One year ago, in March 2020, State and Local Governments put the United States into a recession in response to the global COVID-19 Pandemic. From the outset, it was apparent this recession would be unlike the past recession, or any other in our memory (see my post from March 19, 2020). It set in motion structural changes in our economy that will last decades.
V, U, W, K Recovery
As soon as the recession was declared, economists tried to describe the shape of the recovery. The first forecasts were for a sharp recession and a proportionally sharp recovery, a “V”. As COVID surged in a second wave during the summer, the concern became a long recovery and a long bottom, or a “U” shaped recovery. The improving economics in the fall lead to fears of a fall recovery and a winter retrenchment, followed by a more sustained recovery in the spring, or a “W” recovery. It is clear, that the COVID-19 recession will be something different, a “K”.
A “K” shaped recovery is an economic cycle with a sharp downturn, followed by sectors that boom and others that bust. This bifurcated recovery is painful as some languish under frustratingly dismal conditions while others watch their economic outlook brighten.
Value stocks languished in bear territory following the spring correction while Tech was responsible for the S&P reaching an all-time high at the end of the year. Big box retail saw tremendous pressure on sales while industrial distribution centers experienced record demand. Apartments in the densest urban cores are saw lease rates fall more than 20% while suburban and rural housing saw record high price levels. Tourism destinations such as New York City, Hawaii, and Las Vegas were hit very hard while destinations near national parks in states that did not close performed well. Restaurants with large dining rooms struggled to remain open while drive-thrus saw record sales. Non-essential employees who could not work from home became unemployed while essential and remote enabled roles remained employed and may have thrived.
Unfortunately, K-12 education, one of the most resilient sectors in any recession, has not been spared the bifurcated outcomes. While budgets were hit with technology and curriculum modifications, the bigger impact was students who could continue to attend in person versus those who could not. Parents and students without means were disproportionately impacted by closed schools. With children at home, parents may have had to choose between essential jobs and their child’s education. Education is a means to opportunity, and many were set back by policies that kept children home without necessary technology, supervision, and support.
Structural Population Shift
Since the Industrial Revolution, people have migrated to cities for education and employment. While the country was historically dominated by small farms and agricultural jobs, the industrial revolution resulted in technology and productivity gains that transformed farming and created opportunity in nearly every other industry. The result was generations of better jobs and upward mobility concentrated in urban centers.
These urban centers have housed the nation’s largest employers and attracted talent from across the country. In many instances, employers are there because they were looking for a deep pool of human capital and the infrastructure to support their growth. Over decades, state and local governments set policy with the knowledge that employees would be required to work where their employers were headquartered.
While technology was enabling remote work and remote education for a few prior to the pandemic, COVID-19 may have broken this relationship between employer and geography by allowing millions of jobs to move remote nearly overnight.
Live, work, play is a movement that has been upended by COVID-19 and the structural shifts in its wake. It used to be that we lived where we worked. Now, many may have the opportunity to live anywhere. If they have that choice, will they choose to live where they play? Will they relocate to be near family? Will they choose to live in expensive urban centers? We have already seen that many are willing to relocate if their employer will allow them.
This is a potential reversal of a migration trend that could favor most communities in the country with only the largest, most expensive, most dense urban centers impacted. It is a reversal that could change population and demographic trends for generations to come.
What happens when interest rates are not set by market forces, but rather managed by policy? Jerome Powell, chair of the Federal Reserve, and Janet Yellen, immediate past chair of the Federal Reserve and current Secretary of the Treasury, have stated that they do not want to see interest rates rise. An increase in interest rates would make government borrowing more expensive.
What are the impacts of a managed low interest rate environment? First, is the intended boost to consumption and investment. Because interest rates are low consumers and investors are incentivized to spend more. Housing is a good example. A 1% decrease in interest rates on a $350,000 home will allow the price to rise approximately 14% while the mortgage payment remains the same. In other words, the payment on a $350,000 house at 4% is approximately the same as the payment on a $400,000 house at 3%.
There is downside. First, if you are looking to earn a return on savings, you will be disappointed. This incentivizes savers to take additional risk and compete for other investments like stocks, bonds, and real estate—driving those assets values up. Second, the distortion makes government borrowing for federal, state, and local governments appear lower than it should be, incentivizing borrowing by government.
When interest rates become more about policy decisions than economics, unexpected distortions occur that are not healthy in the long run.
More than ever, economics is valuable in helping understand the result of policy choices. It is important to listen to what policy makers say, but it is even more important to watch what they do.
Policy makers have often said they want to help individuals who have been hurt by the COVID-19 induced recession. More than once, they have issued checks of $1,400 to qualifying individuals. They have provided rental assistance and eviction restrictions. At the same time, interest rate policy has increased home values on average by $50,000 in the United States. This disparate impact has benefited homeowners and widened the wealth gap relative to those who rent.
