We are enduring one of the slowest economic recoveries in recent history, and the pace can be entirely explained by the fiscal austerity imposed by Republican members of Congress and also legislators and governors at the state level.
EPI’s Josh Bivens examines the reasons beyond our slow economic recovery (one that has progressively slowed with each recession).
Given the degree of damage inflicted by the Great Recession and the restricted ability of monetary policy to aid recovery, historically expansionary fiscal policy was required to return the U.S. economy to full health. But this government spending not only failed to rise fast enough to spur a rapid recovery, it outright contracted, and this policy choice fully explains why the economy is only partially recovered from the Great Recession a full seven years after its official end.
The question of why the economic recovery has been so tepid is a vital part of the presidential election discourse. Clinton says she will increase employment through a public investment program. Trump says he will cut taxes to spark employment growth (and further limit spending).
Bivens argues that it’s federal policymakers who are most to blame, since structurally only the federal government can maintain spending levels in the face of revenue declines (through monetary policy and debt increases). State and local governments lack these tools (with some caveats around borrowing). But I think this lets state and local officials off too easily; many of them also embraced austerity as reason for pushing through tax cuts that will be almost impossible to reverse. And state lawmakers (which control the revenue options available to cities) lacked the courage to grapple with structural fiscal issues that each recession has made progressively stark.
A new report by Sylvia Allegretto at IRLE and Lawrence Mishell at EPI finds that in 2015, public school teachers’ weekly wages were 17% lower than those of comparable workers (a gap that has widened from 1.8% in 1994).
There are many reasons for the pay gap between public school teachers and similarly-educated workers, including the same gender pay gap that affects workers throughout the public and private sectors. But there’s no doubt that the widening gap between teachers and other college educated workers is a direct consequence of our rapid disinvestment in public services, which has hit school districts harder than any other segment of the public workforce. I’d be interested to see a similar study of other public workers and their similarly-situated private counterparts.
The long-term effects of the recession on city governance have been particularly severe. Two policy responses in particular—expanded state control over city finances and efforts to “reform” public pension systems—have reverberated well beyond the initial impacts of the recession. In my study of US city responses to fiscal crisis, I found that these two themes persisted in widely different fiscal and economic circumstances. I don’t think we learn much by simply attributing the persistent focus on pensions to a widespread and ongoing neoliberal push for austerity. If we pay close attention to the financial and intergovernmental politics involved, we see that each city reveals something specific about the ongoing problematic of municipal fiscal power in a framework of federalism.
Fiscal crises in the US constitute histories of negotiation between city and state power, with states claiming additional oversight powers of city governance in each crisis (Sbragia’s Debt Wish presents a great history of this process). The dramatic revelation in 2015 that residents of Flint, Michigan, had been drinking lead-contaminated water for several months brought unusual scrutiny to such powers, in the form of Michigan’s emergency manager law, under which an appointed executive switched Flint’s water source to save money.
Michigan’s emergency manager law is the most far-reaching in the country; even before Detroit was taken over by an emergency manager (to the acclaim of credit ratings agencies), five cities and three school districts (including Flint) had been taken over. In late 2012, just months before Detroit’s bankruptcy, Michigan voters had repealed the emergency manager law by popular referendum, only to have a nearly identical version quickly passed by the state’s Republican legislature. Despite widespreadcritique in the wake of Flint’s disaster, the law remains in place.
The erosion of local democracy and fiscal autonomy at the hands of state governments in the US has been one ongoing consequence of the Great Recession. State governments in the US already exert significant control over city finances: they regulate access to municipal credit, control cities’ ability to raise revenues, and define the options for responding to economic downturns (including access to bankruptcy or state receivership). Since 2007, states have broadened powers of fiscal monitoring (North Carolina, New York), emergency takeover (Michigan, Rhode Island), and control over municipal bankruptcy (Pennsylvania, California).
The justification given by state legislatures for this increased control is twofold: that city governments lack the political will to make necessary cuts, and that city fiscal distress can be contagious. Expanded state powers have been praised by financial ratings agencies, who are especially keen on keeping cities out of federal bankruptcy, where a judge may value the claims of pensioners over those of bondholders and other creditors (as happened in Detroit).
This city-state struggle for autonomy and control can also be seen as a move to concentrate power by state governments that are more politically and socially conservative, more (and perhaps disproportionately) influenced by rural and suburban political interests. The combination of this move for state intervention and the ongoing project of federal devolution has, by and large, left American cities to falter in the face of economic downturns. Blame for that faltering has been displaced, in recent years, onto the shoulders of public employees.
The second legacy of the recession has been a national consensus that public pension plans have dragged down city and state budgets below the point of sustainability. Public pension reforms have been largely framed as a victimless policy shift that simply aligns public workers’ benefits with their private counterparts, and as a long-overdue correction to excessive commitments made by local governments to public workers. Financial analysts have described the structural threat posed by pension and health care costs as “unsustainable” and “ridiculous” (see Chappatta’s numerous articles). The funds have been described as chronically underfunded, threatening to hobble cities and states if measures are not taken to cut benefits.
The narrative of a national public pension crisis is simplistic on (at least) two counts. First: the “health” of any pension plan is based on many moving pieces: the projected rate of return on plan assets, the value of the assets at a given moment in time, and estimates of future liability (i.e. pension payments). During the financial crisis, these pieces were significantly reshaped.
