Pa. is completely unprepared for the next recession

Pennsylvania Budget
“If we want to move toward that future and be able to attract dynamic new employers like Amazon and the dynamic workforces that go with them, our elected officials must be willing to make the tough decisions today, not years from now,” says Dan White.

It may not always have felt like it, but the United States is in the midst of the second-longest period of economic expansion in modern history. More than eight years have passed since the end of the Great Recession, and most U.S. business owners and policymakers have finally been granted enough breathing room to ask: What’s next?

You don’t have to be a Ph.D. economist to know the answer to that question. One of the few absolutes in the field of economics is the reality of the business cycle. In economics, as in physics, what goes up must come down. Thus, “What’s next?” is another recession.

How companies and governments prepare for that next recession will ultimately determine how painful it is. One of the key lessons learned from the Great Recession was that whether you are a bank president or a governor, preparedness can prevent a lot of pain.

One of the reasons the Great Recession was followed by the not-so-great recovery was that most states in particular were unprepared for any economic downturn in 2008, let alone one the magnitude of the Great Recession.

Consequently, states and local governments laid off almost three-quarters of a million workers during and after the Great Recession. In Pennsylvania alone, roughly 65,000 public-sector workers have lost their jobs since the Great Recession, a number that continues to increase.

Fortunately, we still have some time. Most economic forecasters don’t project another recession for at least two to three  more years.

Unfortunately, Pennsylvania is among those states most substantially underprepared. Pennsylvania’s state budget situation has already caused significant economic disruption and uncertainty, even in a time of economic expansion. What will things look like during a time of economic contraction?

To try to answer that question, we at Moody’s Analytics recently stole a page from the banking industry’s playbook and put all 50 state governments through a comprehensive stress test. The tests, which examine how much state tax revenues will decline and how much certain spending categories will rise during a hypothetical recession, found that most states are at least on their way toward being prepared for the next downturn.

Sixteen states have already put all of the money away that they need to survive a moderate recession without having to raise taxes or cut spending. An additional 19 states have put away enough money to survive a recession by only modestly raising taxes or cutting spending.

Worryingly, Pennsylvania is not one of those 35 states. Even though Pennsylvania’s tax structure makes it one of the least volatile states during a recession, it has zero reserve put away to handle the next downturn. In fact, after last year’s budget deficit, Pennsylvania actually has less than zero put away for a rainy day.

That means the next time we have a recession, something that is all but assured to occur in the next five years, Pennsylvanians will have to endure much larger spending cuts and tax increases than the average American.

Specifically, if a recession were to occur next year, Pennsylvania would have to raise taxes or cut spending by a combined $2.3 billion just to keep the lights on. That’s $500 per year for every household in the commonwealth, more than triple the national average.

The reasons we are so far behind the eight ball have been enumerated at length in these pages and elsewhere, but the overwhelming need at this point is the ability to make tough decisions. We are in our current mess not because of some temporary unforeseen event, but because of major structural issues that have been ignored for too long.

These are difficult problems that require difficult and often painful solutions. What’s needed today in Pennsylvania is some bold and pragmatic decision-making by our leaders in Harrisburg. If not, the commonwealth will continue to stand out nationally for all of the wrong reasons.

Other states are looking ahead to the next recession, while Pennsylvania is still looking back for ways to fix mistakes made more than a decade ago. It’s impossible to prepare for the future when we’re still grappling with the past, and it will take some tremendous political will to move us into the future.

If we want to move toward that future and be able to attract dynamic new employers like Amazon and the dynamic workforces that go with them, our elected officials must be willing to make the tough decisions today, not years from now. Waiting for the next crisis will be too late.

Dan White is a director of economic research at Moody’s Analytics in West Chester and serves as an adjunct professor of economics at Villanova University. daniel.white@moodys.com @DanWhiteEcon