Policy makers have said the want to put money in families’ pockets to help them weather the pandemic. The combined relief packages of over $5.2 trillion in COVID-19 stimulus in the United States distributed to over 130 million households would have been $40,000 per household if distributed directly. If relief focused only on those who lost jobs during 2020, the combined relief packages for approximately 25 million lost jobs is $208,000 per lost job.
Policy makers are concerned about large urban cities and their recovery. Structural shifts accelerating work from home options have released many from living in urban areas, and they have responded by moving to less crowded areas. The result is less traffic, less crime, better air, and better balance for relocating employees. The downside is less revenue to support urban infrastructure and programs.
Policy makers have said they are concerned about getting Americans back to work. Many will stay out of the work force by no choice of their own until economies are open and policy makers trust citizens to make good decisions.
Policy makers are concerned about equal opportunity for all Americans. There is no greater equalizer than education, yet in many communities our schools remain closed and those students who are least prepared to catch up are being impacted the most.
Unfortunately, as with most recessions, individuals are impacted differently. This recession is unique in that winners and losers are primarily determined by policy, not by economics. The response has been to stimulate the economy by lowering interest rates and fiscal spending of $5.2 trillion. Homeowners, suburban and rural communities, and essential services are winners that are benefiting from the upside in a “K” shaped recovery. Urban centers, renters, children, and low wage earners are feeling the downside. The policies of the last year are highly inflationary, even if inflation doesn’t show up in traditional consumption items such as food, fuel, or other household purchases. Asset prices are rising and will do so until the policy induced stimulus runs out.
As a new public charter school authorized for 8-12th grades opening in August of this year, St. George Academy will help benefit all of the students in Southern Utah. Michael Dee Martineau titled his 2013 Department of Economics PhD dissertation at the University of Utah “The Competitive Effects of Charter Schools in Utah.” In his paper, he concluded “districts that have seen a greater degree of charter competition tend to see increases in traditional public school achievement”.
St. George Academy is designed to be an educational experience with the goal of better preparing students for college and the rest of their life. The Salt Lake Tribune published an article on March 5, 2017 titled “Struggling Students Forced to Wait as Utah’s Public Colleges Don’t Have Enough Therapists”. Therapists for what, you might ask? Anxiety, stress, higher expectations, or unsettling news according to the article. Our students need to be better prepared for life after high school graduation.
Students also need to be better prepared academically. Universities and colleges work with a large number of students who are not ready for their freshman classes. This problem manifests itself in two ways, students who start college but do not finish, and students who are required to pay for and take developmental courses before continuing with their education. The time and expense to students, colleges, and universities on individuals who are not graduating is concerning.
In public education, some have pitted local districts against charters. This is the wrong focus. There should be one focus. Students. I currently have children enrolled at both charter schools and district schools. Our children attend their respective schools not because of the kind of school they are, but rather for the educational experience they offer.
As much as anything the public sector does, education is the most impactful in our community. Every other aspect of well-functioning societies are positively impacted by a better educated population. Some argue our educational institutions are failing. I say let’s improve. Some say they are underfunded. I say let’s work with what we have. Others argue the best educators are leaving the industry. I say let’s prove them wrong.
We don’t offer education to a community, a school, a grade, or even a class. Education is a personal experience. It is offered to each individual. While students may sit in a class together, each student has the opportunity to choose to learn. Let’s improve by trying to create an environment where more students want to learn. Let’s rise above the funding constraints by demonstrating creativity and problem solving skills. Let’s demonstrate that education is more than bricks and mortar, programs and features. Education is a resourceful teacher inspiring students to learn.
St. George Academy will benefit the students walking through the doors, but it will do more. Our students, parents, faculty, and community members desire to be part of the solution in their own lives, and hopefully realize the conclusion asserted in Mr. Martineau’s paper, “a greater degree of school choice in Utah can indeed be a rising tide that lifts all boats.”
You can read the full dissertation here: https://collections.lib.utah.edu/details?id=195861
I reviewed over 30 charter school bond issues for schools located in Utah. The process involved reading the offering statements and aggregating information about the school, the key service providers, interest rates, and key economic terms.
For easy reference, I've assembled the data into two tables and used the data to create charts showing key relationships related to interest rates. Larger schools and schools with better credit ratings clearly have a financing advantage relative to smaller, lower credit quality schools. Further, they have lower relative issuance costs.
All students are not considered equal, according to this analysis of state support for institutions
of Higher Education in Utah. When it comes to capital facilities and annual appropriations, the
results indicate that students at the University of Utah and Utah State University receive
significantly more support from the Utah State Legislature than the other institutions of higher
education. While some underfunded institutions are catching up, others are falling further
behind. Some of the discrepancies are justified while others may require a second look.
