Treasurer: Stock Market ≠ ​“Real Economy”

The ​“real economy” has taken a beating during the Covid-19 pandemic. The stock market, meanwhile, is doing just fine.

State Treasurer Shawn Wooden sees both economic arenas as vital for Connecticut’s fiscal health — and argued now is the time for government to address unemployment, even as it continues to prop up Wall Street’s financial markets.

Wooden offered those insights during a 20-minute interview with the Independent during a recent visit to town.

The first-term state treasurer and former Hartford City Council president had come to the Elm City to participate in a free burger giveaway in the parking lot of Dixwell’s Varick AME Zion Church. 

He had helped organize the traveling fast food pantry in conjunction with the Massachusetts-based restaurant Wahlburgers and the Los Angeles-based investment firm Crescent Capital.

Wearing a bright blue surgical face mask and matching latex gloves, Wooden talked with the Independent about how the financial havoc wreaked by the Covid-19 pandemic has looked from his seat as the elected manager of the state’s cash flow, pension funds, banking relationships, and bonded debt.

He also shared some thoughts on what has and hasn’t worked in the $2.2 trillion CARES Act, the monumentally influential role the Federal Reserve has played in shoring up capital markets without spending a single dollar, and his hopes that so-called ​“essential workers” will emerge from this crisis with the pay and economic recognition that matches their true social value.

Below is the New Haven Independent’s interview with Wooden, lightly edited for clarity.

Having A Rainy Day Fund Helps

NHI: Big picture, how has Covid-19 affected the state’s finances, particularly in regards to long-term structural obligations like pensions, debt, and employee benefits?

Shutting down America is having a tremendously negative impact on state revenues. Connecticut is no different in that regard. Our budget is naturally off given the loss of revenue and the increase in certain expenditures.

But because of the work that many of us, including the governor and myself, have been doing on getting Connecticut on a stronger fiscal footing, we are much better positioned than many states in the nation to actually weather this storm.

That’s reflected in us having a historically high rainy day fund. The size of our rainy day fund, which is currently around $2.5 billion, is twice as large today as it was going into the 2008 recession. The treasurer’s office is charged with making sure that we have the cash to make government operations work, and the resources that the state needs. And we do.

Also in my role as secretary treasurer of the National Association of State Treasurers, we have been lobbying the federal government and Congress to enact policies to help address this need in the form of direct state aid.

The CARES Act has been a help to our state in helping some of those funds to come in. The Federal Reserve has also intervened to create liquidity in the market place. In basic terms, that means our ability to borrow in the market, as we do routinely every year, has not been interrupted. In fact, we just issued $850 million in bonds for transportation projects, and will be doing another $500 million, to be followed by another $400 million, in borrowing.

We are able to do this because of the federal monetary policy that supports the market. And also because of our credit ratings. All of the major credit rating agencies have recently affirmed our credit rating and our stable outlook.

What role did the state’s $2.5 billion reserve fund play in preserving the state’s credit ratings during this crisis?

It had a huge influence on that. Because what they’re looking at in this time of crisis is: What is the strength of your ability to repay? They’ve noted our rainy day fund as being a significant contributing factor.

As for pensions, we have had a pension funding crisis that has been seven decades in the making. My number one priority in my first legislative session was restructuring the teachers pension fund. We were on an upward trajectory of increasingly eating up our general fund budget with the annual payments to contribute into the pension system. Our restructuring made that more of a flatline. It extends it a bit over a period of time, but it’s flat and steady, and in the immediate five years, there’s $500 million savings to the state.

That was the right thing to do last year in terms of sustainability for taxpayers and for the pension system. Now that we’re in this pandemic, it’s also something that gives us budgetary relief and more flexibility, which is a big help right now.

States Need More CARE-ing From Feds

Nearly every state and local government in the country appears to be staring down an imminent fiscal crisis. What has Connecticut received so far from the CARES Act in terms of state aid? How would the House-approved $3 trillion HEROES Act help Connecticut shore up its budget?

And what do you make of the apparent unwillingness of Republican Senate leader Mitch McConnell and Republican President Donald Trump to support any additional aid any time soon?

The state has received around $1.6 billion from the CARES Act. That will help us significantly. One of the things that we as state treasurers have been advocating for is increased flexibility on how that money can be used.

How is that money supposed to be used right now?

On expenses directly related to addressing Covid-19. The range of impacts from the pandemic are broad. For example, the state has lost significant amounts of revenue during this crisis. Is that a direct impact of Covid-19? The money can be spent on supporting the purchase of personal protective equipment, for example.

What we’re asking for from Congress and the federal government is: 1) We need additional support and more aid, and 2) We need greater flexibility in using that to address budgetary gaps. We started off the year with a budget that was projected to be in balance. This pandemic has just thrown everything off in terms of those receipts.

This money is critically necessary to pay for police, for firefighters, for sanitation workers, for basic operations of government to serve the public. It’s that type of flexibility, for payroll, for basic services, that we’re looking for from the federally government.

Unfortunately, partisanship is increasing and making it challenging to move legislation again. But I am still cautiously optimistic that we will get an additional legislative package. It will not look like the HEROES Act, but this will be a negotiated process.

States like Connecticut have been hit pretty hard by this pandemic. We send a lot of money to the federal government every year, a lot more than we get back in federal resources.

