Recovering from the Great Recession in the U.S. and Nevada

5/23/2011
Recovering from the
Great Recession
in the U.S. and Nevada
Elliott Parker, Ph.D.
Professor of Economics
University of Nevada, Reno
The Great “Balance-Sheet” Recession
• Recessions - less common than they used to be.
• Depressions – much less common, much longer and
deeper than normal recessions.
– A recession caused by a financial crisis
– A “balance sheet” recession: financial wealth collapses,
banks collect reserves to offset bad debt, government
becomes borrower of last resort, deflation and ZIR.
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78%
U.S. Consumption Share
76%
74%
72%
70%
68%
66%
64%
Consumption
Consumption plus trade balance
62%
60%
58%
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Real U.S. Investment
(Share of GDP)
14%
12%
10%
Nonresidential Fixed Investment
Residential Investment
Inventories
8%
6%
4%
2%
0%
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
-2%
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110%
100%
90%
80%
Spending as a Share of U.S. GDP
Private Investment Purchases
Trade Deficits
70%
60%
50%
40%
Private Consumption Spending
30%
20%
Federal Purchases
10%
State and Local Government Purchases
0%
1960 1964 1968 1972 1976 1980 1984 1988 1992 1996 2000 2004 2008
Response #1: Monetary Intervention
Federal Reserve authorized:
• Quantitative easing: purchase of government bonds, helped
drive yield to zero.
• Purchase of private mortgage-backed securities, central bank
currency swaps, target federal funds rate near zero.
• Pushing vs. pulling on a rope. Effectiveness varies.
QE II is currently planned:
• – “Hail Mary pass” – to prevent deflationary expectations.
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Monetary
Base
(Currency
plus Bank
Reserves)
Money
Stock
(M2)
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But inflation
hasn’t been a
problem yet!
Low interest rates
and inflation have
increased money
demand.
Response #2: Bank Bailouts
Emergency Economic Stabilization Act:
• $700 billion authorized in October 2008. Only $550B used.
• TARP funds first for purchase of troubled MBS, but changed to an
equity purchases approach with executive pay restrictions.
• $270B went to AIG, GM, Wells Fargo, Citigroup, BoA, JPMorgan
Chase, Morgan Stanley, and Goldman Sachs.
• $27B went to over 600 banks ($300K-$968M)
• Majority has already been paid back, with interest.
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5/23/2011
Response #3: Fiscal Intervention
• Economic Stimulus Act of Feb. 2008:
– Tax rebates for 2008, estimated $150B cost (about 1% of GDP) in 2008.
• American Recovery and Reinvestment Act of 2009:
– Estimated $800B cost over several years, with less than $200B spent in FY
2009, and $400B in FY 2010 (about 3% of GDP).
– About 40% in tax credits, 30% in state fiscal support, and 30% in
infrastructure investment (education, energy, health care), and some
extended benefit support.
– How effective was this stimulus?
Three Questions Answered…
• Why isn’t the economic recovery more robust?
– It’s a depression, dummy. They last a while. Banks stopped lending, and
people stopped building houses. But the economy did not collapse.
• Is inflation a threat?
– No, the bigger concern has been deflation. However, the Fed must be
willing to unwind the monetary base, once banks start lending again.
• Has the overconsumption problem eased?
– Yes, consumption spending plus residential investment has fallen – though
as a nation we are still spending more than we make.
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The Federal Deficit and the Debt
• The Federal Debt is almost $14T, about our annual GDP ($10T
in 2008, compared to less than $6T in 2000).
• About $8T is held by private, half of that by foreigners.
• The current deficit is temporary due to the recession, but
there are serious structural problems: tax cuts, the growth of
health care costs (i.e., Medicare).
• Borrowing for investment, or in bad times, makes sense.
Borrowing in good times for consumption does not – IBGYBG.
