Texas leads the nation in coronavirus cases — and that has policymakers scrambling to lessen the blow on the state's economy.
Think host Krys Boyd talked about the state's financial future with former Speaker of the Texas House Joe Straus and Dallas Fed president and CEO Robert Kaplan.
The following transcript has been lightly edited for clarity.
Krys Boyd: Rob a year ago, before anybody knew about the pandemic, you and a lot of other experts were saying we'd be pretty safe from any kind of recession in 2020 — no shade to you because no one could have predicted what happened. How has the year actually played out?
Robert Kaplan: I think we would have had solid growth this year, what I mean by solid is 2-2.25% GDP growth. What happened because of COVID is second quarter GDP actually contracted by about 32% annually. As sharp as the contraction was, the economy probably bottomed out in April. This was brief, started to grow in May-June and with fits and starts because of the resurgence we kept growing. So third quarter GDP grew by 30-33% annualized.
So we had a big decline, we had a rebound and now we're at an awkward period where I would have told you a few weeks ago, we'd grow again in the fourth quarter and we may still, but the resurgence is so strong that if it gets worse and worse and worse, we're noticing mobility and engagement starting to decline in various cities in the country, El Paso being an example where they had to do lockdowns.
I think consumers and population will power through this until, in their city, the healthcare system gets overwhelmed and local officials don't have a choice but to put restrictions on. I hate to say this...we're going to have a rough fourth quarter and I think a very challenging first quarter.
The good news is over the horizon by middle of next year because of a vaccine and wide dissemination, we're going to have 3.5% growth next year. It's going to be above trend, but we're going to have to get through the next six months and it's going to be challenging.
KB: Joe, a lot of Americans are hoping for another round of federal relief funding to help them get through periods of underemployment or unemployment. Efforts to push that out at the federal level have been gridlocked in Congress.
When you were speaker of the house in Texas, you developed this reputation for working productively across the aisle. Any thoughts on why lawmakers in the Capitol seem unable to make progress?
Joe Straus: I felt when I was the presiding officer of the House for that decade, that if I worked at putting together an agenda that wasn't partisan, that everyone could buy into. And most of the issues that the legislature deals with are not partisan and you don't have Republican elementary schools or Democratic highways. So I think that once the session begins, if the leadership wants to unite people and wants to get things done on a limited amount of time, and with always limited dollars, it can be done.
KB: What's the situation with budget shortfalls for state and local governments because of declining tax revenues, due to the pandemic?
RK: Most cities and states in this country suffered a big hole in their budget from the second quarter, lack of tax revenues. Things are better, but they've got to balance their budgets. So most cities and states I talk to ,municipalities, are waiting to see whether there's fiscal relief, but if there isn't many of them I talk to are going to have to make cutbacks at a time where they're being asked to do more to support schools and support a whole range of activities because of COVID.
KB: Did you want to follow up on that Joe?
JS: I was only going to say that on the state level and having lived through an enormous budget shortfall in 2011, that the current outlook for the state and the current biennium that we're in, rather than the $2.9 billion surplus that was certified at the end of the last session, it's now a $4.6 billion shortfall. As Rob mentioned, you know, federal stimulus funds could help. But I think they're going to be needed at the state level and certainly also at the local.
RK: Krys, I might take the opportunity to broaden this when we talk about fiscal support. So there's the state, local government's support. And then there's the other issue, which is relief for those who are unemployed or those who can't get enough hours. What we're seeing here at the Fed, people have taken for granted a little bit — this downturn has been extremely unusual and that normally when you have a severe contraction, you'd have a severe drop in consumer spending and household income. We have not had that this year.
The reason we haven't had it is the fiscal relief for unemployed, allowed them to keep their income up and spend and make ends meet. So our contraction in the U.S. Economy has been much less than it would have been. The problem is people who are relying on savings from that fiscal relief starting to run out of the savings.
We can't tell exactly when that's going to happen, but we're nearing that. And if you have this resurgence, you have small businesses under more pressure because of the resurgence and millions of people who can't make ends meet. It means you're going to eventually going to see consumer spending start to drop off. This is going to feel a lot more like a typical recession, if we let this go too far.
KB: So what makes sense to you? Something like a repeat of the measures in the CARES act? A differently structured relief package?
RK: Yeah, our own view is there's going to need to be extension in some form, doesn't have to be the $600, but in some form, maybe reduced of unemployment relief. And also for those who can't get enough hours that they can make ends meet. That would be number one. The state and local government relief, I do think is also very important. Those would be two things that I'd mention right off the bat.
KB: How would either of you say Texas has weathered this downturn as compared with other states?
JS: I've been surprised at how stable things have been and how diligent people have been in going about as much of their daily lives and their business lives as they can.
RK: Just to build on what Joe said, I agree with everything Joe said, and just to frame it, our downturn in the spring was not quite as bad as the country's, because our incidents of the virus in the spring was not quite as bad as places like New York and other states. We had a resurgence in June through say August.
It was a little worse than some of those other states and the long and the short of it is you'll see our downturn, our recovery has been similar to the country. But as Joe said, we started it from a position of strength. And one of the things that had been a tailwind for Texas has been a migration of people and firms to this state, which has been going on for 20 years. It is accelerating as a result of the pandemic.
Whereas I used to have a conversation, I'm sure Joe did every few weeks about somebody thinking about coming here. Now it's every couple of days from California, New York, Illinois, and it's great for Texas. I'm very optimistic we're going to outperform the nation for an extended period of time.
The problem is it does make me worried about the country and that for those states and cities that need to close that fiscal hole, they don't have the options Texas does, and they can't raise taxes because it's going to push more people out of their state. And a lot of those people are coming here. So we're the beneficiary of intensified migration. So I'd say the future and the prospects for Texas are very bright, but we'll do better if the country did better. I'm a little, a little worried about the country.
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