Solvang's Covid Christmas

Sometimes we watch sappy Hallmark Christmas movies, about one in eight is somewhat decent.  A month or two ago there was one about Solvang, a town about 30 miles north of Santa Barbara, California.  

-- "A very charming Christmas town," Santa Ynez Valley Star

Solvang's "unique selling proposition" is that the architectural style of the central business district is Old Dutch style, although they say it's Danish, and as a result it's a big tourist destination.

As we know, the pandemic has decimated retail and hospitality businesses generally ("Pandemic Closures Devastate Restaurant Industry’s Middle Class," New York Times), small business ("COVID-19 devastated California’s small businesses. Here are three that didn’t survive," Los Angeles Times), commercial districts specifically, and tourism especially ("IMPACT ASSESSMENT OF THE COVID-19 OUTBREAK ON INTERNATIONAL TOURISM," UNWTO; "The pandemic is hurting tourism," Baltimore Sun).

Because the Republican Senate is resistant to most forms of financial support for these types of businesses and destinations, they're hurting.  Many thousands of businesses have shut their doors, and in these sectors, unemployment is rampant.

A result, many businesses and tourist destinations are pushed to stay open in the face of inadequate federal assistance -- states and localities are providing some assistance beyond that of the federal government, but with budget issues of their own, it's not enough.

Even though we know that it's a bad idea because of the prevalence of the coronavirus.  The Sturgis motorcycle rally is but one example of event tourism being a bad idea right now ("How the Sturgis Motorcycle Rally may have spread coronavirus across the Upper Midwest," Washington Post).

Eating in restaurants, being indoors for long periods of time, etc., are really bad ideas.

So when I saw an article ("A small tourist town is refusing to comply with California's shutdown. It may not be the only one," San Francisco Chronicle) that Solvang is defying covid restriction orders, because of economic desperation, I thought, that's not a movie you're going to see on Hallmark...

UK local governments selling off public assets in face of austerity-driven budget cuts

I have mentioned from time to time how local governments in the UK have been devastated by cuts to their budgets by the national government, justified by austerity, or the non-Keynesian approach to macroeconomic fiscal policy focused on reducing government expenditures and deficits rather than expanding the economy in the face of economic downturns.

Arguably, a justification for austerity derives from neoliberalism and its ideological position that government action and spending is always inferior to the market.

From the Guardian article "Neoliberalism's 'trade not aid' approach to development ignored past lessons: Neoliberal development policy was radical and abstract, but its uncompromising approach proved dangerous in the real world":

Neoliberalism is often used today as shorthand for any idea that is pro-market and anti-government intervention, but it is actually more specific than this. Above all, it is the harnessing of such policies to support the interests of big business, transnational corporations and finance. It seeks not so much a free market, therefore, as a market free for powerful interests.

Similarly, the flip side of this is a focus on outsourcing government functions to the private sector and private financing, both of which have been shown to be more expensive and often less successful than if these functions were handled by government.

-- "Failure of outsourcing in Great Britain," 2018
-- "How part-privatising the UK probation system backfired," Financial Times

UK austerity is also in the news, with claims that cuts in budgets for policing have contributed to a rise in crime more generally ("UK Police Are Stretched by Austerity," New York Times) and more recently, knife crime ("K Knife Crime Rises. Are Budget Cuts to Blame?," NYT).

UK local governments have experienced cuts in budgets up to 60% and that combined with the double whammy of also being financially responsible for elder care, this has driven many governments to bankruptcy, but also selling off property.

The problem is exacerbated by restrictions on local taxation, especially taxation of residential property, which is undertaxed.

The Guardian reports ("Great British sell-off: how desperate councils sold £9.1bn of public assets") on a study of this phenomenon conducted by the Bureau for Investigative Journalism and HuffPost UK.

The article discusses putting up various civic assets up for sale such as the Stretford Public Hall in Trafford and the Moseley Road Baths in Birmingham.

Both these buildings ended up being taken over by community nonprofit initiatives, with support from the nonprofit Locality and their Save Our Space campaign. From the article:

“Part of the problem is a lot of councils don’t have policies in place to think about alternatives to selling off properties to the private sector,” says Tony Armstrong, Locality’s CEO. “Councils are under a huge amount of pressure, and we definitely sympathise with them, but when they look at plugging these budget holes in the short term, once they’ve done that, they can’t do it again - and these places are lost forever.”

In a period of austerity, non-profit making services are “just seen as a drain”, Armstrong says.

“It probably sounds like jargon, but we talk about this concept of ‘social infrastructure’. It’s common sense really, but what brings communities together is the common experiences that we share, and a big part of that is the tangible, physical places where we get together.”

