by James A. Bacon
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. Continue reading
by James A. Bacon
This past year saw one of the greatest redistributions of wealth in U.S. history. People are upset by the 8.5% increase in inflation, but they’re not nearly as upset as they should be.
Wage earners, especially lower-income wage earners, have every right to be irate. Their hourly pay has increased, but not nearly as rapidly as the Consumer Price Index, and far less than those components of the CPI such as food, housing and gasoline that comprise a major share of their household budgets. Many were living paycheck to paycheck before the onset of inflation. Now they’re drowning.
Retirees ought to be enraged. Inflation is more devastating by far to their financial security than taxes. A retiree family with a middle-class standard of living might pay, say, $20,000 a year in federal taxes. But if they have a $1 million nest egg in 401(k), IRA and other investments, an 8.5% inflation rate pillages $85,000 from their net worth.
Who are the beneficiaries of inflation? Borrowers — homeowners with a mortgage, consumers with credit card debt, motorists paying off notes on their cars, corporations that have taken advantage of Federal Reserve Bank-engineered low interest rates to leverage their balance sheets, and, of course, the biggest borrower on the face of the planet… the U.S. federal government. Continue reading
by James A. Bacon
The U.S. national debt has passed a symbolically important milestone of $30 trillion. That’s up from the $13-$14 trillion when I wrote my book, “Boomergeddon,” in 2010 warning that the U.S. government was heading to functional insolvency by the late 2020’s or early 2030’s. I argued that higher deficits and debt were inevitable as Republicans and Democrats in Congress followed the path of least political resistance — more spending and lower taxes. The U.S. is careening toward certain fiscal crisis by 2033, when the trust fund for the Social Security system runs dry and payments to retirees are slashed to 76% of promised benefits.
One thing I did not take sufficiently into account in Boomergeddon was the resurgence in inflation caused by monetization of the debt. I thought the political class had learned its lesson from the 1970’s era of stagflation (stagnant growth + inflation), and would hold inflation in check. Higher inflation allowed government to repay its debt with cheaper dollars for a time, but investors demanded higher interest rates to offset that erosion plus they added a premium for uncertainty. The inflation rate in 1980 hit 13.5% and the federal funds rate peaked at 20%. Forty years later, it appears that those lessons have been forgotten. The Consumer Price Index rose 7% last year. And while it could subside, it will remain far higher than the 2% targeted by the Federal Reserve Bank.
The U.S. is now in a fiscal/monetary box. Continue reading
by James A. Bacon
Tom Barkin, president of the Federal Reserve Bank of Richmond, is optimistic overall about the nation’s economic recovery. The housing market is strong. Job creation has resumed. Disposable incomes are up. And families are saving more and paying down their credit cards.
But he worries about “scarring” — a term that economists use to describe longer-term negative impacts that can hinder economic recovery. “Severe downturns can leave scars that, while not always permanent, take a long time to heal,” he said in a March 21st speech at the virtual Credit Suisse Asian Investment Conference.
COVID-19 lockdowns hit hit primary caregivers particularly hard by closing schools and child care facilities, putting pressure on at least one parent to stay home. Labor force participation for parents, said Barkin, is about 6 percentage points below where it was prior to the pandemic. “If parents who left the workforce don’t return, that would have long-term negative implications for our growth potential.” Continue reading
From Virginia Business magazine: Charlottesville-based Blue Ridge Bank has made it possible for customers to purchase and redeem bitcoin at its ATMs — the first commercial bank in the country to do so. Blue Ridge Bank cardholders can purchase and redeem the virtual currency at 19 locations across the state. A year ago, bitcoins were worth $6,000 each. Today, they’re worth approximately $45,000.
By all means, let’s make it easier for small, unsophisticated investors to speculate in highly inflated and volatile cryptocurrencies!
