“Unprecedented, unchartered waters . . . no signposts” are but a few of the descriptions Monday’s ICMA Annual Conference keynote speaker Diane Swonk, senior managing director and chief economist for Mesirow Financial, used to describe the conditions facing local government managers. But, Swonk reminded us, we have lived in an illusory environment for the past 30 years. Financial crises are harder to recover from than recessions because they affect the underpinning of the economy. It wasn’t the subprime market alone that decimated us, it was the leveraging. TARP was necessary to save the financial and global system. Without TARP, $3 trillion would have left Money Market accounts. Wall Street as we knew it disappeared within one week’s time. It’s amazing, Swonk remarked, that the unemployment rate is not now at 30%. Unemployment insurance is not discouraging people from finding jobs; there are not enough jobs for those seeking them.

How did we get here?

With the industrial revolution, we moved people from farms to cities so they could work in industry. We accomplished this through investments in education. Now, we have to import the highly educated. We stopped investing in education in the 1970s, explained Swonk. In the 1980s debt soared, and incomes of the bottom half of wage earners stagnated. In the 1990s, credit became a right, not a privilege.

Failure to educate causes inequality. We tried to address inequality with more credit. Instead of education, we gave homes. The incentives that government provided to mortgage issuers are what contributed to failure.

What now?

Foreclosures have to be cleared because they are putting the housing market on hold. Eventually the housing market will come back, and there will be pent up demand, resulting in increased home sales.

The U. S. consumer will no longer be the mythical Atlas carrying the world, but there are some hopeful signs. There are declines in credit card debt, and the savings rate has picked up. Corporate profits have been robust, but it’s because the private sector is hanging on to profits. We need to free up the money for small business loans to enable investments in productivity and jobs. Smart technologies are one of the bright spots. They should show gains in the low double digits.

Trade is picking up. China needs to change as much as the United States. does. China is addicted to exports; we are addicted to cheap imports. Isolationism does not work. Exports will be the driver of economic gain for the United States if we do not become protectionist.

For state and local governments, Swonk sees weaker growth in spending. Property tax revenues are generally down, and local governments are struggling to deliver services with fewer resources. The United States will not repeat the mistake of the Great Depression. There will be more monetary stimulus. The United States is coordinating monetary policy with other central banks in Europe and elsewhere, which helps stabilize the global situation.

How much is structural rather than cyclical?

The federal deficit is a significant problem for the United States. The decisions required to have a major impact on the deficit are not for the faint of heart. They include simplifying the tax codes, eliminating deductions, and rolling back taxes. The global economy’s influence cannot be underestimated:

• We have to rebalance the world economy. It’s evolutionary, not revolutionary.
• One or more major markets will default in the next year. Developing economies will account for 50% of the GDP in the world.
• Public debt will continue to escalate.

What can local governments do?

• Invest in education.
• Invest in innovation.