Also see these past Guardian articles:

-- "These squares are our squares: be angry about the privatisation of public space," 2017
-- "Britain's cash-strapped councils and the great Civic Centre sell-off," 2017
-- "Councils forced to sell off parks, buildings and art to fund basic services," 2018
-- "In the frame: two radically different plans for civic art collections," 2019

This is an issue for local government in the US, not so much with public buildings and park space, although it does happen, but with services and infrastructure, such as Chicago's disastrous long term lease deals for its public parking structures and parking meters. The city was driven to make a fast deal because they needed money to plug a $2 billion budget deficit.

-- "Financial engineering for municipalities," 2011
-- "A lesson to cities that they need to be very careful when leasing assets to public private "partnerships"," 2012
-- "Chicago's ongoing debacles: parking and governance," 2013

This also comes up with outsourcing and similar kinds of deals concerning speed cameras, parking meter revenue collection, etc.

At the federal level, outsourcing is a big deal, and hyper problematic, from the management of "camps" to house undocumented immigrants ("Are US immigrant child detention centers "concentration camps"?," Quartz) to privatized prisons (Private Prisons in the United States, The Sentencing Project)

Lehman Brothers and the Great Financial Crisis: Ten Years Later

I still don't understand fully "high finance," and so I am not sure about "credit swaps," interest rate swaps, etc., and how they influenced the Real Estate and Finance driven "recession" in the US and Europe.

The New York Times has a very detailed special section, "Crisis and Consequences," and after reading it which I haven't done yet, maybe I'll understand high finance a bit better.

Back in 2008, not unlike John Gapper of the Financial Times ("My naive part in Lehman's downfall"), I too thought it was the right response for the US Government to not bail out Lehman Brothers as it went into bankruptcy. Government officials were hesitant because of all the criticism of their bailout of Bear Stearns a few months before. From the article:

A few hours before Mr Paulson spoke, the Financial Times published a rather jaunty column by me, advising the Treasury secretary to take the weekend off to pursue his hobby of birdwatching. The government should resist the pressure to save Lehman Brothers, as it had Bear Stearns and Fannie Mae and Freddie Mac, the mortgage institutions, I wrote. It had “talked tough about moral hazard . . . but been a soft touch.”

Within days, Mr Paulson took my advice (and that of others) and allowed Lehman to collapse, triggering the worst postwar financial crisis and unleashing economic and social damage that still endures. It is rarely that an article backfires so rapidly and spectacularly, and I have had a decade to reflect on my part in Lehman’s downfall.

Yes, it sucks that excepting a few companies, leaders, and stockholders there wasn't much consequence for the "moral hazards" that financialization of so much of the economy got us into.

A protester in Chicago.  Photo: Keystone.

But I failed to consider  the ramifications of letting such a big actor fail and the mulit-year e negative impact this would have on real estate development -- both office and multifamily residential -- in urban cores.

The market was devastated and took years to recover, although some cities like Washington, Seattle, San Francisco, and "West Los Angeles" managed to recover sooner, although certain types of construction like condominiums, took much longer to recover.

But as we all know, the consequences of the GFC are far greater than the construction meltdown in US cities.

The government response, focused on maintaining financial institutions but not in helping the people, mortgages, and businesses that were "collateral damage," led in the US the rise of the "Tea Party" and rightward "populism" in Europe, including the Brexit vote in the UK.

In the US, the Tea Party furthered the anti-government strains within the Republican Party.  Whereas the Occupy Wall Street movement likely has had some impact on the current move for a more progressive Democratic Party.

I say I am not that good at economics (I do understand microeconomics pretty well in practice), in particular macroeconomics, but I definitely understand the concept of Keynesian economics, and why governments are supposed to be "countercyclical" in fiscal responses to crisis.

To stoke demand in times of recession, they should spend.

Note that what happened in 2008 is also a classic example of what Marxists call a "capitalist crisis," and it was a joke that Tea Partiers complained that the government was taking over the economy, that President Obama was a socialist, etc., as this was a classic example of the government stepping in to bail out capitalism."

-- "The Global Crises of Capitalism: Whose Crises, Who Profits?," Global Research

Also a good example of "neoliberal overreach."

-- "Neoliberalism: The Idea that Changed the World," Guardian

Unfortunately, in Europe definitely and in the US somewhat -- although there was a fiscal response in terms of the ARRA, the American Recovery and Reconstruction Act -- it wasn't enough because of Republican opposition, the response was government fiscal austerity, which New York Times columnist economist Paul Krugman has written about ad nauseam ("A General Theory Of Austerity?"), which extended the recession by many years.