30%
Government Spending and Revenues
(Share of 1950-1990 Trend Quarterly GDP)
20%
Share of Trend GDP
10%
Federal Revenues/Trend
Federal Expenditures/Trend
Net State & Local Expenditures/Trend
0%
1947 1951 1955 1959 1963 1967 1971 1975 1979 1983 1987 1991 1995 1999 2003 2007
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5/23/2011
Fifty Herbert Hoovers
• State and local governments are often ignored.
• SLGs purchase more goods and services, and employ more
people, than the federal government.
• Most SLGs have balanced budget requirements, which means
they must either cut spending or raise taxes during recessions.
• SLG financial crises lag the rest of the economy.
• Estimates: cuts to SLG lead to twice the fall in GSP the next year.
45%
40%
Government Purchases of Goods and Services
(Share of GDP)
35%
30%
25%
20%
Federal Purchases
SLG Purchases
15%
10%
5%
0%
1929 1933 1937 1941 1945 1949 1953 1957 1961 1965 1969 1973 1977 1981 1985 1989 1993 1997 2001 2005 2009
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Spending cuts have more
effect than tax increases.
It should therefore be no
surprise that when SLGs
are cutting as the Feds
are spending, the
economy does not
recover very fast.
What happened to Nevada?
• Gaming was a sustainable model, until monopoly ended.
• Las Vegas maintained growth by building new properties, but
gaming/hotels/tourism still a falling share of state economy.
• Rapid construction was not sustainable: building homes for other
construction workers, dependent on California bubble.
• Low educational attainment: supply and demand.
• Relatively undiversified economy: little public investment.
• State and local government revenues reliant on gaming tax,
narrow-based sales tax.
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5/23/2011
Nevada’s Economy
• Housing prices fell more than elsewhere, most mortgages
underwater.
• Personal income had been growing by 8% per year for
previous decade. It declined by 6% from 2008:1-2009:1, and
has been flat since.
• Gaming in long-run decline – 17% of GSP in 1980s, 10% in
2007, 8% in 2009.
• Construction boomed from 1997-2006, became largest share
of any state.
• Unemployment highest in country.
200
Inflation-Adjusted
Housing Price Index
California
Nevada lagged
California, and our
initial housing stock
was smaller.
1980 = 100
100
USA Average
Nevada
- 37%
- 16%
- 49%
They came here
looking for deals.
Our construction
sector was the
country’s largest.
0
1980 1984 1988 1992 1996 2000 2004 2008
Quarterly FHFA Data
Underwater
mortgages:
USA 23%
CAL 33%
NEV 66%
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20%
Personal Income Growth Rate
10%
Nevada was the fastest-growing
state.
USA
California
Nevada
0%
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
-10%
We became the fastest-falling
economy (a net decline of
7.2%)
Because of its
reliance on
construction
and gaming,
Nevada’s
economy
declined more
than any other
state. We went
from richer
(mean, not
median) to
poorer.
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Nevada’s
unemployment
rate became
highest in the
nation – and is
only falling
now because
people are
exiting the
workforce, and
the state.
Nevada’s Fiscal Crisis
• Economic Forum revenue projections lower for 2009-2011
biennium than for 2007-2009.
• Sales tax revenues continued to fall.
• Gaming win continued to fall:
+8.4% in 2006, +1.8% in 2007 (was $12.8 billion).
-9.7% in 2008, -10.4% in 2009 (now $10.4 billion).
• Cuts of 8% to state budgets in 2008.
• Legislative Cuts of 12% to NSHE budget for 2009-2011 biennium,
net of ARRA funding.
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5/23/2011
$4,000
Figure 1: Nevada General Fund
(in Millions of Dollars)
$3,500
$3,000
$2,500
$2,000
$1,500
$1,000
$500
If you look at the raw data prior to
the 2009-2011 biennium,
government spending in Nevada
has exploded.
The Governor has repeatedly said
that expenditures are out of
control.
This surplus
was given back
in a rebate.
$0
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
General Fund Expenditures
University of Nevada, Reno Budget
General Fund Revenue
NSHE Budget
25
Figure 1(B): Nevada General Fund
(in Constant 2007 Dollars Per-Capita)
$1,600
$1,400
$1,200
$1,000
$800
$600
$400
$200
If you adjust for inflation and population growth, you
get a different picture – though you can still make it
look like it is growing by picking the right dates.
