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The ongoing recession is a crisis like no other. GDP fell 9.5 percent in the third quarter, the sharpest decline on record. Here in New Mexico, employment is down by 8.3 percent since the onset of the pandemic. Add to this the sharp drop in oil prices. All this illustrates what we already know: this is easily the deepest, sharpest recession in our lifetimes.
The impact of the pandemic on the economy is profound, affecting both supply and demand. The supply effect arises because the pandemic exposes people who are at work to the virus. People react to this risk by avoiding the workplace.
The demand side effect arises because consumption activities, like going to a restaurant or shopping at the mall, also expose people to the virus. People react by reducing consumption.
Working in tandem, these supply and demand effects generate a large and persistent recession. Government containment activities, as necessary as they might be, add to the negative economy.
This raises the question of what state government can do to mitigate the impact of the recession.
First, state policy should aim to maintain small and medium businesses as going concerns. Doing so will allow these businesses to rapidly ramp up when, as will eventually happen, when the pandemic is brought under control and the economy begins to expand again.
In this regard, maintaining existing employer/employee relationships is key. Having experienced personnel in place will make reopening easier. To the extent that businesses permanently close, workers will have to search for new employers, and this will slow the recovery.
The state has already implemented a program, administered through the New Mexico Financial Authority, that provides low-interest loans to local businesses. Another measure is strategic regulatory forbearance. Care needs to be taken not to impose undue risk or economic costs on the public. But in the current circumstances, reducing regulatory burden can help some businesses to survive.
The second goal of state policy should be to maintain consumer spending. Consumption accounts for two-thirds of GDP, so consumers are critical in preventing a worsening of the recession and for the ultimate recovery. Here, how the state deals with its $1 billion expected revenue shortfall next year is critical.
To the extent possible, government layoffs should be avoided. Tax increases are better than program cuts, although neither is pleasant, and spending down any remaining reserves is preferable to either spending cuts or tax increases.
One idea would be to eliminate loopholes in the gross-receipt tax, perhaps even converting the GRT to a true value-added tax. Help for local governments is also important to help them avoid layoffs or cut programs.
In any case, in balancing the budget, the legislature should take care to continue to provide services to those who, through no fault of their own, find themselves thrown out of a job or forced to close a busines because of the pandemic. The burden should be put on those of us who still have jobs and incomes despite these troubling times.
Christopher A. Erickson, Ph.D., is the Carruthers Chair in Economic Development at NMSU. This article is based on his testimony before the Economic and Rural Development Committee. He can be reached at email@example.com.