Last August Michael Saylor of Tysons-based Microstrategy invested a quarter billion dollars in bitcoin on the premise that massive fiscal and monetary stimulus in the U.S. and other central banks around the world would be highly inflationary. His bet is looking brilliant at this moment in time. More recently, Elon Musk of Tesla fame — Tesla shares ballooned 7.4 times in 2020 on rampant speculation — has endorsed bitcoin. Don’t get me talking about the GameStop frenzy or the IPO boom for companies that have yet to make a profit. The scary thing is, we haven’t reached peak crazy yet. Continue reading
2021 New Year baby?
by James A. Bacon
Three hundred and sixty-five days ago, my wife and friends and I tossed confetti, tooted our noisemakers and welcomed in a new year. Twenty twenty, we all agreed, couldn’t possibly be worse than 2019.
It didn’t take long to disabuse us of that notion. First came the coronavirus. Then the George Floyd protests and riots. And then the presidential election. We won’t be celebrating New Year’s Eve with anyone this year — we’ll be hunkering down in social isolation — but we’re thinking that, short of an outbreak of nuclear war, 2021 has got to be better than our current annus horribilis.
But it could be a close call.
On the positive side, we should be on the downward slope of the COVID-19 epidemic as vaccines are administered and herd immunity sets in. Life for most will return to normal. We’ll be able to socialize and travel once more. But 2021 will be no epidemiological nirvana. The virus will do plenty of harm on its way out. Millions more Americans will be infected and tens of thousands likely will die. Many people will suffer lingering medical after-effects from the virus. And the nation will be dealing with the economic, mental-health and fiscal fallout for years to come. Continue reading
by James A. Bacon
“A billion here, a billion there, and pretty soon you’re talking real money,” Illinois Senator Everett Dirksen said many years ago. With the passage of time and inflation, we might need to update the quote to “a hundred billion here, a hundred billion there…” But even by the debased standards of 2020, the $435 billion that the federal government likely will have to write off as bad student loan debt amounts to real money.
The losses projected by the most authoritative study yet, reports the Wall Street Journal, are far steeper than prior government forecasts. Last year the Congressional Budget Office that the government would have to write off only $31.5 billion.
The problem has long been evident. “We make no attempt to evaluate the quality of the borrower, the ability to repay, the effectiveness of the loans,” said Douglas Holtz-Eakin, a former CBO head who now heads the American Action Forum. Not surprisingly, borrowers with subprime credit scores are among the most likely to default. As with all government excesses, taxpayers will be stuck with the tab — unless the government just monetizes the bad debt and accelerates the nation’s headlong rush to Boomergeddon, the society-crushing collapse of federal finances when lenders finally conclude they will never be repaid.
Sooner or later there will be a reckoning for America’s — and Virginia’s — system of higher education. Even a nation as profligate as the United States — estimated 2020 budget deficit this year, $3.7 trillion, national debt $27 trillion — has to staunch the losses. The nation cannot afford to continue shoveling money into the abyss. Any meaningful reform, however, would be traumatic for the many higher-ed institutions whose business models are predicated on indiscriminate lending to students. Continue reading
by DJ Rippert
Saving America’s bacon. In 2010 Jim Bacon, blogrunner of this site, wrote a book titled Boomergeddon. The sub-title of the book is, “How Runaway Deficits and the Age Wave Will Bankrupt the Federal Government and Devastate Retirement for Baby Boomers Unless We Act Now.” The book is well written and contains considerable supporting detail but that sub-title pretty much sums things up. At the time of publication Bacon’s book amplified the conventional wisdom of the day — deficits are bad and, as our president might say, big deficits are bad bigly. That traditional belief has come under scrutiny lately. One leading critic of the theories espoused by Boomergeddon is Stephanie Kelton, an economics professor at Stony Brook University and former advisor to the Sanders campaign. Her new book, published in 2020, is titled, The Deficit Myth. One paragraph from the description of Kellon’s book on Amazon.Com sums up her thesis vis-a-vis Boomergeddon. “Kelton busts through the myths that prevent us from taking action: that the federal government should budget like a household, that deficits will harm the next generation, crowd out private investment, and undermine long-term growth, and that entitlements are propelling us toward a grave fiscal crisis.” Kelton believes the United States has considerably more room to incur debt without causing economic harm and we should get about the business of incurring more debt. Paying homage to her Democratic-Socialist roots, Kellon sub-titled her book, “Modern Monetary Theory and the Birth of the People’s Economy.”
