The Virus Your Town Can’t Shake

It’s obvious that central banks cutting interest rates won’t do a darn thing to soften the economic blow from the spreading coronavirus. Fed Chair Jay Powell and his fellow bankers are smart people. They know this.

But they’re also aware they had to do something at least to appear like they were in tune with the market jitters, even if making loans cheaper won’t solve the problem of falling business activity.

Yes, there were other reasons for the Fed to act, like bringing U.S. rates a bit more in line with rates in other countries so that the U.S. dollar didn’t jump to nose-bleed levels. But that still leaves a gaping hole in consumption.

There’s only one type of policy that can address this, fiscal policy. However, even if Congress tries to ride to the rescue, they can’t solve the biggest financial headache, which is coming soon to your town.

With the virus spreading around the world, who wants to get into closed metal tube, fly across the nation, and breathe partially recirculated air with 160 other people?

The problem isn’t a lack of money, it’s that consumers both here and abroad are less likely to spend their cash in ways that require congregating in public places. With that as a backdrop, any government policy that puts more money or credit in the hands of consumers won’t make a difference. To the extent that government wants to help, it must direct policy at the businesses themselves. Think corporate welfare.

I don’t know if this will fly, given that large businesses are flush with cash after two years of much lower tax rates, but from what I read it looks like we’re headed this direction. Such a policy would be controversial, and would also miss the bigger mark, local and state budgets.

The Wall Street Journal analyzed data from 478 cities across the U.S. as reported to the National League of Cities, and found that 27% expect their 2019 real revenue to be less than 2018.

The real total general fund revenue for U.S. cities is expected to fall in the final 2019 numbers for the first time in seven years. Only about half of the cities surveyed expected real general revenues to increase in 2019, and of course, this is before any effect of the coronavirus.

Falling business activity across the nation will mean falling tax revenue, which will leave a hole in many already-tight city budgets. It’s likely that many city officials will look for a place where they can trim expenses, and unfortunately some will land on the same old line item, pension contributions.

Merritt Research estimates that in 2018, U.S. cities owed $500 billion in pension liabilities, up 25% from 2013. Keep in mind, these were good years when cities were raking in higher tax revenue. As revenues fall, some cities will slash their pension contributions, making the problem worse, while others will have to shift spending to make good on what they owe.

At the same time, the recent fed move will make pension liabilities increase, putting pension sponsors like cities and states in a deeper hole. As interest rates fall, the future payments promised to current and future retirees are discounted at a lower rate, making the present value bigger. This requires pension sponsors to put away even more money than they already were, at a time when they have less money to spare.

Even when the virus scare fades, either because a company developed a therapeutic, or summer arrived and the virus can’t live as long outside a host – or both! – we’ll still have to deal with an impaired economy and jittery markets.

It’s questionable if the equity markets will shoot back to record highs, especially in the midst of an election when the Democratic nominee, whomever wins that slot, has promised to raise corporate taxes by at least 30%. Investors will likely spend some time on the sidelines, protecting their gains from 2019 and waiting to see how things shake out.

All of this points to the same end… higher taxes at the local and state level, to pay promises made decades ago that politicians refused to fund in the intervening years. The bill is coming due.