In our time of need in a crisis that is not of our making, we think it is reasonable and fair to ask for additional federal support for our state and to have the flexibility to have governors and mayors make determinations on how that money should be used.

What do you think of how the fund-limited Paycheck Protection Program (PPP) has worked so far in its support of small businesses with forgivable loans so long as they don’t fire workers and spend the money on payroll?

And do you think that something like the Paycheck Security Act, which is co-sponsored by Richard Blumenthal, would do a better job at keeping businesses afloat and workers employed by essentially covering all businesses’ payrolls up to a certain dollar amount for the indefinite future?

I was very critical of the first phase of PPP. I co-authored an op-ed with Congressman Jim Himes criticizing how it was implemented, and the number of small businesses, particularly minority and women-owned small businesses, that were left out in the cold.

That speaks to a broader critique of banking relationships with these small businesses. You had these gross disparities of public corporations qualifying for millions of dollars, and the true small businesses not getting the aid they needed and laying off people, which hits local communities very hard.

I do believe there are other models that might work better, and our policy leaders should look at these.

And I believe there was an improvement in round two of PPP, in terms of allocating funds to community financial institutions. I think that is definitely helping.

What we are facing is the consequences of structural disparities already built in, where you have many urban communities, many communities where black and brown people live and have small businesses, and a lot of the traditional banks have exited those communities. So you don’t have the relationships at those levels, and you have to look to credit unions and to other community institutions.

It is easier for large banks to put out a $10 million loan in one transaction with one of their VIP clients than it is do the work to deal with giving out a $150,000 loan to a small business in a community that’s already hurting.

That was a major part of what was wrong with the first round. Hopefully we’ll see a greater sensitivity from those banks because of the criticism that I and many others have leveled.

This problem is deeply embedded. It’s structural. We have to address the fundamental issue of certain communities being underbanked.

Stock Market And ​“Real Economy” Are Not The Same

There has been much public attention and reporting on PPP, and much less on Congress allowing the Federal Reserve to leverage upwards of $4 trillion in bailout lending for larger businesses thanks to the CARES Act. Without spending a single dollar, the Federal Reserve was able to allow Boeing to borrow $25 billion on the private market because of the central bank’s verbal commitment to backstop seemingly all financial markets. 

As a result, the stock market is currently thriving. At the same time, over 40 million Americans have filed for unemployment over the past two months. What do you make of that disconnect?

There’s always a disconnect between the stock markets and what I call the ​“real economy.” They are not the same. Even when we have a president talking about the roaring economy, that doesn’t mean the real economy is roaring.

We have three things that have happened here. We have a health crisis that moved us into a real economy crisis, with unemployment and people laid off and terminated, which started a financial crisis in the markets.

The Federal Reserve stepping up quickly and robustly backstopping the corporate and municipal markets played a big role in propping up and reassuring the financial markets.

And I think that it is a good thing. I think it’s good for this country to have strong financial markets. But we cannot equate that with a strong real economy.

We have to first deal with the public health crisis. Everything else will flow from that.

Also, even though the financial markets have appeared to stabilize, I talk to market economists at least three to four times a week, and I talk to my investment staff every day of the week, and nobody feels confident, comfortable, secure that the financial markets have passed this moment of disruption. The markets can be fickle.

Without a dollar of real money put in, the actions of the Federal Reserve gave a sense of calm and stability and said, ​“We’re not going to let our markets crash.” That is a good thing.

But much more of a focus needs to be put on the real economy and what’s happening with people who are unemployed and underemployed. As we start to look down the road, what does a new normal look like? What does it look like for people who have been structurally squeezed out in the real economy? Where is their place?

One fundamental shift I believe will come out of all this is a redefinition of what it means to be an essential worker, and the value of front line workers.

As we have seen, our country doesn’t work without the nurse. It doesn’t work without the sanitation worker. It doesn’t work without the gas station attended. It doesn’t work without the person in the food production system who’s making minimum wage, but all of a sudden we have a president who’s willing to deploy the Defense Production Act to make that worker go into harm’s way.

In our new normal, we have to protect against those who have been historically on the margins from being further marginalized and reshift our focus to the value of essential workers.

What are your policy and administrative priorities as state treasurer in the coming weeks and months of the Covid-19 crisis?

I want to focus on making sure that our state has the ability to pay its bills on time, and that the resources we need to do that are available. That means managing daily our cash position and liquidity, and how much we have available to spend each day. That means planning for and executing borrowing in the market and projecting out what will we need in the future.

As the trustee of our state pension system, my priority is also making sure that we continue to focus on maximizing the returns for pension fund beneficiaries and minimizing and protecting against risk.

That’s where I care a lot about the financial markets, because that impacts our retirees, teachers, and a host of other Connecticut residents. That is a laser focus for me and my team, in terms of managing our investments in a way that protects value and grows value in the long term in order to pay those liabilities.

And my priority is events like today, why we’re here in Dixwell. It’s about leveraging relationships, which are quite extensive for the treasury. Crescent Capital is one of my investment managers. We put out the call saying: ​“What’s the value added we can get?”

It’s not in my job description. You wont find it in the constitution for the treasury. But in our time of need, looking at how I can leverage all the relationships that we have to bring resources into the state of Connecticut, whether that be food or PPE, that’s a priority too.