$0
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
General Fund Expenditures
University of Nevada, Reno Budget
General Fund Revenue
NSHE Budget
26
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4%
Figure 2: Nevada General Fund
(as a share of Gross State Product)
Share of Overall State Economy
2%
And you get an even different picture if you compare
it to the whole economy – since the most educated
people have tended to see their real incomes rise
over time.
0%
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
General Fund Expenditures
University of Nevada, Reno Budget
Annual Data
General Fund Revenue
NSHE Budget
3.5%
Nevada State General Fund
(Share of 1980-2005 Trend GSP)
Actual Revenue
3.0%
Budgeted
Expenditures
2.5%
2.0%
1.5%
1.0%
0.5%
General fund budget may
not legally grow faster than
population growth plus
price inflation rate
(relative to late 1970s).
Over last decade, K-12 plus
Human Services have grown
from 60% to 70% of the state
general fund budget. Cuts hit
other sectors harder.
0.0%
1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
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Components of the Budget
• The state budget consists of the General Fund, plus other funds that are
either paid for through special taxes (e.g., the highway fund) or through
federal funding or matching (e.g., Medicaid).
• In the General Fund:
– K-12 – grew from 35% of 2000-01 budget to 40% of 2010-11 budget.
– Human Services – grew from 25% to 31%.
– NSHE – stable at 19% (about 0.6% of GSP) until 2008, now 15%.
• UNR’s share of NSHE budget fell from 45% to 32%.
– Public Safety – fell from 12% to 10%, now 7%.
– Everything else fell from 10% to 7% of budget.
Different ways to measure the size of
government
• General Fund
• Federal and Local vs. State.
• Total Spending, including federal pass-throughs.
• Total purchases of goods and services, including state
employee income.
• Tax Burden
• Number of state (or state & local) employees.
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10%
Figure 3: Nevada Government Spending
(as a share of Gross State Product)
8%
Share of Overall State Economy
6%
4%
2%
It is not just the General Fund…
0%
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
State & Local Government Output (BEA)
General Fund Revenue
University of Nevada, Reno Budget
General Fund Expenditures
Tax Burden (Tax Foundation)
NSHE Budget
31
How does Nevada compare?
• Nevada has the second-lowest tax burden in the country
(Alaska’s was lowest, but their expenditures were much higher),
and we export taxes to tourists.
• Nevada has the smallest general fund in the country, as a share
of GSP – less than 2.5%.
• Nevada’s state government spent 6.4% of GSP in total, lowest in
the country.
• Combining state and local government spending, Nevada spent
12.4% in 2005, 38th in per-capita terms, 48th as a share of GSP.
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Smaller states (except Nevada)
tend to spend more.
Nevada’s SLG Employment
• In 2005, Nevada had approximately 86,000 government employees, of which
22,000 were state employees and the rest local.
– 45% in K-12, 10% in higher education, 10% in local police and fire
protection, 8% in administration, and the rest in corrections, parks and
recreation, highways, hospitals, health, and public welfare.
• Only 5.5% of Nevadans worked for state and local governments – lowest
amount of the 50 states.
– Average of all states = 7.5%.
• Nevada was also 50 th in the number of state employees in higher education,
and 49 th in the number in K-12.
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Again, most small states tend
to have more state employees.
SLG Wages and Benefits
• Before the fiscal crisis began, Nevada’s state employees earned
slightly more than the national average – but cost of living was
about 10% higher than average.
• Nevada’s city and county employees earned more than 10%
above national average, but K-12 teachers earn close to median.
• University of Nevada, Reno paid the average salary for
comparable universities. Currently less than national average.
• Are benefits comparable?
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Is more government spending good?
• Relative efficiency of private sector.
• Sometimes markets fail.
• Public Goods – provided or paid for.
• Examples: roads, ports, bridges, schools, national defense,
courts, police, firefighters, bank auditors, cloud seeders and
even a social safety net or a functioning health care system.
