The governments of the really big cities of the US were in fiscal trouble BEFORE the COVID crisis. The Democratic Party has long governed these places and throughout that period they made promises with regard to disbursements that far exceeded expected revenues. As an example, pensions for city employees were inflated to incredible levels. The NY City Police Department has 40,000 employees, etc., etc. With the rise in these obligations came massive growth in state and local taxes in these big city localities.
The near elimination of deductions for State and Local Taxes (SALT) in the Federal Income tax after 2017 was a mighty blow to rich people resident in the big cities. The loss of the SALT deduction in federal income taxes has greatly increased the departure of the moneyed class from these places. Where are they going? Since the US is a federal republic in which each state has its own law code and tax system, the rich can flee to states where there are much lower taxes. Texas, and Florida are examples.
As these people and their money depart, the tax base shrinks proportionately but the expenditures have not shrunk thus far. The governments of these cities have not been able to face the needed abandonment of the welfare and big government models that they have built.
And now, pilgrims we have the phenomenon of COVID-19 and the devastation wrought by government forced closures upon the many thousands of small businesses that lined the streets of these cities ante-COVID.
People are being trained by "staying home" to understand that they really do not need a lot of these businesses. They are also being made to understand that working from home is not a bad way to live. Their employers are being taught that perhaps they do not need to carry the burden of massive rented space in towering office buildings at the city's center.
Will the restaurants, small grocery stores and customer service businesses of all kinds survive the financial losses they have endured and bring themselves to re-open? That is an open question. Will they prefer to take "early retirement," husband their remaining resources and move away to less devastatingly expensive pastures?
Loss of revenue is affecting everything within the economic "well" of the big cities. A friend of mine lives near the New Jersey shore just south of New York City. There is a small fishing port near him. He told me that because the restaurants are closed in NY City the fishermen have lost their major market and are selling into the local market at devastatingly low prices. Example – North Atlantic lobster fresh off the boat at the pier for $5.50 / pound. In the long run these prices are a disaster for the fishermen.
The handwriting on the wall is clear for De Blasio, Andrew Cuomo and Gavin Newsom among others. They surely will not have the tax revenue needed to run these cities at the present scale of government. That is why you see careful restraint on the part of these people when speaking of Trump. They want federal subsidies on a massive scale. They want them today, tomorrow and forever.
Without that support these cities will inevitably shrink. pl
I met a nice couple from Chicago a few years back, he’s a retired EMT and proud of the fact his pension is 80K yearly. I asked him about it as our local EMT’s start at $10 an hour and after a bit of time they get $14 an hour. He said his union had invested for them in oil stocks. “Wow, I told him, I don’t see how our local EMT’s would have the money to invest in anything other than a modest savings account”. He told me it was easy as he was making 80K a year while working.
The states that rely on sales taxes will be the ones that feel the more immediate pain as economic activity grinds to a halt. Politicians in those states also want to get reelected. Laying off teachers and essential workers anywhere is not a good look. I think we’re all in the same covidious boat. Mosquitos don’t discriminate goes the Mosquito Principle.
I assume this will affect cities with GOP mayors as well?
Col. Lang,
Big government inevitably runs out of other people’s money to paraphrase Maggie Thatcher. The issue is not just Democratic high tax states but also the federal government.
The idea that taxes funded government expenditures is long gone. Just look at the federal government debt growth over the past two decades. The Bush & Obama tenure had a significant ramp up in debt. The Trump era ramped it up even further with over a trillion dollar annual debt growth prior to the Wuhan virus even while Trump trumpeted greatest economy evah.
The demand from the many federal entitlement programs especially Medicare with our runaway medical cost inflation is going to be massive just in the next decade. Then the biggest elephant in the room all the unfunded liabilities especially pensions. When you add to that the demand from states and municipalities the scale is beyond immense.
The big problem is that debt growth especially when used for current consumption suppresses real economic growth, creating the vicious cycle. As we’ve seen in the past couple decades, debt is growing faster than economic output as debt productivity keeps declining. The implication being digging deeper into the debt hole as more debt is issued just to pay interest & principal of previous debt.
The Fed is just getting started. No one should be surprised if they take their balance sheet expansion to warp speed in the next decade compared to even the vertical rise we see now.
https://fred.stlouisfed.org/graph/fredgraph.png?g=r66m
No one knows where this leads as this is a global problem. Every major state from EU, China and Japan are on the debt treadmill as they accumulate debt faster than economic output that is needed to pay the interest & principal on that debt. Will we go the way of Weimar Germany or will it be a sudden stop jubilee with a repudiation of our current currency system or something different? Another great war?
We’re in a Wile E. Coyote moment. The CARES Act created a situation in which a lot of people lives were not that much affected despite the lockdowns. That comes to an end soon and the reality of the new normal will begin to sink in.
Laura Wilson
If they have governed as the Democrats have – Yes. In fact the Democrats run the 8 biggest cities in the country and have for a long time. They own the fiscal mess which is now made devastating by the COVID-19 crisis and the continued fall in tax base sources.
These cities send much more tax revenue to the federal government than they receive back in services or subsidies.
If you let them contract you contract federal revenues proportionally. That’s why NY was put back on its feet after bankruptcy. One may not like them, but these cities are where the money comes from and where the money is made.
The states that rely on sales taxes will be the ones that feel the more immediate pain as economic activity grinds to a halt. – Koranteng Ofosu-Amaah
“The amount of federal taxes paid and federal benefits received by taxpayers has absolutely nothing to do with the management of state budgets,” Scott said, going on to note that “New York has 2 million fewer people than Florida, but their budget is nearly twice as big.”
“Why? Reckless, irresponsible fiscal mismanagement,” Scott said.
https://floridapolitics.com/archives/335947-rick-scott-andrew-cuomo-continue-bailout-funding-feud
As mentioned by BP one of the biggest and fastest growing areas of problem are pensions. The Colonel’s use of the lovely word “disbursements” made me smile, their level in most of the schemes is simply astonishing. They were running out of money before interest rates got down to the current levels and many are still projecting figures as if the old 6% interest was still the norm. In virtually every case when the pensioners have been asked to cut pensions to put the evil day off they have said no. There seems to be a general expectation that a miracle will happen or the Fed will step in.
Whereas there might have been a chance 6 months ago, now that the debt load has been dramatically increased due to Corvid, the Fed spending could teach a drunken sailor a thing or two, it seems unlikely.
The strains on the fabric of society are going to become pretty bad once all the aspects of this works their way through to Treasuries and the cuts start.
We in the UK have a similar but differently structured (we don’t have states so more tax is collected at the country level) so are looking at a more centralised and controllable problem. I just know that the cuts are going to be dramatic.
Maybe a Weimar crash but there must be a very strong possibility the the US and the West are facing a similar situation to Eastern Europe and Russia in the early 1990s. And the man in the street has no idea its coming.
Colonel:
you have indicated the result microcosm of politicians mishandling of society’s needs and wants by showing the problems of 8 large USA cities.
Of course the same problems in macrocosmic size prevail in the Federal level, e.g. the famous Social Security Trust Fund has “assets” of USA federal restricted bonds/papers.
When the payment has to dispersed to the recipients, the Federal Treasury Borrows the cash from the Fed to monetize the restricted bond [viz.: cash them] to have the funds to pay [among others your personal pension] the pensioners be they Soc. Sec. recipients, Veterans, retired Congress Critters or any other person.
This goes on as the revenues of the Federal Government keep shrinking while the expenses keep growing [as the funded and unfunded obligations].
It is notable that the poorly rated foreign debt of the Russian Federation represent the US prejudice against the Nation for that countries total foreign indebtedness is covered by the nation’s foreign exchange/gold holdings.
Colonel,
Both California and New York claimed they are “donor states” (states that send more money to the federal government than getting it back). I recall New York reported that they get 90 cent from the federal government for every dollar.
I know the inevitable question will be asked is how they did their accounting and came up with that. Just like with unemployment U3 vs. U6 rate. For California, the claim is questionable, a toss up. But for New York, it is most likely correct.
NMS
I suppose these cities under contemplation could begin to print their own money … (joke)
The handwriting on the wall is clear for De Blasio, Andrew Cuomo and Gavin Newsom among others.
How can the nation go wrong with such a lowbrow group of economically illiterate tax and deficit spend central planning micromanagers “leading” the way?
For decades, residents of these cities have voted reflexively for Democrats, never once looking at the results.
If these voters don’t like high taxes, unsafe (and often dirty) streets, dysfunctional and unsafe schools, well….
People get the government they deserve.
Life’s tough, it’s tougher when you’re stupid.
The grift and corruption in cities and states is something to behold. I live 280 miles from NYC, but I pay NYS taxes. The local Republicans in government have no reservations about spending and rewarding their cronies. We’re even giving Amazon $75 million to build a warehouse that will pay 2 bucks over minimum wage.
But let’s be serious here; NYC alone has more billionaires than any country. They live in the new glass pencil skyscrapers condos that cost $100M+ for penthouses. These monstrosities don’t pay ANY property tax for decades, just like Trump’s hotels. There is no shortage of revenue sources, only the political will to tax them. Why should I have to pay 5% of fair market property tax while Amazon or NYC billionaires don’t pay any property tax?