Also, for an expanded look at state facilities spending, view this blog post from earlier this year: http://rneilwalter.weebly.com/home/state-funded-buildings-are-not-free
Charter schools are public schools. State owned facilities, including charter schools, do not pay property taxes. Facilities leased by the state or one of its subdivisions do have to pay property taxes. Many states have exemptions for state facility leases, which would include schools, but Utah currently does not.
This is especially problematic for charter schools that are built by a developer as a stand-alone facility. Charter schools leasing one of these new facilities must bear the added burden of paying tens or hundreds of thousands of dollars in property tax expense. Many schools have dreamed of having a waiver. While there is no waiver, the summary below describes how schools may be able to take advantage of the property tax exemption by structuring their transaction appropriately.
You can preview the overview below or download the document as a PDF here.
Capital Expenditures are a unique challenge in state budgets because subdivisions of the state
are rarely charged for using the state’s debt or equity for facilities, equipment, and other
investment needs. In an effort to take advantage of the current resource allocation process,
state subdivisions lobby for capital expenditure appropriations. The result is an inefficient
distribution of resources for capital expenditures within state budgets where the most
connected, best funded lobbying efforts frequently win. This paper proposes changing the
capital resource allocation processes by attaching a cost to state appropriated capital
expenditures in an effort to increase accountability and efficiency while improving the long
term credit strength of the state.
Public lands issues are becoming a polarizing issue once again in the State of Utah. Currently, the Attorney General is pursuing a lawsuit to have federal lands transferred to State control, and the American Lands Council is building support from other western states who agree that federal land control in the West is overreaching. Opponents suggest attempting to change the status quo is a waste of money and will result in developers ruining the beauty and accessibility of the American West.
It is helpful to view public lands through a different lens prior to choosing a side in this debate. I found a Dixie National Forest map published by the Department of Agriculture with 1962 dates on it. It starts with an introduction to the June 12, 1960 Multiple-Use and Sustained-Yield law which directs that “the renewable surface resources of the National Forests be developed and administered on a multiple-use and sustained-yield basis…National Forest resources include recreation, forage, timber, water, and wildlife.” It goes on to say that “sustained yield means perpetuating a high-level annual or periodic output of the various renewable resources.”
In the early 1960’s, Dixie National Forest forage crop was harvested by 20,000 cattle and 37,000 sheep and the annual growth and harvest of timber was 29 million board feet—enough to build about 2,500 homes.
Those calling state control and who simultaneously object to current federal land management policies recognize that there is a difference between the multiple use and sustained basis of the past, and the conservation only mindset of today.
Why does the change in position matter? In Utah, significant education funding comes from property taxes. Because the Federal Government owns 62% of Utah and is exempt from property taxes, Utah’s ability to fund education is impaired relative to states with little or no federal ownership. When 20,000 head of cattle were foraging on Dixie National Forest land, it was less expensive to raise cattle. Higher beef prices are partially the result of fewer annual grazing permits on federal lands. Similarly, beetles devastated millions of acres of Utah forest while we imported lumber from Canada. Much of the timber was not harvested because of difficulty obtaining permits on federal land. Further, recreation opportunities are diminished when motorized vehicle restrictions close roads and restrict access to the young, the elderly, and the disabled.
Last, and equally frustrating, on September 22nd the Salt Lake Tribune reported the conflicts between the BLM’s Special Agent in Charge and rural county Sheriffs. According to the Tribune, the Sheriffs say, “his intimidating attitude and unwillingness to consult with counties exemplify a ‘culture of arrogance’ that undermines cooperation in Utah’s remote reaches. The public loses, safety is compromised, and tax dollars are wasted.”
Public lands will continue to be a polarizing issue. Everyone agrees that the lands should not be exploited, but a conservation only mindset today sacrifices education funding, increases commodity prices, and results in frayed relationships between locals and federal administrators.
It is in this context that the Republican Party and its elected officials are pursuing multiple strategies to bring the administration of public lands closer to home. There is no desire to ruin national parks or pollute pristine vistas. The objective is to return to a more balanced approach consistent with the “multiple use and sustained yield basis” that allows all of our citizens to be simultaneous beneficiaries of our vast public lands resources.
This article was originally published in The Spectrum as a guest editorial on 9/27/2014.
For more information about the economics of a potential lands transfer, please see the study published by a collaborative effort between three state universities: the University of Utah, Bureau of Economic and Business Research; Utah State University; and Weber State University published here: http://bebr.business.utah.edu/page/transfer-federal-lands-state-utah
Charter Schools are a positive development for public education in the United States. According to the US Department of Education in 2013, there are nearly 6,000 charter schools nation wide serving over 2,000,000 students. The majority of net enrollment growth across the United States is being absorbed by public charter schools.
This represents a tremendous facilities expansion. Most schools are governed by a board of directors made up of parents and community members. With the large number of new charter schools being authorized each year, I felt it was important to provide a guide to negotiating and navigating the charter school facility decision making processes.
Below is a free copy of Charter School Facility Finance: A Resource for Boards and Administrators.
Some of the topics include: