Finding Opportunities in Recessionary Times

Kiran Cunningham & Hannah McKinneyKalamazoo College

Michigan Municipal LeagueSeptember 23, 2009

1

Who we are

A PhD Anthropologist and a PhD EconomistMcKinney has been an elected official for 12 yearsOver a decade of experience working with community

leaders throughout the countryHelping leaders reorient their work in changing social,

political and economic environments

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Overview of the Session

Goal: Facilitate a better understanding of the changing economic landscape and catalyze the kind of new thinking necessary to prosper in the New Normal

Presentation on the changing economic environment you are likely to face for the next few years

Engage in conversation about how municipal leaders can best navigate through the downturn and prosper in the new normal

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Think about your community. In your opinion, how much longer will the economic downturn last?

It’s about over1-2 more years3-5 more yearsMore than 5 years

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Welcome to the New NormalThe long term impacts of the current economic downturn are

not well understood by anyone. Even while some economists believe that the recession has

ended, foreclosure rates continue to rise, unemployment is increasing, and incomes continue to fall.

Local governments struggle to keep their budgets balanced today knowing full well that their fiscal constraints will be even tighter tomorrow as the impacts of fall property values, reduced sales and income tax revenue, and an ever increasing demand for public and social services.

Welcome to life in the “new normal.”

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Fundamental structural changes have occurred in the economy

Financial sectorManufacturing sectorEmployment & IncomeHousing market

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Federal Reserve monetary policy still in crisis mode

The Federal Reserve has taken on many of the functions of Wall Street

On Aug. 17, the Fed announced that it would extend its Wall Street type programs until mid-2010.

A Year After Financial Crisis, the Consumer Economy is Dead, Kevin Hall, Sept. 8, 2009, McCatchy News

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The number of problem banks continues to rise

http://www2.fdic.gov/qbp/grgraph.asphttp://www.calculatedriskblog.com/2009/09/problem-bank-list-unofficial-sep-4-2009.html

81 banks have beenclosed by the FDICso far this year

421 banks are on the unofficial list of problem banks

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Manufacturing employment has been falling for 10 years

In the same period, Michigan has lost 1 million jobs (20% of all jobs in Michigan).9

All private employment has fallen over the past decade in the U.S.

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Yves Smith, www.nakedcapitalism.com 11

Larry Summers, National Economic Council Director, says:

“The level of unemployment is unacceptably high and will, by all forecasts, remain unacceptably high for a number of years.”

Read more: http://www.politico.com/news/stories/0909/27052.html#ixzz0R5s8BSnA, 9-11-2009.

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Slow job growth and sluggish wage increases will be the norm

"Those things are likely to be subpar for a long period of time," said Martin Regalia, the chief economist for the U.S. Chamber of Commerce. "I think it means that we probably see potential rates of growth that are in the 2-2.5 (percent) range, or maybe . . . 1.8-1.9 (percent)." (A growth rate of 3 percent to 3.5 percent used to be considered average.)

Regalia thinks that it could be five years before the U.S. economy generates enough jobs to overcome those lost and to employ the new workers entering the labor force.

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Dennis Lockhart, President of the Atlanta Fed, describes the new normal:

The economy that emerges from this recession may not fully resemble the pre-recession economy.

It is unlikely that we will see a return of jobs lost in certain sectors such as manufacturing.

In a similar vein, the recession has been so deep in construction that a reallocation of workers is likely to happen.

I do not expect quick fixes for the unemployment challenge ahead.

Remarks by Dennis P. Lockhart, President, Federal Reserve Bank of Atlanta, August 26, 2009.14

Middle class household incomes have been flat for years

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Middle class can no longer borrow to consume

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Consumer behavior: confidence & consumption

Source: http://economistsview.typepad.com/timduy/2009/09/quick-note-on-confidence.html 17

Net worth of households dropped by 20% in 18 months 2007(2) to 2008(4) or $12.9 trillion

Every $1 lost consumer wealth decreases spending by 5 cents over the next two years ($322.1 billion per year)

Home equity has fallen 43% ($5.9 trillion) from 2005 to the end of 2008 (Joint Center for Housing Studies)

As many as 27% of homeowners with a mortgage owe more than their house is worth

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The Mortgage Bankers Association reports:Delinquency rate for mortgage loans on 1-4 unit

residential properties rose to 9.24% of all loans outstanding at the end of 2nd quarter of 2009.

The delinquency rate breaks the record set last quarter (records go back to 1972).

The percent of loans in foreclosure at the end of the 1st quarter of 2009 was 4.3%

Reported August 20, 2009

19

Paul Krugman, Nobel prize winning economist says:

Even if the big bust is over, that doesn’t mean we’ll see a rebound; at best, this is the new normal. 2005 isn’t coming back.

New York Times, August 26, 2009, 10:04 am Housing prices

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Michigan’s Budget problemsFiscal year 2009 marks the ninth consecutive

year that state revenues have not been adequate to fund state services and programs

Since the first decline in revenues in fiscal year 2001, Michigan has experienced cumulative deficits well in excess of $10 billion, has exhausted over $6 billion in fiscal reserves and has instituted over $4 billion in spending cuts.

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Michigan’s Recessionary Experience

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U.S. & Michigan % Change in EmploymentMay 2008 to May 2009

Source: Bureau of Labor Statistics, Michigan Fiscal Agency

U.S.

Michigan

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Michigan Job Growth

Source: Bureau of Labor Statistics, Michigan Fiscal Agency, August 2009

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Property Value Growth SlowingState Average

Source: Michigan State Fiscal Agency, August 2009. 25

Realtytrac.com, accessed September 9, 200926

The market for new home construction has fallen even faster in Michigan than in the rest of the nation.

