Virginia, Antifragility, and the Next Recession

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advantage of 10 years of economic expansion to buffer itself from the next recession, which, unless President Trump has repealed the law of business cycles, is inevitable.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?

We saw the economic meltdown in overtaxed, over-indebted and mal-administered Puerto Rico after Hurricane Maria devastated that island commonwealth. That fiasco was a dress rehearsal of what awaits several states in the United States. The state of Illinois and city of Chicago are one recession away from fiscal insolvency. (Moody’s gives Illinois a Baa3 bond rating, one level above junk. Chicago’s is better but not by much.) Just imagine the chaos ensuing from a financial meltdown and collapse of government services in a state as large as Illinois and a city as large as Chicago. Imagine the riots, the breakdown in order, the panic, the flight of capital, and the exodus of people with the means to escape. That financial and human capital will have to go somewhere. Where will it land?

(Does the talk of riots sound crazy to you? Maybe you didn’t live through the ’60s and ’70s. From the heights near the Washington Cathedral, I watched as riots after the Martin Luther King assassination burned much of Washington, D.C., to the ground.)

Nicholas Nassim Taleb has introduced the concept of “antifragility” into the public lexicon. Antifragility, for want of a better word, is the opposite of fragile. Fragile systems disintegrate under extreme stress. Resilient systems survive extreme stress and eventually recover. Antifragile systems thrive from extreme stress.

Government at all levels will be fiscally stressed by the next recession. The most fragile, like Illinois and Chicago, could well disintegrate. Others, like New Jersey, could survive as functioning entities, but they will be hobbled. Some states could prove to be resilient; they will endure significant hardship but they will recover. Hopefully, Virginia will fall into the latter category. A handful of the most fiscally disciplined and economically dynamic states might be antifragile.

What would an antifragile state look like? It would enter the national/global recession in sound fiscal condition, and it would continue to provide core government services without drastically raising taxes. Furthermore, it would have the wherewithal to accommodate the housing, educational, and infrastructure needs of an influx of newcomers. Thanks to its ability to function in a chaotic world, an antifragile state would act as a magnet for financial and human capital fleeing disordered states and metropolitan areas. The inflow of investment and talent would prop up the state economy, offsetting much of the hardship inflicted by a national downturn. An antifragile state would emerge from the trauma of a major recession stronger and more economically competitive than before.

At best, Virginia could be classified today as a resilient state. On the plus side, our AAA bond rating is indicative of comparably strong state finances. We can absorb bigger fiscal hits than some other states. On the negative side, our economy remains distressingly dependent upon federal government expenditures, particularly in the defense/intelligence/homeland security area. On the plus side, we have a low poverty rate, a lower crime rate, and a smaller percentage of the population dependent upon government largess, all of which bodes well for the maintenance of public order during times of rising joblessness and budget cuts. On the negative side, our housing, schools and transportation systems are over-taxed as it is. It is not clear if Virginia could handle a sustained, large-scale in-migration of newcomers.

No one has studied these issues systematically or identified metrics by which to gauge a state’s or community’s level of fragility, resilience, or antifragility. Virginians have given far more thought to resilience in the face of global warming and sea-level rise, the worst impacts of which, should they occur as predicted, are decades away. The next recession and test of our fiscal resilience is, at best, a few years away.