There’s good news for Virginia on the fiscal front. We need to make the most of it.
The Old Dominion closed fiscal 2022 with a $1.94 billion General Fund revenue surplus, Governor Glenn Youngkin announced yesterday. Total revenue rose 16.3% from the previous fiscal year.
“Fiscal 2022 was an extraordinary year for revenues and finished strong,” Secretary of Finance Stephen Cummings said. While the state has yet to recover all the 133,000 jobs it lost during the pandemic, job growth has been strong this calendar year — 3.5%. And, while competitor states all exceed their pre-pandemic employment levels, Virginia has scored some economic-development coups — LEGO, Raytheon and Boeing most notably. Over the first four months of 2022, Virginia ranked 15th nationally among the states in employment growth.
Youngkin makes a case for giving some of the revenue surplus back to taxpayers, who are getting clobbered by 9% inflation. I’m sympathetic. Taxpayers are getting the shaft. But I have bigger concerns.
In all likelihood, Virginia’s economic and budget surges are unsustainable. They are byproducts of economic recovery from the COVID-19 shutdowns and massive federal stimulus. The effects of COVID recovery are largely spent, and the federal stimulus is unsustainable. Washington’s political class may delude itself that it can continue ramping up deficit spending with economic impunity, but history suggests that it cannot.
In the video above author John Rubino describes how the U.S. — like other developed countries with profligate central banks — is approaching debt saturation. “We’ve borrowed so much money that we have to keep interest rates low to make that debt manageable,” he explains. “But by keeping interest rates extremely low, we, in effect, have to create a lot of new currency … to buy the bonds whose yield we’re trying to force down. And that leads to inflation, which forces interest rates up because nobody wants to lend money if they’re going to be paid back in a depreciating currency…. And that makes it impossible to manage the debt load. That’s kind of where we are right now.”
As columnist Kimberly Strassel observes today in The Wall Street Journal, the United States no longer has a party of fiscal austerity. There still are Republicans who fret about deficits and the debt, but plenty of R’s vote with Democrats, who have convinced themselves that deficit spending and monetary stimulus have no meaningful consequences. Blaming 9% inflation on Putin’s war in Ukraine and COVID-related supply-side disruptions, the economic illiterates contend that inflation is transitory.
It is true that the Fed has bumped up interest rates a smidgeon, but when 1-year treasuries yield 3% and inflation is 9%, that’s an inflation-adjusted interest rate of negative 6%. That is not a restrictive monetary policy. It will do next to nothing to reign in inflation. But monetary tightening may be sufficient to push the U.S. into a recession. Rubino foresees two possible scenarios: one in which the political class gives up the fight on inflation, which then rages higher; and the other in which monetary tightening leads to a nasty recession in which the debt-laden economy collapses like a deck of cards. With real interest rates at -6%, the Fed has run out of tricks to keep the game going.
Making the problem immeasurably worse is that every major central bank in the world has been pursuing lax monetary policies and racking up debt. The European Central Bank still has interest rates that are negative in nominal terms, not just inflation-adjusted terms. China is facing the collapse of its housing market, which accounts for 75% of all personal wealth in the country. Japan has accumulated the largest national debt-to-GDP ratio in the world, made possible only by harsh interest rate repression. As food and energy prices soar, civil unrest in developing nations is spreading — witness most recently the collapse of the government in Cyprus, where insane green policies ruined the critical agricultural sector. How will the shock of defaults on sovereign debt transmit through the global economy? That’s anybody’s guess.
There is no telling how the global experiment in massive indebtedness will end. Perhaps the brain trust in Washington, D.C., will manage to kluge its way through another business cycle without triggering another depression. But any sentient person should be able to recognize that the systemic risks are incredibly high.
Where does that leave Virginia? As I have argued since the publication of Boomergeddon in 2010, we need to bullet-proof our state finances. When the federal fiscal regime disintegrates, state fiscal solvency will be the only thing standing between the citizenry and societal collapse.
Youngkin and the General Assembly are making small down payments toward that goal. According to the Richmond Times-Dispatch’s Michael Martz, Virginia will add $250 million to lower public pension liabilities, for a total of $1 billion. In 2021, according to the Reason Foundation, Virginia’s unfunded pension liability stood at $5.97 billion, making the Virginia Retirement System 94% fully funded, a huge improvement from the 2007 recession. Unfortunately, negative investment returns this year mean that public pension fund shortfalls are expected to exceed $1 trillion by the end of the year. Virginia is not exempt.
Meanwhile, no one has a clear idea how much debt other state and local authorities have accumulated or what the quality is of those investments. No one has conducted an audit. We simply don’t know. Maybe the U.S. can avoid its economic reckoning and Virginia has nothing to worry about. But maybe it can’t. As much as I’d like to give back money to taxpayers, I’d prefer to have functioning state and local governments should the fiscal cataclysm come.