At a national level, Generous benefits for the military and the parasitic contractor complex, paid by taxpayers, make the financial holes of NYC, LA,Chicago, etc look trivial by comparison. Do we REALLY need a trillion spent on the F-35, or another $1.7 trillion spent on a new generation of nukes? Or how about 14 aircraft carrier battle groups (wonder if they have bullseyes painted on them?). A trillion per year for “all thing security” isn’t chump change. Like Evertt Dirksen said, “a billion here a billion there, pretty soon you’re talking about real money”.
The rot is bipartisan and national in scope. COVID only highlights the bipartisan rot.
Our 100% blue, union backed city council just got woke once they saw their immediate shut down actions reduced the very tax revenues that fund their own salaries and pensions. Well duh? They learned they cannot eat their own SJW preening and virtue-signaling.
What did they do once they got woke? Gave the city union employees a raise, opened up the pot industry, and are now trying to cut back on regulations to allow devastated small businesses to make a comeback.
None of these actions which were motivated by anything other than seeing their own cash cows finally get gored. And seeing their own city union campaign contributors suffer.
Then in express maganimity, they granted a year of rent moratorium for all city tenants (we care for the little people, see? ), which now prevents any evictions for a full year for any cause.
Pinching elected officials in their own pocketbooks was finally the motivator to snap out of 100 virtue signaling – but only for themselves; not any one else.
(House paid for and weather is good and too old to make another move – we persist)
Colonel,
Just saw where your state’s Governor Northam has mandated a statewide mask requirement that goes into effect Friday. Indoor public setting include retail, barbershops, restaurants, government buildings, public transportation, anywhere people congregate in groups indoor he wrote on Twitter. The only exemptions Northam made were those who have health issues while wearing masks and children under 10 can be exempt.
Northam is saying that no penalties will be imposed, and that law enforcement will have no roles in enforcement. Northam said that any enforcement will be done by Virginia’s Department of Health through a court order,
upstater
Ah, you begrudge career soldiers with families their pay. were you ever in the military?
JSN
These people will be happier living in the fly-over country. At half the size the magic eight will be nice places to live.
TonyL
Bless them! How is life in Pasadena?
Sir;
If I remember my history, old campaigners from the Ancient Greek and Roman days were often “paid off” in land and other useful things. I believe that the word “colonia” would serve.
As for present debts owed to soldiers, I agree that the State made a compact with the soldiers to support the soldiers after they could no longer carry out their duties. The soldiers have carried out their side of the compact. This subject has a seldom voiced importance in that, when all else in the society has been financialized, and stripped of morality, what except personal honour keeps retired officers out of the Domestic Regime Change business?
Thank G-d for the Constitution.
Colonel,
It is great! the weather is nice. People went out to the beaches (with physical distancing protocol in mind). The small businesses are already reopening. The freeway is getting crowded, lots more traffics (it is fun to drive in the freeway again and not feeling like you are driving through a war zone). Less people wearing masks in parks, but all aware of not being too close to each other. Kaiser Permanente (my healthcare provider) has noticed all patients that need minor/elective surgery to contact their doctors to make appointements.
All in all, the lockdown has been successful. The planned re-opening in stages is prudent, IMO.
Colonel,
If it doesn’t follow the mainstream news’s agenda it doesn’t get put on the national front page. A church in Mississippi was burned down by an arsonist for breaking lockdown.
https://www.nbcnews.com/news/us-news/mississippi-church-fighting-coronavirus-restrictions-burned-ground-n1212646
Colonel,
no military.
I don’t begrudge any group for having pensions or retirement healthcare, etc. This includes military, groups like firefighters, police, teachers, DPW, sanitation, etc. Whether public or private sector, we shouldn’t be forced to gamble with our retirement in the Wall Street casino.
I do begrudge the grifters and cronies of all sorts that feed off the public trough and cultivate sloth and inefficiency. Likewise for the finance “industry”, which should be like a regulated utility. There is a huge opportunity cost we pay for this corruption, DOD, blue state, Republican county government, etc.
TonyL
The Gamble House is one of my favorite places on earth.
Colonel,
I’m embarrassed to admit that I have never been inside The Gamble House :P. I moved around in Southern Cal, and probably will move again once more in my lifetime.
This leaked German Government document is quite interesting regarding COVID (aka the CCP Virus):
[ https://www.ichbinanderermeinung.de/Dokument93.pdf ]
https://www.strategic-culture.org/news/2020/05/29/german-official-leaks-report-denouncing-corona-as-global-false-alarm/