Cities return to “old normal”

March 1, 2010 - (3 min read)

I’ve been hearing a lot of chatter about “the new normal” – the prospect of the current economic malaise resulting in a longer-term pattern of stagnating economic growth. We’ve even thrown the term around a few times here at NLC.

But, predictions about slow growth in the coming years are not new. The new piece was the unprecedented economic growth that characterized much of early to middle portion of the past decade. What’s happening now is a large, violent correction that, particularly for cities and other local governments, represents a return to an “old normal” of a highly constrained fiscal outlook with broad and deep systemic challenges.

Where did this new normal idea emerge? The phrase new normal is widely attributed to global investment firm PIMCO’s executive Mohamed El-Erian, who is quoted as saying “the notion of a new normal is increasingly resonating in policy circles and among market practitioners. This reflects a growing realization that some of the recent abrupt changes to markets, households, institutions, and government policies are unlikely to be reversed in the next few years.”

Well, that’s not exactly news. NLC has been reporting much the same thing on city fiscal conditions for awhile now.

The “old normal” we are experiencing (what statisticians call a regression to the mean) might best be described as a return to where the nation’s economic recovery will be characterized by a return to moderate levels of year-to-year growth.

For local and state governments, a return to an old normal presents a more stark reality. The economic boom period masked significant challenges to underlying economic and fiscal systems; challenges that NLC has been calling attention to since at least the late 1990s (see Taxing Problems, most recently), including:

– Longer-term economic shifts away from goods, to services and knowledge-based economies have created a mismatch between economic activity and sources of revenue;

– Demographic shifts including overall population increase, immigration, and the aging of society alter, and often increase, demands for public services;

– An unraveling of the intergovernmental (federal-state-local) system for funding and delivering public services; and

– Polarized politics that make it increasingly difficult to address these challenges.

Addressing these systemic challenges means we will have to broaden tax bases, integrate new groups of people into the economy, reform health care and pension systems, and make sustained investments in public services and infrastructure. No problem, right? Systemic change is difficult, but we have to start somewhere to provide a more vibrant economic future — a “new normal” — for communities.