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The Global Economy, Public Administration and Significant Challenges

The views expressed are those of the author and do not necessarily reflect the views of ASPA as an organization.

By Ben Tafoya
May 9, 2022

The global economy is not a typical concern for US public administrators, but recent months call for renewed interest as there is a strong connection between global events and growing challenges for state and local leaders.

Continuing Pandemic

The COVID-19 pandemic that came to the United States over two years ago continues. Another wave of undetermined size is growing. While some are eligible for their second booster, the overall uptake on boosters is still lagging in the United States and breakthrough infections continue to rise. Over 24 million infections have been logged worldwide in the past four weeks. Yet, there is another threat from the ongoing spread of COVID-19 abroad. The China “Zero COVID” policy has shutdown critical areas of the economy causing supply chain disruptions. Despite the shutdowns, the trade deficit between the United States and China has widened with exports stagnating (who is out buying if the stores are shut?) and imports ballooning to the highest levels ever (shift of consumption from services to goods).

Russian Invasion of Ukraine

The Russian invasion of Ukraine has caused a massive humanitarian crisis in Europe, and sparked price spikes and shortages of critical commodities such as fuel oil, cooking oil, natural gas and wheat that typically flow from the region. The United States and allies responded to the Russian aggression with strong sanctions against Russian leadership and industry. The Russians have retaliated by changing terms of sale and insisting on payments in rubles. They have also undercut the worldwide price of oil in order to continue some flow of revenue which their government depends on for funding to be able to repay its international indebtedness owed in United States dollars.

Worldwide Inflation and Federal Reserve Action

The United States first quarter GDP estimate showed an economy that contracted a small amount, in part due to increased imports and decreased exports, but also driven by declining government spending at federal, state and local levels. Concern about lower levels of unemployment and historically high rates of inflation in the United States are putting pressure on the Federal Reserve to increase interest rates, with several adjustments currently being planned for this year and next. Raising interest rates are a blunt instrument to attack the structural problems caused by COVID, war and supply chain disruption. Solutions to those problems will take time and policymakers feel the immediate need to tamp down the increasing prices. Many central banks are in the process of increasing rates.

It is important to note that the global context has global impact. Price increases are happening everywhere, and for the same goods and services as the United States. We’ve experienced this phenomenon in asset prices for several years now, as homes and equities soared in value. Now it is a worldwide problem for commodities, as well as desired consumer goods. Demand is strong but supply is weak due to production disruptions and supply chain challenges.

Impact on State and Local Government

These trends create significant challenges for public administrators. The downturn of Q1 2022 is a tiny annualized 1.4 percent, but if this continues into the second quarter, it will indicate the United States economy has fallen back into a recession. Government expenditures and investment dropped twice the overall rate and federal spending took a harder hit than state and local. But the numbers show the toll inflation will have on the public sector. There will be significant wage pressures for employees to keep up with living expenses. This will come at a rate not experienced by the government in decades. Food prices will impact school lunch expenses and the provision of food security. Fuel prices make vehicle operation more expensive. Construction and asphalt prices are at all time highs making infrastructure investment more costly. Costs for investment will also be pinched with increased interest rates as capital borrowing becomes more expensive.

Revenues will also have impacts both positive and negative. If incomes rise with inflation, then income taxes will also increase. As retail prices increase, so do sales tax revenues. However, equities markets are in a very rough period with stock markets down for the past four months, and bond prices are suffering from increasing interest rates. This means less capital gains revenue until those prices rise again. Housing markets are in an uncertain period as the scorching increases of the last decade may run into the headwinds of increasing borrowing costs and economic uncertainty.

State and local finances come into this period in a healthy state, thanks in part to the federal aid that flowed from the CARES Act and the assistance through ARPA and a general increase in tax revenue during 2021. Yet, a potentially stagnating economy, price increases for food and fuel and ongoing crisis in housing and public health require vigilance to make sure human needs are met. This is not a time to withdraw government support for the economy given the range of threats. The role of the Federal government is critical as state and local governments cannot sustain operating deficits. Continuing federal support is necessary to help state and local administrators bridge these significant challenges brought by the global economy.

Author: Dr. Ben Tafoya is an adjunct faculty member at both Northeastern University and Wentworth Institute. Ben is the author of a chapter on social equity and public administration in the recently published volume from Birkdale, Public Affairs Practicum. He can be reached at [email protected] or Twitter as @policyben . All opinions and mistakes are his alone.

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