Recession and Florida

by Dr. C. C. Elebash

The economic recession that began in 2008 is having a profound impact on state and local governments. The effect is more pronounced in Florida than in most states. This is not a short-term problem.
What happened? The underlying causes of the severe downturn were:

The United States consumed more than it produced. We are a highly productive nation, but consumption exceeded national output. We bought more from abroad than we sold abroad. This created large trade deficits which the U.S. financed by borrowing from other nations.

Credit became too easy. Congress encouraged banks to make risky loans, especially home loans. Federal and state regulatory agencies failed to foresee the consequences of this folly – or knew the dangers but still failed to curb excesses.

Easy credit produced a real estate boom that collapsed in 2007. When the “bubble” burst, developers could not pay off construction loans, and many property owners could not make their mortgage payments. Investors took big losses on “toxic” securities based on so-called “sub-prime” mortgages. The strain on our financial system spread around the world.

What now? The Federal government should keep spending! Yes, the Federal government has to keep spending. (It pains me to write this.) The recession continues because personal consumption remains low. Many workers have lost their jobs. Those who are employed are saving as much as they can and spending as little as they can. The economy may have a relapse unless Federal outlays continue to supplement private spending.
We will not have a real recovery until consumer confidence returns. The Federal government cannot address long-term imbalances until consumers spend more, banks lend more and businesses increase capital investment.

What about Florida? Almost all state and local governments face a period of weak revenues. Unlike the national government, states cannot “print money”. With few exceptions, states cannot borrow money to pay operating expenses.

The outlook for Florida government revenues is grim. Population growth and new construction were the basis of Florida’s economy and tax structure for over 50 years. That era is over.

The state depends heavily on the sales tax, and retail sales growth is weak. Federal stimulus funds may not last indefinitely. The State budget problem will not ease up anytime soon. Florida will not fully recover until a new state economy evolves.

Public education in Florida is under severe pressure. The “day of reckoning” has arrived for the K-12 class size constitutional amendment, and it is arriving at a time of financial crisis. Community colleges and universities are making painful adjustments in the face of smaller appropriations and resistance to tuition hikes.

Although municipal bankruptcies have been rare, they are now a real possibility. Local governments in Florida will be in a financial squeeze for more than just a couple of years. They rely on property taxes to a large extent, and property values are severely depressed. Little improvement is in sight for real estate. Counties and cities cannot expect the State to “bail them out” if they over commit financially, and angry citizens will balk at new local taxes.

Summing up. We are in the early phases of recovery, but improvement will be slow and uncertain. Neither Florida nor the U.S. will pick up from where we left off in 2007. There will be a new economic framework, the outline of which is not yet clear. Florida can no longer depend on in-migration to fuel our economy. Our state government will struggle financially and so will our local governments.

The ingenuity and productivity of this nation will eventually prevail. Better times will then return. Meanwhile: “Hold on to your seats!” It will be a long and bumpy ride.

(The author is a retired UWF finance professor and a Chartered Financial Analyst.)