• State & Local vs. Federal.
• U-shaped relationship.
Fiscal Effects
• When spending is falling, this leads to more cuts in spending.
Government spending can help stabilize overall spending.
• Tax hikes are bad for an economy in recession, but spending cuts
are worse.
– Kilkenny, Harris, and Fadali – In Nevada, last cuts in state
government spending will lead to $1 billion less in private
spending (tax hikes $0.5 billion).
– My own estimates: effect of changes in SLG GSP significant.
• Role of states in the Great Depression.
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Is Nevada especially generous to Higher Education?
• The state pays a greater share of higher education than in most
states – but state law (NRS 396.540) says it should be free for
most Nevadans.
• The state spends a larger portion of the general fund on higher
education than in most states – but that general fund is small,
and there are few true private universities that compete for
students.
• Just because a poor man spends more of his money on food
does not mean he eats better.
1.0%
Figure 4: Nevada System of Higher Education Budget
(as a share of Gross State Product)
University of Nevada, Reno Budget
NSHE Budget
Share of Overall State Economy
0.5%
0.0%
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
40
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The Gibbons Cuts
• Biennial budgets, from July 1 to June 30.
• Expenditures matched to Economic Forum projections for tax
revenues.
• Biennial budget for 2007-09 = $6.8 billion (about 2.6% of
2007-08 GSP), but only $6.3 billion spent as spending was cut
in special session.
• State Government faced a $2 billion shortfall last time.
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Budget for 2009-11= $6.9 billion
• Federal stimulus funds ($350m).
• Many K-12 teacher salaries rose due to contracts.
• NSHE budget cut by 12.5% (15% at UNR).
• Business payroll tax for large businesses ($346m).
• Sales tax increase ($280m).
• Clark County room tax ($220m).
• Furloughs.
• Share of Clark and Washoe property taxes.
• State is borrowing to pay for unemployment benefits.
The Sandoval Cuts for 2011-13
• Total revenue currently projected = $5.3 Billion for biennium –
about 2.1% average of current GSP.
• Budget augments revenues with $0.5 Billion in diversions and
securitization.
• Budget diverts county property taxes to replace some General
Funds for universities, and pushes many social service
responsibilities to counties.
• Net budget cuts of 23% to higher education, 29% compared to
FY2009. UNR operating budget cut 26% (35% cumulative), and
General Fund contribution falling 37% (50% cumulative).
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Are there options?
• On the table now:
– A Business Margin Tax of 0.8% to replace the Modified Business Tax.
– A Transactions Tax of 1% on services not already covered by Sales & Use
Tax, or other taxes.
– More service fees, including tuition.
• What could be on the table:
– Corporate profits tax; reducing deductions for mining net proceeds tax;
streamlined sales tax agreement for internet sales tax collection.
– Borrowing to get through the biennium, from internal funds and delayed
contributions, securitizing future revenues, or general-purpose bonds.
National Prognosis?
• Housing prices are stabilizing nationwide.
• There is still a significant inventory of foreclosures and
forced sales which are waiting to go on the market.
• Officially, the recession is over, but national recovery is
slow. Banks still have significant excess reserves.
• Unemployment lags growth, and acts as a brake.
• Congressional efforts to cut spending would dampen
recovery, if they were more than symbolic.
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5/23/2011
What about Nevada?
• Nevada appears to have hit bottom, now showing some signs of
stabilizing in gaming and sales.
• But Nevada continues to lose jobs, losing people to match.
• California is adding jobs, which will help in Nevada.
• Nevada underinvests in education and public investments, and is
poised for more major cuts. Potential for brain drain.
• People continue to hope for one more magic bullet: green jobs,
Yucca Mountain, mining severance tax, et cetera.
So What Shall We Do?
• Nevada is a low tax state, no matter what NPRI says.
The projected budget gap is only 1% of GSP.
• Basic state services necessary for a decent present, but
education is necessary for our economic future.
• We can trade reforms (e.g., collective bargaining,
benefits, pensions) which reduce the growth of future
spending in return for tax restructuring now.
25