A “Perfect Storm,” is described by Dictionary.com as “A detrimental or calamitous situation or event arising from the powerful combined effect of a unique set of circumstances.”
If you are a Long Islander, “Perfect Storm” conjures up the image of the massive Nor’easter that commenced on Oct. 28, 1991 and blasted the Northeastern coastline of the United States.
This unexpected storm’s disastrous effects on the fishing boat the Andrea Gail, were accurately depicted in a book aptly named “The Perfect Storm” by writer Sebastian Junger, and subsequently made into a major motion picture.
Many of us recall the storm’s aftermath, and the apocalyptic images of Westhampton Beach, after miles of Dune Road were washed away, leaving very few hearty homes struggling to remain upright.
Sadly, in New York State’s near future, all levels of government are about to find themselves aboard the Andrea Gail, in the midst of a new Perfect Storm, because all politicians, regardless of party, will fight for lower taxes.
On Long Island, a region already suffocating under one of the highest tax burdens in the nation, advocating for higher taxes would be political suicide.
That’s a primary reason the 2% tax cap was passed by the NYS legislature and signed into law on June 24, 2011.
Luckily, since the 2 percent tax cap became law, inflation has remained at historic 50-year lows.
Coincidentally, the strong economy has generated a surplus of fee, sales and income tax revenue filling the coffers of local, state and federal governments and mitigating the need for large tax increases.
As a result, elected officials on Long Island have been pushing for 0 percent tax increases to show how fiscally prudent they are. The problem is, due to market forces outside of anyone’s control, this is all about to change.
First of all, it’s no secret interest rates are rising. CNN reported last month that the Federal Reserve plans to raise interest rates in the near future at an “even faster” rate to slow down the overheating economy.
The Fed believes they need to do this in order to avoid asset bubbles like the ones we experienced during the dot-com crash in 2000, and the collapse of stock and real estate markets in 2008.
Rising interest rates will negatively impact all Americans by putting pressure on business investment, job creation and most likely the stock and real estate markets.
Second, the average yearly inflation rate from 1970-2015 was 4.36 percent.
Last year, for the first time in several years, inflation pierced 2 percent, and that was still less than half the rate of the previously mentioned time frame.
Rising interest rates and inflation usually go hand in hand.
When inflation spikes above 2 percent the costs of running government go up in tandem, as health care and pension costs continue to skyrocket, and municipal workers want to keep their income at least on par with inflation. Under this scenario how will local governments stick to a 2 percent tax cap without decimating services?
I will focus on solutions to mitigate tax increases during a period of high-interest rates and inflation in a future article.
Finally, government always reactively responds to a financial crisis as opposed to proactively preparing for one.
Look no further than the Republican shouts for a balanced budget during the Obama administration after the 2008 financial crisis.
President Obama ran large budget deficits by injecting trillions of dollars into the economy through quantitative easing. He did this by printing money while the Fed lowered interest rates, to encourage borrowing to keep the economy from collapsing.
Congressional Republican calls for a balanced budget have mysteriously disappeared when President Trump recently lowered taxes during a strong economy, further expanding a larger hole in the ever-increasing deficit.
Nobody on either side of the aisle has made any plans to pay down the huge federal imbalance of revenue and expenses. The poor fiscal discipline displayed by Congress is a terrible model for all other governments to follow and the interest payments on our national debt will soon eat up a growing portion of future budgets.
Here’s the predicted Perfect Storm: In the near future health insurance costs continue to spiral upward at up to 10 percent a year or more, wage increases rise above 2 percent annually to keep pace with inflation which moves closer to its historic average of over 4 percent, energy prices spike as demand grows from a soaring economy, and then the super-charged economy goes into a normal and healthy cyclical recession.
As the recession deepens government revenue from fees, sales and income taxes drops on the local, state and federal levels.
There is nothing to cushion the blow of diminishing government revenue because most elected officials don’t plan out further than a budget year, and reserves have been depleted to keep current taxes low.
This confluence of events isn’t hard to imagine if you take a step back and study how America has a long history of boom and busts every 20 years.
What’s frustrating is nobody seems to be focusing on the hard work of tightening up the expense side of government right now.
I could go into detail about the eventual draconian budget cuts and slashing of services coupled with rising taxes and fees (not to mention bipartisan finger pointing), but it’s too scary to talk about.
In the meantime, start saving my friends. The financial superstorm I’m forecasting is coming.