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Michigan Per Capita Income Deviation from National Average

Source: Michigan State Fiscal Agency, August 2009. (Last 3 years of data are estimated.)

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Michigan’s consumers faring poorly compared to most others

Data from American Bankruptcy Institute and American Mortgage Bankers Association, data at Calculated riskblog.com

Michigan’s ranking for per capita income has dropped from 17th in 2000 to 34th in 2008

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From the Census Bureau Median income in Michigan fell 2.5 percent last year, from $49,807 to $48,591,

according to the census. Nationally, it fell 1.2 percent, from $52,673 to $52,029. It was the fourth year in a row that income dropped in Michigan. And it's likely to get worse, according to fiscal experts, because the census

figures don't reflect this year's travails, which includes a skyrocketing unemployment rate of 15.2 percent.

"Michigan is in a world of hurt," said Don Grimes, an economist at the University of Michigan. "That's no big surprise. It will take awhile to recover."

Before its eight-year recession, Michigan had long bucked an economic truism: A state's income ranking was directly tied to its residents' education level.

The state's auto factories allowed workers, despite their lack of college degrees, to make more money than the national average.

But the Big Three are dealing with fiscal calamity, workers have lost their jobs or seen their paychecks shrink, and the state's income ranking is dropping to a level in line with its blue-collar work force.

Michigan's education level ranks 35th in the nation, according to the census.

30http://detnews.com/article/20090922/METRO/909220383, Sept. 22, 2009

Michigan School Aid Fund Estimated Budget Shortfall

Source: Michigan State Fiscal Agency, August 2009.31

Michigan’s State Budget Estimated Shortfalls

Source: Michigan State Fiscal Agency, August 2009.32

State’s FY 2008-09 Budget Funding Sources

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As of yesterday,20% state shared revenue cuts proposed for

2010 budgetLarge cuts to the Department of Human

Services budget as well

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Arizona’s budget problemsMarshall Vest, Director of the Economic and Business Research

Center at the University of Arizona talks about “stunning” state revenue declines stunning

Sales and income tax receipts are way down, so the legislature has been talking about selling state buildings and leasing them back, borrowing money, cutting whatever it can.

Vest says, “I mean you could lay off every state employee and not even begin to balance the budget. You could defund the universities, for heaven's sake, and not even begin to balance this budget. “

Unemployment insurance for laid off workers is putting an even bigger strain on Arizona's budget, along with increased need for Arizona's version of Medicaid, K through 12 education, and prisons.

35Source: Checking In With Three States In Budget Limbo, Rick Pluta, Susan Phillips and Ted Robbins, NPR, Sept 15, 2009

Mitch Daniels, Governor of Indiana, says:

State government finances are a wreck. The drop in tax revenues is the worst in half a century.

During the past decade states increased their spending by an average of 6% a year, gusting to 8% during 2007-08. Much of the government institutions built up in those years will now have to be dismantled.

Unlike the aftermath of past recessions, odds are that revenues will take a long time to catch back up to their previous trend lines – if they ever do.

Source: The Coming Reset in State Government, Wall Street Journal, 9-4-2009.

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Impacts on the Nation’s Cities

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88% of cities less able to meet financial needs

Research Brief on America’s Cities, Chris Hoene and Michael Pagano, NLC, Sept. 2009,

http://www.nlc.org/ASSETS/E0A769A03B464963A81410F40A0529BF/CityFiscalConditions_09%20(2).pdf

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Expenditures outpaced revenues in an unsustainable manner

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Tax collections show housing bubble impact

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Increasing fiscal pressures on U.S. cities due to:

Large state government budget shortfalls in 2010-11

Employee-related costs for health care coverage and pensions

Tightened credit markets resulting in higher debt costs, particularly for infrastructure

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All sources of tax revenue have been affected negativelyProperty taxSales taxIncome tax

All indications are that these sources of tax revenue will not grow at the rates we’ve grown accustomed to

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The lived consequencesLower property values lower property tax revenueForeclosures lower property taxesForeclosures more blightLower incomes lower sales tax revenueHigher unemployment higher crimeHigher unemployment foreclosuresHigher legacy costs lower operating revenueFunds of all public entities have diminished can’t look to

others for $$

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The lived consequences for decision-makers

“the challenges we are facing are so significant it forces us out of our comfort zone”

“how do we deal with this? Everyone looks to us to fix it, but we didn’t cause the problem. But we are the closest to the people so it is our problem now.”

“there are a lot of immediate problems and no immediate answers”

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Dissonance catalyzes new ways of thinking

Denial is an obstacle to new thinking

While other states may be able to deny the problem, Michigan can’t (and isn’t)

Opportunity to take advantage of the dissonance and come out the other end in a position of strength

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Prospering in the New Normal Requires a New

Set of Taken-for-Granteds

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The first step toward developing new taken-for-granteds is identifying obsolete ones

Discussion: What taken-for-granteds from the old normal are getting in the way of moving productively into the new normal in your community?

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Navigating successfully into the new normal

Discussion: Think about one way in which the dissonance in your community is creating opportunities for new ways of thinking and operating.

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Taking Action in Your Community

Discussion: How might you take action in your community to both catalyze new thinking and capitalize on opportunities?

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“[T]he industrial crisis and economic collapse following the stock market crash of 1929 were especially severe in Michigan. With its faltering automobile industry in decline, Michigan experienced unemployment levels unmatched in any other state in the early depression years."

(Organizing the Unemployed, by James Lorence. Albany: State University of New York, 1996, p. 4.)

Michigan’s communities emerged from the Depression in a position of strength.

We can do it again.

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