I’ve spent several days over the past month providing economic forecasts on Zoom. In this pandemic year, I gave a forecast for the five states of the Great Lakes region and seven metro areas. This is a broad set of forecasts, but the pandemic makes the forecast easier to explain. The evidence is very clear that the disease caused a sharp, historically unprecedented decline in economic activity before any state took action to slow the virus’s spread.
The states that are recovering better today are not those with the lightest government action, but those that suffered the least spread of the virus. I don’t yet know if it was government action or luck that reduced spread; that’s the work of epidemiologists. Still, the economic evidence is overwhelming. It was always the virus that caused the recession.
The looming universal availability of the vaccine means that we face a potential end to the pandemic. So, the real start of the recovery is in the hands of vaccine distributors, not economic policymakers.
Viewers of my forecast asked many questions, but two dominated every presentation. These were, quite predictably, concerning the size of the federal debt and the long-term consequences of COVID. These are big questions, worth answering.
The U.S. federal government debt rose faster and higher under Mr. Trump’s presidency than in any time in history. It is now at 125% of annual U.S. Gross Domestic Product. That’s not far off the European Union’s or UK’s debt level, and less than half that of Japan’s. China is very deeply indebted, but the level masked its debt through state-owned enterprises and local governments that are really extensions of the central government.
The size of the debt isn’t the big worry; it is the repayment costs that matter. Our debt is almost exclusively issued as bonds, which are then bought and sold on financial markets. If buyers lose confidence in our ability or willingness to repay these bonds, they’ll demand a higher interest rate. In that way, it is like any lender and borrower arrangement.
Right now, 6-month U.S. Bonds are selling at an interest rate of 0.05%. In other words, buyers are so eager to own these bonds that they are willing to receive a negative interest rate after adjusting for inflation. As long as borrowers are willing to pay us to lend them money, we should be pleased to take on more debt.
Obviously, this happy circumstance is temporary. Interest rates will rise, and as they do, a higher proportion of our annual tax revenues will be dedicated to servicing that debt. We should worry about our debt situation before that happens. I am sure Treasury Secretary Janet Yellen is considering every way possible to issue long-term debt at low rates.
I have been a critic of government debt all my adult life, but today it is among our least pressing concerns. That will change, but we have time to adjust. To be fair, we probably will not. With both political parties having wholly abandoned fiscal conservatism as a guiding principle, I expect it’ll take a crisis for us to react. That is at least years away.
The second question about long-term COVID changes mostly involved the location decisions of businesses and families. Today, 23% of all workers and nearly 3 out of 4 office workers are still working remotely. The technology and workplace requirements of a vast home workforce have accelerated by decades. Commercial office space values and family choices about where to live are about to undergo major changes.
The location decisions of families change with home-based work. Even if workers must be in the office one day per week, the opportunity to live farther from the office will be alluring. This likely means less densely populated urban centers. However, easing the daily commute will not necessarily cause metropolitan places to shrink. In contrast, less congestion and a broader geographic choice of residences could swell metro areas. I’d expect demand for housing in the outer fringe of metro places to rise, as workers relocate away from the city core, but close enough for that weekly commute.
The aftermath of COVID will ease the need to be proximal to a city center, and that means workers will substitute other preferences in their location choices. Those are certain to be related to higher quality of life. Chief among the factors that determine higher quality of life are the quality of local public services, particularly public schools.
So, if your community had good schools (ranked A or a high B), safe neighborhoods, access to trails and are still within an easy drive to a large metropolitan center, you should expect faster growth. That’s a good thing for places like Shelbyville, Kokomo or Daleville.
But, if you do not have high-quality schools, then your prospects are no better than they were before COVID, and may well be worse..
This means the geography of large metropolitan areas will expand over the next decade, perhaps much faster than anticipated. COVID has not changed Americans’ preferences; it has changed their ability to act on those preferences. This means that municipal governments that were successful in making their communities more attractive to residents may well see accelerated growth over the coming decade. Those that did not will surely experience accelerated declines.