By James C. Sherlock
Steve Haner’s superb column on the state budget turned attention to federal aid to state and local governments. It is worthwhile to review where the feds get that money.
James T. Agresti, CEO of Just Facts (chart above), has written recently hat U.S. debt-to-GDP ratio is four times the historical average and climbing:
“The US national debt has just reached 120.5 percent of the nation’s annual economic output, breaking a record set in 1946 for the highest debt level in the history of the United States. The previous extreme of 118.4 percent stemmed from World War II, the deadliest and most widespread conflict in world history.”
The Federal Reserve
The Fed’s dual mandate from Congress is to maximize employment and stabilize prices. The Fed floods the economy with money in times like this and is supposed to sop it up with higher rates when the economy appears to overheat and prices rise too fast. Continue reading
by James A. Bacon
It’s been ten years since I published my book, “Boomergeddon,” in which I advanced the argument that the fiscal/monetary system of the United States would collapse into chaos by the late 2020s or so. The nation has continued down the path to perdition, but not at the rate I had expected. I did not anticipate private-sector innovations like fracking, which put an end to fears of “peak oil,” nor did I foresee policy innovations such as Quantitative Easing, which repressed interest rates and bilked lenders and investors (retirees, pension funds) but eased the burden of paying interest on the national debt. And I never imagined that the nation could last a decade without a recession.
Our national leaders did a brilliant job of fighting the last financially-led recession through regulations that strengthened the finances of our biggest banks. But a true “black swan” — a rare and unanticipated event, the COVID-19 epidemic — and the governmental response of shutting down large swaths of the economy are plunging us into a severe downturn that no one saw coming. The Congressional Budget Office estimates that Gross Domestic Product for the 2nd Quarter of 2020 will “decline by at least 7 percent or at least 28 percent at the annualized rate.” Unemployment is spiking, and will likely linger. The CBO expects joblessness to linger around 9 percent through the end of 2021.
Needless to say, a recession of this severity will have devastating impact on federal, state, and local finances. The federal government was already running a $1 trillion-a-year deficit. To that, we can add another $1 trillion or so (the CBO offers no official forecasts) from lost tax revenue, and another $2.3 trillion from the congressional rescue package, and that doesn’t include a second-round package. This year alone, the U.S. will likely add $4 trillion or more to the national debt, which is already approaching $24 trillion. That compares to a $21.4 trillion GDP. By the end of this year, the debt as a ratio of GDP could well stand at 140% — totally uncharted waters. Continue reading
The good news in Secretary of Finance Aubrey Layne’s presentation to the House Appropriations Committee this morning is that General Fund revenues, after a below-forecast start to the fiscal year, surged 27.4% in April. On a year-to-date basis, total revenues are 6.2% ahead of last year, beating the 5.9% forecast for Fiscal 2019.
The bad news is that U.S. economic prosperity is built on a mountain of consumer, corporate, and government debt. The national debt stands at $22 trillion, and the Congressional Budget Office says that debt as a percentage of GDP could increase from 78% this year to 96% by 2028. Plus, student debt exceeds $1.5 trillion, and credit card debt has surpassed $1 trillion, both record highs. And corporations are carrying a $9 trillion debt load, almost double the level of the Great Recession. At 46% of GDP, corporate debt is the highest on record.
