the economy that are still producing money — perhaps with a tax on services, “even if we start with high-level luxury services,” or Chicago could also consider a city income tax of 1 percent on incomes above $100,000.
He said that would potentially enable the city to “weather through a long-term protracted recovery,” and perhaps even “make us more stable for decades to come.”
“With great crisis there is opportunity for great change,” Kass said, perhaps in the form of “a more equitable world” with real changes in methods of state financing. But for now she warned of the potential ill effects of “yet another round of austerity.”