State economists grapple with ‘unprecedented times’

THE STATE ECONOMY will tank and unemployment will rise. But how bad will it get and how long will the recession last?

Top Massachusetts economists, testifying at a legislative budget hearing Tuesday, gave stark estimates of the financial pain that will be felt in the state, but all stressed the uncertainty of their predictions.

State Treasurer Deb Goldberg was the first to testify and opened with a statement that would be repeated throughout the three-hour event: “We are clearly in unprecedented times.”

The hearing, in which the experts testified via video, was convened by Senate Ways and Means chair Michael Rodrigues, House Ways and Means chair Aaron Michlewitz and Administration and Finance Secretary Michael Heffernan as the first step in a revamped state budget process. Lawmakers are trying to develop a budget for fiscal 2021, which begins in July, amid a near-total shutdown of the economy as the state, country, and world respond to the coronavirus pandemic. The House typically debates its version of the budget in April, a timeline Michlewitz said “is no longer feasible in the new reality we’re dealing with today.”

Massachusetts’s problems are a microcosm of global events. On Tuesday, the International Monetary Fund predicted that world gross domestic product in 2020 will fall by 3 percent year over year – which would make it the worst recession since the Great Depression.

UMass Dartmouth public policy professor Michael Goodman said he prepared a slide for the hearing that read, “A global recession is a virtual certainty,” but he would now remove the word “virtual.”

The economists predicted a range of potential impacts to the state’s tax revenue next year, none of them good. Eileen McAnneny, president of the Massachusetts Taxpayers Foundation, predicted that fiscal 2021 tax revenues would be $4.4 billion, or 14.1 percent, less than envisioned in January 2020. Marie-Frances Rivera, president of the Massachusetts Budget and Policy Center, predicted a drop of $5 billion to $5.7 billion.

David Tuerck, executive director of the Beacon Hill Institute, estimated a decline in Massachusetts’s gross domestic product of 7.2 percent in calendar year 2020.

On unemployment, Northeastern University associate professor of economics and public policy Alan Clayton-Matthews predicted that 20 percent of the state workforce as of mid-March will not be working by June, because they are unemployed, on leave, furloughed, or left the workforce. The Massachusetts Taxpayers Foundation is predicting 17.8 percent unemployment, with 677,000 people unemployed, in the second quarter of 2020. That compares to 2.8 percent unemployment, or 107,000 people out of work, before the pandemic. The Beacon Hill Institute is estimating unemployment will reach 14.7 percent.

The reason for the devastation is obvious – what Goodman called an economy that is in “a state of suspended animation” or “a medically induced coma.” In an attempt to slow the spread of the highly contagious coronavirus, the state shuttered non-essential businesses, closed schools, and discouraged travel. “This is a shock on a scale we’ve not seen before,” Goodman said.

For state budget writers, closed businesses mean lower corporate and sales tax revenues. Closed hotels and restaurants mean lower rooms and meals taxes. Workers earning less money pay less income taxes and buy fewer discretionary products, generating less sales tax. McAnneny said shuttered casinos will cost the state $32 million in gaming revenue.

Goldberg, whose office runs the state Lottery, said 1,800 of the state’s 7,500 Lottery retailers are closed, and others do not have enough staff to sell Lottery tickets. Goldberg said total Lottery sales last week were down 33 percent compared to the same week last year – a drop from $106.9 million to $71.9 million. While Goldberg said other states have seen boosts in online Lottery sales, the Legislature has not given Goldberg authority to allow online sales. The pandemic, Goldberg said, “dramatically exposed the limitations and vulnerabilities of the Lottery’s all-cash, in-person business model.”

Even as the state anticipates a dramatic revenue drop, it is also seeing increased demand for services, including unemployment benefits, welfare benefits, and MassHealth insurance coverage. The nonprofit Tax Foundation estimated in a model released April 9 that Massachusetts’ unemployment trust fund only has enough money to pay benefits for another six weeks.

One bright spot for Massachusetts is that it has a robust rainy day fund of $3.48 billion. State budget writers can draw from the fund directly and can use it to show the state’s fiscal stability when selling municipal bonds. “Certainly, we are experiencing the kind of serious situation that rainy day funds are meant to address,” Goldberg said.

Historically, Massachusetts has outperformed the national average in measures like employment rates and economic recovery after a recession. But while some economists relied on this for their models, other experts noted that this situation is different than prior recessions.

“Never before in the country’s history have we purposely slowed down the economy,” Michlewitz said.

McAnneny pointed to an analysis by the ratings agency Moody’s that listed Massachusetts and Boston as being particularly vulnerable to the COVID-19 outbreak. The state has high exposure to the virus, a dense population, a large population over 65, global interconnectedness, a robust tourism industry, and a reliance on the financial industry.

Goodman noted that the two major industries that have historically kept Massachusetts financially stable in tough times are health care and higher education. Today, health care institutions are stressed by COVID-19 and were forced to cancel the more profitable parts of their business, like elective procedures. Colleges and universities are losing a huge portion of their revenue from room and board fees as learning becomes remote.

One wildcard is what federal stimulus money Massachusetts will receive. The recently passed CARES Act is directing billions of dollars to the state, through direct government aid and through stimulus checks and unemployment benefits for individuals. Massachusetts is expected to get $2.6 billion in direct government aid, which does not include funding from separate pots of money for public transit, schools and other specific areas. Clayton-Matthews said individuals in Massachusetts could get another $16.1 billion between direct stimulus checks and enhanced unemployment payments and eligibility.

Virtually all the economists who testified agreed that Massachusetts cannot get through the downturn without more federal money. “There’s no question federal resources are going to be required if we’re going to ride this out in a way that minimizes human pain and suffering and positions the business community for growth (when things reopen),” Goodman said.

Beyond waiting for federal aid, lawmakers must figure out what else they can do to shore up state finances. Evan Horowitz, executive director of the Center for State Policy Analysis, suggested lawmakers look for money that cannot be spent due to the COVID-19 restrictions. Rivera suggested eliminating some corporate tax breaks and rolling back the state’s new tax deduction for charitable contributions, which is set to go into effect in 2021.

One point lawmakers repeatedly pressed the economists on is what the recovery will look like and how long it will take. The answer was largely uncertain.

McAnneny predicted the recovery could begin in July, assuming the virus peaks in April and subsides in June. But, she noted, there will not be a full economic recovery until people feel comfortable taking the train or watching a game at Fenway Park. At some point, there needs to a vaccine, treatment, and mass testing – none of which exists today. And no one yet knows if there will be more waves of the virus.

William Burke, research director for the Beacon Hill Institute, said there are “a ton of different scenarios” regarding the trajectory of the virus and what a reopening of the economy will look like. “Everything is super uncertain,” he said.

If the pandemic lasts longer than anticipated, Burke said the economy may move from a recession – which generally lasts months – to depression levels. A depression is characterized by a larger drop in economic activity, potentially lasting for years.