Innovation Ecosystem/Opinion

Budget planning in a time of pandemic

Is the state willing to consider borrowing money to get out of its economic hole?

Image courtesy of WPRI Twitter feed

Missing from the news coverage around budget gaps caused by the coronavirus pandemic has been stories about how the state could borrow money as an important tool in its budget toolkit.

By Tom Sgouros
Posted 5/25/20
To prepare for Rhode Island’s economic future in a post-pandemic world, it may require borrowing money and raising taxes, rather than just slashing the budget.
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PROVIDENCE – What are the novel economic policies needed for the novel coronavirus? The last two months have been cataclysmic for many people in our state, but the sad truth is that the economic devastation wrought by the virus and our own government’s faltering response to it is only beginning to be felt.

The lockdown is ending – for now – but it was the virus, not the government, that caused the sudden decline in demand for goods and services, and it’s going to be with us for a while, even if some things can reopen. This is what economists mean when they talk about a demand-led recession and the coming months and years are going to be very bleak for a lot of people.

What’s worse is that government response is going to be weak, at best. Congress is wrangling over whether there will be aid to states in anywhere near adequate amounts, but back here in Rhode Island, policy makers only say, “What can we do? We have to balance the budget.”

They are discussing how much to slash state aid to schools and towns, how many state employees can be furloughed or laid off, and how many services can be cut back. This is the same story as a decade ago, and will have the same result: cutbacks by state government will prolong and deepen the economic crisis, just as they did in the Great Recession of 2009-2010.

Retelling a success story
This is an appropriate moment to tell you a story about a state that suffered a humongous and very sudden demand-side economic crisis a generation ago and how they addressed it successfully. In that state, a third of its citizens were suddenly – overnight – deprived of the ability to spend their own money. Shops, restaurants, and tradespeople saw an immediate and drastic decline in their incomes and economic devastation loomed.

What did that clever state do? They borrowed a billion dollars – about a third of the state budget – to get out of the crisis and they simply gave that money to people who had lost it. No strings, no means testing, they just gave it to people. To pay back that huge loan, the state added a half-percent to the sales tax. As a result, the economic crisis was not nearly as deep as it might have been. The economy of that astute but anonymous state survived and did well enough that the loan was paid back almost 20 years ahead of schedule.

By now, anyone familiar with my cute rhetorical devices would be at least faintly suspicious that the state was Rhode Island, and the crisis was the credit union fiasco of 1991.

Cuteness notwithstanding, in the face of that crisis, Rhode Island leaders acted boldly. They took a risk to keep the state going and we are better off today as a result. It was not a small risk, either. As a proportion of the state budget, this is the equivalent of more than $3 billion today.

This is not a full-throated endorsement of then-Gov. Bruce Sundlun, or the House leadership of the time. The policy response to the banking crisis was driven as much by panic as deliberation and better possible outcomes were left on the table for some fairly crass reasons. But the bottom line is this: the state was not powerless in the face of a demand-led economic crisis. State policy makers recognized their power and used it decisively to make lives better for everyone. And the lasting effect on the state was clearly positive, even if it could have been better.

The path forward
What could we do as a response to the economic body blow our state is absorbing right now? Strictly as a matter of economics, it would not be a terrible idea just to give money to people. After all, that’s what worked last time. But you could do better, too: subsidizing rent, helping businesses retain employees, enhancing test-and-trace capacity, providing a low-cost alternative to COBRA for newly laid off workers, funding virus mitigation measures for reopening schools in the fall, and more. There are dozens of other ways to put money in the hands of people who desperately need it and who are likely to spend it in ways that will help the state’s economy stagger back to life. And many of those ways would leave us collectively better off, too.

We still enjoy the benefits of investments made during the Great Depression. The Federal Works Progress Administration made improvements to parks all over the state, including Prospect Park and Roger Williams Park in Providence, built the Pastore Federal Building [Post Office] in downtown Providence, the Apponaug post office, schools in East Providence and Cranston, sidewalks in Warwick, the Brenton Point sea wall and Cardines Field in Newport, sewers in Woonsocket, and much more. McCoy Stadium was a WPA project, too. [See link below to details of WPA projects in Rhode Island.]

Where would the money come from
Who would lend us this money? As it happens, the state has not had much trouble borrowing recently. There is a global capital glut and interest rates are at historic lows. And the Federal Reserve is prepared to lend as much as $500 billion in short-term money to states who want it, so the state could borrow a large amount right now and over the next three years issue longer-term bonds to repay the Fed.

What about the need for a balanced budget? A state with debt can still have a balanced budget. People who say the state can’t do deficit spending seem unaware that the Federal government uses different accounting conventions than state and local governments in the U.S. If Rhode Island used federal accounting conventions our budget would not look balanced, but states do not use those conventions because states do not print money.

Any state can borrow for whatever it can persuade lenders to lend, and digging us out of a deep economic hole is a 100-percent praiseworthy goal. Rhode Island should have no trouble structuring and selling a bond for this purpose. A dedicated revenue stream, such as the 1991 bond had, would make the borrowing cost even lower.

In other words, the tools are available to act to ameliorate or even prevent economic devastation. The precedent is pretty clear that what policy makers think is impossible is not only possible, but was actually done, and not even very long ago.

The question before policy makers in Rhode Island is whether they want to do something to help the state’s economy and leave us possibly better off than we were last year, or whether they plan just to slash the budget, muscle and bone, cross their fingers, and hope for the best.

Tom Sgouros is a frequent contributor to ConvergenceRI.


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