In November 2008, Moody’s reported that retirement systems’ stock investments had fallen by 35 percent. Rates of return that seemed reasonable in 2007 (and which were widely used by the private sector) were cut significantly (ratings agencies and cities continue to differ in the rates of return used to estimate future assets). These market declines escalated a key measure of pension plan health: unfunded actuarial accrued liability (UAAL). Because the actuarial required contribution (ARC), which cities must pay from operating expenses, is based in part on estimations of future returns, cities abruptly faced a significant operational cost increase, just as their revenues contracted.
Some plans went into the recession already underfunded, in part because of how city pension funding fits into a strategy of fiscal mitigation that reflects the instability of city fiscal structures. In some cases, cities’ discretion over how much of the ARC must be paid out of the operating budget each year represents a significant share of the discretion available in the budget. Both the formula for calculating a city’s ARC and the degree to which it must comply with that calculation are subject to local and state policies.
In 2011, the Government Accounting Standards Board (GASB), followed in short order by all three major credit ratings agencies, began to account for government pension liabilities as equivalent to debt; Moody’s and the other ratings agencies took the additional step of increasing the weight given to debt in a government’s overall rating evaluation. Thus the emergence of a pension “crisis” has been a product of both the politics of city fiscal management and its monitoring.
As pressure from state officials and creditors pushes cities to focus on restructuring pension plans as a short-term fix for operating deficits, there has been little conversation about how cities can increase long-term stability before the next economic crisis erupts. While something must be done to shore up public pension plans (whose beneficiaries often can’t fall back on social security), we shouldn’t kid ourselves that this debate is moving cities toward fiscal sustainability.
Thank you for your editorial about Illinois and Kansas as examples of states where policy makers do more harm than good (“Sorry Tales From Two Statehouses,” April 25).
Service agencies have laid off experienced and talented staff members, perhaps never to get them back. Lutheran Social Services of Illinois, the state’s largest social service provider, announced that it would cut 43 percent of its work force.
And all 29 Illinois agencies serving sexual assault survivors have instituted furloughs or left unfilled positions vacant, leaving survivors without essential services.
The damage is permanent, not easily or perhaps ever remedied. Even when funding is restored, we won’t simply return to business as usual. Ours is a real-life example for governments considering a similar path.
JOHN BOUMAN
President, Sargent Shriver
National Center on Poverty Law
Chicago
Great recap of the welfare reform travesty – in which Clinton admits that the poorest families in the U.S. are worse off after welfare reform. Also describes how state control, combined with fiscal downturns, pulled money away from the poor.
The situation in Flint only gets worse: not surprisingly, residents are now worried about their property values, which have already fallen significantly over the past decade. The inability of many residents to sell their homes will only get worse as the reputation of the city’s water supply plummets. This means not only an ongoing crisis of lack of mobility for the city’s residents, who might want to move to better work opportunities, but a looming crisis for city’s already decimated property tax base. Residents will certainly request reassessments of their property values, which are tied to the true cash value of the home.
“Given what’s going on there, I’d have to imagine there’s a plummeting in the fair market value,” said Nathan Resnick, a Bloomfield Hills lawyer who specializes in tax appeals and real estate law. “There’s going to be disparity” between what assessors say the properties are worth and what buyers are willing to pay.
Morse said lenders are already skittish about lending in Flint and are asking appraisers to find comparable homes that have sold very recently rather than, say, eight months ago.”Eight months ago was a completely different market than what’s going on now,” Morse said.
I’ve written a lot about how public pensions came to be blamed for the fiscal crisis looming (or already “crippling”) many cities and states. The National Public Pension Project has been working since 2007 to change the narrative about the value of public pension plans, and has an interesting website and blog.
NPPC believes every American should be able to retire in dignity. We also know that there is no one more interested in strengthening the public pensions system than the public employees who are counting on pensions to retire. After all, public pensions are the only source of retirement for 30% of public employees since they do not receive Social Security. Pension plans also play a vital role in decreasing poverty among older Americans, according to the National Institute for Retirement Security.
Across the country, public employees – who have faithfully contributed their life savings into the pensions systems — are at the mercy of public officials unfairly targeting their financial security for political gain. The NPPC is working to preserve the financial security of all workers for generations to come.
Important article about the slippery slope from an underpaid teacher crowdfunding for classroom supplies to a bankruptcy city crowdfunding to clean up its parks. Crowdfunding is great when it funds new products that aren’t getting supported by more conventional forms of investment:
Public necessities, by contrast, are not awesome; they’re essential. Roads, health care, education: These are not the kinds of things that go viral and raise $2 million in less than a week. But if crowdfunding for the public good is allowed to continue unchecked, it’s not hard to imagine a future in which everyone votes on public works with their dollars—distorting priorities and giving those with deeper pockets more of a say.
Of all the crowdfunding appeals I’ve come across on facebook, a solid 90% of them are for healthcare expenses (and more often than not for dire conditions, like cancer or a terminal genetic disease). This is depressing not just because healthcare is also a public good (and these appeals make clear the inadequacy of our healthcare funding structure), but because it puts people in the position of begging for money at the most desperate time in their lives. Their very survival is now hitched not just to their own healthcare-employment situation, but to the wealth of their family members, classmates, and facebook connections. I’d like to call that evil too.
