Headlines vs. Reality (Which is Still Very Bad)

OK. We had fun in our prior post, but there was also a serious note attached to that post about the looseness of state budgetary language.* There is a headline amount of a $53 billion "deficit." But is that the "deficit" in common English parlance: revenue minus spending during a year? Yours truly now has the document given to journalists. When you read the document that was given to journalists, $40.9 billion of the $53 billion is what is projected for the 2020-21 fiscal year as a common-parlance deficit.**

That's still a lot. But the document also says we have a rainy day fund of $16 billion tucked away. And blog readers may recall that on a monthly basis we have been looking at the controller's cash statements which reported that for March (latest date available), the state had about $38 billion - including the rainy day fund - in unused borrowable resources. (Those resources are in funds outside the general fund.)

Now, the governor and the Dept. of Finance will point to legal limits on how much of the rainy day fund can be used and on what can be done with other unused borrowable resources. But creative minds in past budget crises have managed to "relax" such limits. Note that the economic assumptions underlying the budget are entirely at the discretion of the legislature and governor. Yes, they are required to "balance" the budget on paper, but what's on the paper depends on underlying assumptions. Old timers may recall that when Jerry Brown took over from Arnold Schwarzenegger in the last budget crisis, at one point the legislature passed - and the governor signed - a budget that assumed that a windfall of $4 billion would somehow appear beyond what was then projected for any tax.

The bottom line here is that we have a really big budget problem, but that problem is not well represented by $53 billion. If you really cut spending by $53 billion in one year, you would be talking about roughly a third of this year's spending. There will be big cuts, but not of that magnitude. And they may come in two rounds: the budget enacted in June and a revision over the summer when more information on (delayed) tax revenues come in.

Much depends for the longer term on whether there is a relatively quick economic recovery. If you think there will be a relatively quick snap-back, then big cuts and one-time tricks will "solve" the problem and we can stagger into a better future. And if you want to make a case for that type of economic response, you might cite evidence that many people who have been laid off at least think they are likely to be recalled to their old jobs. There is some evidence from labor market data that many unemployed people do have such a belief. A Washington Post poll today puts that proportion at 77%.***

But you can also take a more pessimistic view. The employer who told his workers they would be recalled may go out of business before that could happen. People who aren't unemployed but have seen headlines - or have neighbors and family members who are unemployed - may be reluctant to spend out of fear that they could be next and they'd better save their money. They may also be reluctant to sit in a restaurant where the waiters are walking around in space suits. In that scenario, the economic damage could be long term as it ripples out to industries not immediately affected by the shutdown. And one-time budgetary tricks in that scenario may not be available after a year.

There is also political uncertainty. In the short term, will there be more big spending at the federal level (with the Federal Reserve essentially financing the deficit via money creation)? Will there be some significant bailout money for state and local governments? Who will be elected in the next election cycle and what will be the result?

The value of the $53 billion headline from the perspective of the governor is that it is so big that it might scare the legislature into going along with whatever the governor proposes next week. But even that impact is uncertain. There are staff people in the legislature who can do the same analysis as I have done above.
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*http://uclafacultyassociation.blogspot.com/2020/05/sacramento-bee-california-faces-534.html
**http://www.dof.ca.gov/Budget/Historical_Budget_Publications/2020-21/documents/DOF_FISCAL_UPDATE-MAY-7TH.pdf and http://www.dof.ca.gov/Budget/Historical_Budget_Publications/2020-21/documents/DOF_FISCAL_UPDATE_POWERPOINT-MAY-7th.pdf
***https://www.washingtonpost.com/business/2020/05/07/nearly-80-percent-laid-off-workers-believe-they-will-return-their-old-job-post-ipsos-poll-finds/

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UPDATE: A modified version of this post is now on the UCLA Anderson Forecast page at:
https://www.anderson.ucla.edu/centers/ucla-anderson-forecast/may-2020-headline-vs-reality
or
https://issuu.com/danieljbmitchell/docs/may_2020_-_headline_vs._reality___ucla_anderson_sc