The Peak Oil Crisis: The Looming Fiscal Storm
Last week the stock markets soared when it was announced that the U.S. had lost only 36,000 jobs in February - less than Wall Street economists were predicting
By Tom Whipple | Falls Church News–Press | March 09 2010
In the wake of the announcement, numerous learned analysts appeared on the financial networks to assure us that as soon as the snow melts an economic rebound would start and U.S. employment numbers would start to grow. It is apparent that the learned analysts are spending too much time watching the Dow Jones and not our 50 state capitols where chaos is breaking loose. As state and local revenues continued to plunge in February, and with most legislatures still unwilling to make up for the losses with tax increases in an election year, hundreds of thousands of state and local government workers are facing the prospect of becoming unemployed. The Census Bureau says that as of the start of the recession, there were about 17 million state and local government employees in the U.S. Laying-off 10 or 20 percent of this workforce can easily get into some very impressive numbers. Thousands of others work in the healthcare industry where they are dependent on state Medicaid expenditures for their livelihoods.
While few states have as yet settled on final budgets for the next fiscal year, which in most cases begins on July 1, only the general magnitude of what is about to happen is taking shape. As we now are entering the third year of the economic downturn, most of the "fat" and "nice-to-do-spending" has already disappeared in the $10s of billions that have already been cut at the state and local level. There is little left that can be done except let more and more employees go, furlough them, or cut their pay. Last year the federal stimulus covered about 40 percent of the states' budget deficits, putting the problem off until this year. Another round of help from Washington is not yet in sight. Many governors, however, remain hopeful that the Congress will increase its nearly $2 trillion deficit some more to bail them out for another year.
Short of such a "deus ex machina" bailout, lots more people seem likely to find themselves unemployed starting on July 1. The arithmetic is rather simple. Assuming that the average state and local government employee is costing the taxpayers about $35-$50,000 a year, then for each $100 million state spending is cut some 2-3,000 jobs will have to be eliminated. With each billion dollars you reduce spending, another 20 or 30,000 head for the unemployment lines. Here in Virginia, we are looking at more than $1 billion in new spending cuts for the year so we shall probably lose on the order of 20-30,000 workers whose jobs are dependent on the state budget. Extend this to the 50 states and the threatened jobs can easily approach a million or more considering that several of the more populous states are facing deficits of $8 billion to $20 billion.
Virginia is among the better-off states as it has been managed conservatively and benefits from much federal spending. States believed to be in serious trouble are California, Arizona, Rhode Island, Michigan, Oregon, Nevada, Florida, New Jersey, Illinois and Wisconsin. New York which is currently facing a $9 billion budget shortfall certainly falls on this list.
Short of such a "deus ex machina" bailout, lots more people seem likely to find themselves unemployed starting on July 1.
The reason cumulative state budget shortfalls and looming dismissals have not garnered much media attention is that in most states a relatively small portion of the revenue is spent directly on state government employees. More common is for significant amounts of money to be passed on to local governments, school boards, local social service agencies, and medical facilities that hire the employees. Thus when a state makes massive spending cuts, the governor and legislators can claim that only a handful of jobs will be lost. Here in Virginia, the Governor recently proposed budget cuts totaling $2.1 billion while claiming it only cost some 500 state employees their jobs. Others were quick to point out that the real total was likely closer to 40 or 50,000 when local government, school, social, and health care workers were considered. These numbers of course are difficult to assemble as they depend on the decisions of thousands of local governing bodies and private service providers that could, in theory, make up for the loss of state money by increasing local taxes or other means.
All this says that despite the incessant media repetition that the economic situation is getting better, there is growing evidence that the economy is in fact growing worse. Federal Reserve support of the Treasury security market and purchases of mortgage backed securities is supposed to end in the next few months. Many fear that this action will send interest rates much higher before the year is out.
Where all this leaves oil prices is not yet clear. Gasoline has been rising in recent weeks and now averages $2.75 nationwide. If normal patterns pertain this year, we could see $3 gasoline by summer, but these are not normal times. Two years ago high gas prices are believed to have done much damage to the economy. Asian and Middle Eastern demand for oil appears to be on track to remain strong. But even China's leaders are becoming concerned about too much pointless growth. Geopolitical dangers ranging from the Venezuelan drought to Iran and political stagnation in Iraq remain.
U.S. demand for oil remains weak and if unemployment does take another jump this summer or if interest rates start to climb, demand could get somewhat worse. Taken together, the prospects for an economic recovery in the foreseeable future still do not look good.
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