Sadly, that was the time to build big infrastructure projects, when money was cheap and demand was low keeping prices down, but as the Republican response against "high speed rail" showed, the bias against government involvement and investment of almost any kind meant we failed to do any of that.

That's another economic lesson I learned, because I was aware, growing up in Michigan, how much of the state's infrastructure, be it dormitories at colleges or sidewalks, was constructed as part of New Deal projects, and this investment had great impact in later years and continues to do so.

Of course, in the US we've learned that Republican opposition to fiscal spending because of a concern about debt is total b.s. given what's happened to the US government budget after a massive tax cut for corporations and the wealthy ("Republican tax cuts to fuel historic U.S. deficits: CBO," Reuters).

Republicans are fine with debt if it funds tax cuts but otherwise they don't want to support government spending for much other than the military. And even though they produced the "debt crisis" by cutting taxes, they become a-historical and use the debt as the reason for further cuts to social spending.

In the UK, austerity led to the Brexit vote. The Conservative Party shifted "responsibility" for their recession from their choices on austerity, blaming the EU.

In Europe, austerity drives much of the hard right response in many countries, although this is abetted by immigration from Africa, which has been abetted both by the consequences since the US-initiated war in Iraq which destabilized the Mideast as well as drought further south.

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While yes, it's true that for the most part, no one went to jail and that's probably not good there are a bunch of lessons.

The big problem is that the government response was focused on institutions, not people ruined by the failure of institutions.

The second was the failure to apply Keynesian approaches for substantive fiscal stimulus.

The third is the failure in the adoption of neoliberal approaches to government -- government always bad, market always good, globalization of the economy -- was the failure to build a substantive safety net for people buffeted by the changes, from robust health care access to housing assistance. 

Although this problem has existed since the time of the Reagan Administration.  But as economic shocks become more severe, the need for and the consequences of not having such a safety net become more pronounced.

I don't think DC's tax reform is an exact model for the US

DC is the nation's only "city-state."

By that I mean that DC is a fully urbanized place (no rural or exurban land), a city with close to complete taxing power, including income taxes--with the huge exception that the city can't tax nonresident income, which among other effects means, unlike every other jurisdiction in the US, DC can't assess nonresident income tax on professional athletes (which is one way cities and states collect additional monies after subsidizing sports facilities).

Last week, the New York Times columnist James Stewart suggested ("For tax reform lessons, Congress needn't look far") that DC would be a great example for Congress to consider as a model for how to go about "tax reform" -- although tax "reform" if by reform you mean improvement seems to be off the table in favor of a tax cut for the rich.

From the article:

... in 2014 the council cut corporate and business taxes, reduced individual rates for everyone earning less than $1 million and broadened the tax base by eliminating many loopholes.

In the ensuing years, economic growth and tax receipts have surged, enabling the city to accelerate cuts that were being phased in. The legislation was not revenue neutral, in the sense that broadening the tax base offset the reduction in rates. It was a tax cut. But in a development that would surely warm the hearts of pro-growth Republicans, the economic lift was so strong that tax receipts increased, and last year hit a record.

Tax cuts were simultaneous with significant growth.  The problem with the argument is that DC's economy and population have been growing significantly over the past ten years.  It's easy to "cut" taxes when your economy is growing.

In the last nine years--despite the 2008 Great Recession--DC's population has grown by slightly more than 110,000 people ("D.C. population reaches four-decade high," Washington Post), an increase in population of almost 20% over the base number of 570,000 residents in 2007.

From 2014 when the tax cuts were approved and 2016, the population increased by about 3%, from 660,000 to 680,000. 

New condominium and apartment buildings continue to open and plans for large mixed use developments continue apace.

Income tax and property tax revenues were already increasing at an increasing rate.  Most of the new residents, excepting children, are paying out plenty in terms of income and sales taxes, and property taxes for home owners.

It's easy or at least comparatively easy to cut income taxes when the number of earners is growing and it's easy to cut property taxes when the number and size of buildings is growing, along with property values and assessments.

Plus, DC's property tax base is insulated somewhat by the inclusion of a hefty tranche of highly valued commercial property, primarily but not limited to Downtown DC.  DC's commercial property is highly valued in part as a safe place to park money from overseas, generated in countries with lower economic returns and/or more unstable economies.

Expanding the range of sales taxes had limited impact on revenue.  Complementing tax cuts by expanding somewhat the range of goods and services being taxed is likely a minimal proportion of the total revenue mix compared to the large increase in the number of people paying income taxes and rising property tax revenue from residential and commercial property.