Layne, a traditional fiscal conservative, is not predicting an imminent recession. Rather, he is saying that the U.S. economy and, by extension, the Virginia economy and state budget, are highly vulnerable to a downturn, should one occur. Continue reading
Source: “Repair Priorities 2019
A new study by Transportation for America and Taxpayers for Common Sense documents the magnitude of the “Growth Ponzi scheme” in the U.S. road transportation system. Between 2009 and 2017, the 50 states collectively added more than 223,000 lane miles to their road networks. At an average cost of $24,000 per lane mile to keep roads in a state of good repair, that means states and localities have pumped up their maintenance liabilities by $5 billion a year.
But the states aren’t keeping up with those costs, contends “Repair Priorities 2019.” Nationally, the percentage of roads in poor condition increased from 15% in 2008 to 20% in 2017.
The problem isn’t a lack of money, argues Beth Osborne, director of Transportation of America. “We’re finding the money for expansion. There’s too little money to do everything, but we’re insisting that we do everything.” Continue reading
Dust Bowl refugees in the 1930s. Will Virginia be on the delivering end or receiving end of the next recession-induced migration?
In the previous post I argued that there are large pockets of hidden risk in the U.S. and global economies that could trigger a devastating economic downturn. I’m not predicting that a recession is imminent — I do not profess to see the future — but I would suggest that only fools would pretend that these risks do not exist and fail to protect themselves from them.
As I have detailed in previous posts, Virginia is highly vulnerable to an economic downturn. The consolation is that we’ll have plenty of company. The Old Dominion is hardly the only state in the union that has failed to take advantage of 10 years of economic expansion to buffer itself from the next recession, which, unless President Trump has repealed the law of business cycles, is inevitable. What we don’t know is the timing. Do we have five years to adapt, or only one? Continue reading
The economy is chugging along at a 3% growth rate, unemployment is hitting record lows, productivity is surging. The economy looks like it’s in fantastic shape. A friend of mine and long-time Trump hater, normally disinclined to give the president credit for anything, marveled recently that the low-inflation, low-unemployment economy “is as good as it gets.” I hope like heck it stays that way.
But I am an inveterate worry wart. I’ve lived through booms before — the 1980s savings & loan bubble, the 1990s tech bubble, the 2000s real estate bubble. I’ve heard the promises that “it’s different this time.” And I’ve seen the busts that followed. It’s a universal rule that most “experts” did not foresee the meltdowns coming. The same thing may be happening again. Very few are paying attention to the build-up of highly leveraged corporate debt, both in the U.S. and abroad.
I don’t know if the “junk bond” sector will precipitate the next recession. Perhaps the next downturn will originate overseas and spread to the U.S., and a meltdown in junk bonds will merely act as an accelerant to a broader collapse. Whatever the case, the $1 trillion market now represents a significant risk. State and local governments in Virginia need to acknowledge this and other risks lurking in the economy as they go about making spending and taxing decisions. Only a fool would assume that the decade-long expansion, one of the longest in U.S. history, will last forever. Continue reading
Under a “shock” scenario in which Virginia Retirement System (VRS) investment returns replicated the disastrous performance of the 2008-2009 market crash, the state portion of the retirement plan would see an increase in unfunded liability of $6.9 billion. Employer contribution rates would have to increase to 22% of covered payroll from 13.5% now in order to maintain the integrity of the system. State and local governments would have to cough up hundreds of millions of dollars more in pension payments each year even as a recession was eroding revenues.
Those numbers are found in a recently released report to the General Assembly, “VRS Stress Test and Sensitivity Analysis.” The report is not predicting that such a scenario will occur. Rather the purpose is to show how vulnerable the Commonwealth would be if it did. While investment returns have performed handsomely since the 2008 mortgage-crisis recession, shrinking Virginia’s unfunded pension liability, the global economy is slowing and the strong investment gains of recent years cannot be taken for granted.
Even investment returns on the VRS’s portfolio only modestly lower than the assumed 7% could prove devastating. “If the VRS fund only returned 5% annually each of the next five years, the State plan would see an increase in unfunded liability of approximately $2.2 billion,” the report says. Continue reading