Kansas as a lesson.  Although DC's economy is much stronger than that of Kansas, which has been wrecked by Governor Brownback's application of classic Republican supply-side tax cuts, which decimated state and local government funding, especially for schools because there was no increase in "animal spirits" and tax revenue in response ("Why Sam Brownback's tax cuts failed to make Kansas thrive," Bloomberg View; "The Kansas tax cut experiment," Brookings Institution), many of us worry about the tax cuts because of potential threats to the local economy that are out of the hands of the local government.

The economic winds buffeting DC are not favorable, and this will continue through the entire Trump Administration.  First, local employment and commercial building activity is very much susceptible to the vagaries of federal government policy, which these days is focused on reducing government spending, not increase it--except for the military.  This has a disproportionate effect on the regional economy of Washington ("Uncertainty in Washington is hurting D.C.'s job market, economists say, Post).

For example, a neighbor down the street works for a unit of the Labor Department, where next year's budget proposal calls for the unit to be downsized by 80% and hundreds of people will be fired.  Extend that example across most government agencies and you can see a tremendous negative impact on the local economy.

And the increase in military spending won't impact DC that much, because most of the local beneficiaries would be located outside of DC, in Maryland somewhat and Virginia especially.

Second, the commercial office sector is slowing anyway as federal agencies move out of DC proper,  law firms merge and contract, and as more companies reduce the amount of space per worker, leading to reduced need for commercial office space.

-- "Implications of a Trump/McConnell/Ryan Administration on DC's commercial real estate market," 2016
-- "Why Mayor Bowser is right to be leery of systematic lowering of taxes," 2015

Third, because the city's population is growing there is a greater demand for civic amenities, infrastructure expansions and improvements, and clamoring for various social programs such as an increased amount of services for the homeless and expansion of the amount of affordable housing.

-- "Town-City Management: We are all asset managers now," 2015

But this comes as the city's debt financing cap is close to being exhausted.

Conclusion.  Fortunately the city is in a much different place than Kansas.   The city is much smaller, urban, with fewer economic responsibilities.  But imagine the impact on risk management, predictability, and perception if there is a federal government shutdown, or Congress refuses, if only for awhile, to not raise the debt cap, and long term plans by the Republicans to shrink the federal government with its catastrophic effect on the local economy?

Then it's not out of the question to make the assessment that these tax cuts were foolish, that the city failed to plan for severe exogenous economic shocks that were foreseeable.

A follow up on an earlier point about Houston and extractive economies

The earlier piece:  "I get tired of the articles that ascribe Houston's economic success to its lack of zoning."

A line of pump jacks in production for Fasken Oil and Ranch Ltd., near Midland, Texas. Photo by Jerod Foster, Texas Tribune.

It always bugs me when people ascribe success for a reason which is mostly extraneous.  In the case of Houston, Texas, while it is true that housing costs are lower because of sprawl, it's not becuase of the "lack of zoning" (which is often countered with a serious regime of deed restrictions), which is touted by people like Joel Kotkin.

Despite claims about small government and low taxes (e.g., "Everything is bigger in ... including job gains"), Texas' success has to do with its place in the oil economy in terms of production, processing, refining, and chemical manufacturing.  Houston is the headquarters region for the oil industry, and as the price of oil has increased, and as production from fracking has increased, the impact on the economy in Houston, Dallas, and other Texan cities has been significant.

Petrobuildings in Houston.

But the job growth isn't because Gov. Rick Perry is particularly noteworthy or miraculous ("Oops: The Texas Miracle that isn't," Washington Monthly).  He can thank George Mitchell and fracking for the big increase in US oil production, and for awhile the simultaneous rise in demand from Asia, countered by supply reductions due to unrest in the Mideast, which for awhile jacked prices significantly.

Now that the price is falling, depending on where the price levels off, states reliant on oil production, especially Texas, Oklahoma, and North Dakota, risk economic contraction.

From the Main Street article "Plummeting Gasoline Prices Can Wreak Havoc on Economy Short Term":

Lower oil prices will benefit the regional economies of the energy consuming states of New York and California, the East and West coasts and the industrial Midwest, said Kutasovic. In those states, lower oil prices act as an effective tax cut by boosting consumer discretionary income and at the same time lowering production costs for manufacturing firms. ... 

Yet the impact on the energy producing states such as Texas remains uncertain and depends largely on the magnitude of the decline in oil prices. If oil prices decline enough, exploration and production companies will cut both production and capital expenditures on new projects, resulting in significant job losses and a slowing in regional economic growth in these states, Kutasovic said.

cf. the Businessweek story, "The Petro States of America."

Interestingly, those of us in carless or car-light households that don't purchase much gasoline aren't seeing the same significant increase in disposable income that is currently being enjoyed by car-dependent households.

In high price of gasoline scenarios, we do better, disposable-income-wise.