Growth vs. Gimmicks Part II: Understanding the effects of the pandemic
Long-term Growth vs. Short-term Gimmicks is a seven part series examining the impact of the COVID-19 pandemic on Maine’s economy, the corresponding effects on the state’s biennial budget, and reforms lawmakers should pursue to achieve real budget savings. Check back tomorrow for Part III.
EFFECTS OF THE PANDEMIC & MAINE’S RESPONSE
A survey conducted by the Bureau of Labor Statistics from the beginning of the pandemic in March through the end of September 2020 asked employers all over the country how 2020 affected their operations and workforce. Maine’s results were largely consistent with national trends on how many businesses were forced to close by government mandate (16-18%) and those who had difficulties shipping goods during the pandemic (11-12%), but differed slightly when measuring supply and demand.
More than 40% of Maine businesses reported experiencing “a shortage of supplies or inputs,” slightly exceeding the national average of 36%. Only three states had higher reported shortages. This may be balanced out by the higher-than-average reports of those who experienced demand increases over the pandemic. More than 18% of Maine businesses reported increased demand, the most in the country.
As a result of the pandemic and government responses in 2020, Yelp estimated in September that 60% of U.S. small businesses that closed by the end of August would not reopen, a national total likely exceeding 100,000 businesses. This rate is very likely to be higher for those businesses which rely on a robust summer tourist season to make a profit and pay employees, investors, and creditors. Those firms largely operate on thin margins and cannot make up losses as easily as other sectors. Small businesses make up over 99% of the Maine economy, and employ over 56% of the workforce. Applying Yelp’s findings to the BLS survey results, Maine Policy estimates that up to 9% of Maine businesses closed in 2020.
There are some positive indicators as well. Census data show that business applications in Maine are up over 9% year-over-year from Q4 2019 to 2020. Official state data on changes in business designations are only released in January of every year. Those show the number of active Maine businesses grew by over 6,000 from 2020 to 2021. This signifies that entrepreneurs are beginning to reorganize and reorient their resources to more valuable uses. Overall, applications have been rising steadily in Maine since 2016 and seem to be returning to their pre-pandemic pace, after the uncertainty of the 2020 spring and summer.
Weekly data show that “non-store” or online retailers made up nearly 12% of all business applications filed nationwide in 2020, showing a tendency for many entrepreneurs to look to the virtual space for their next endeavor. Non-store retailers made up more than 71% of all retail business applications. Non-store retail employment in Maine has been on a steady decline since its peak in 2006, but the economic shakeup from the pandemic and resulting surge in online business applications could help Maine buck that trend.
HOSPITALITY & TOURISM
What’s unfortunate for Maine is how much the state depends on leisure and hospitality to drive the economy during the summer tourist season. Accounting for 9.4% of total employment, Maine is more dependent on this industry than many of its regional neighbors: New York, New Jersey, Massachusetts, and New Hampshire. It is possible that this dependence could lead to a greater loss of businesses than estimated.
In 2016, the US Census Bureau reported that 78.7% of workers in Maine’s “accomodation and food service” industry were employed by small businesses, meaning those with 500 or fewer employees. The dominance of small businesses in the scope of the Maine economy could also contribute to later-than-expected losses, as small businesses incur larger start-up costs that can take much longer to recoup than franchisees. This means that it will be difficult for many of the small, tourism-related businesses Maine lost in 2020 to bounce back.
Maine’s tourism, hospitality, retail, and entertainment sectors have been hit the hardest in 2020. Over 60,000 Mainers were employed in hospitality and tourism in the second quarter of 2019, the beginning of the summer season. Measuring the effects of the pandemic-related shutdowns, the industry lost nearly 20,000 jobs from February to November 2020. This is a rosier picture than June, when more than 35,000 tourism jobs had been lost since February, but still accounts for 40% of Maine’s total job losses in 2020.
The Maine Office of Tourism (MOT) estimates that 1 in every 6 jobs is linked to tourism. In 2019, the industry contributed over $2.8 billion in income to Maine households and nearly $650 million in tax revenue for state and local governments. At $6.5 billion per year, tourism makes up more than 10% of the state’s total economic output.
Visitors from Canada alone spent almost $1.2 billion in Maine, making up more than 14% of all overnight stays in 2019, but since March 18, 2020, the international border with Canada has been closed to nonessential travel, including tourism and recreation. In May, year-over-year border crossings were down 88%. The Maine economy receives an outsized economic impact from Canadian tourism; in 2014, Maine attracted the 7th-most Canadian visitors of any state.
Bureau of Economic Analysis data show that businesses classified either as “arts, entertainment, and recreation,” or “accomodation and food services” lost 17.5% of their personal income from Q1 to Q3 2020. In the same period in 2019, these sectors grew just over 1%. Fortunately, the retail sector rebounded from its bottom in Q2 2020, growing personal income by 8% over Q1-Q3 2020. Retail earns more income than the arts and accommodations sectors combined. If retail is included in what is considered tourism, it helped the overall drop in personal income by only 2.9% over Q1-Q3 2020, contrasted with a gain of 1.78% over the same period in 2019. But, retail is also difficult to tie directly to tourism, especially in 2021, since so many new retail businesses applications are for “non store” or online retailers, and thus not linked as closely to “Vacationland” visitors.
A reason that a retail rebound might be more robust versus that of arts and food services is that, once the lucrative summer season passes, hotels cannot backfill their rooms. Restaurants cannot make up for lost patrons, either due to depressed demand or government restrictions that prevent them from filling their establishments. Those businesses that rely on out-of-state visitors missed untold income from the multitude of cancelled vacations to Maine over 2020. Some businesses, like those in manufacturing or retail, have the potential to make up for past losses with higher productivity or more working hours in the future. Others, like restaurants and recreational tours, cannot recoup these losses once their season is over.
Maine’s tourism workers, especially in arts, entertainment, hospitality, and food service, continue to struggle to recover their lost income from the 2020 spring and summer shutdowns. Sadly, in yet another misguided and heavy-handed approach to COVID-19, Governor Janet Mills ordered a statewide curfew of 9:00 p.m. for public-facing food and drink service, which began on November 20 and continued until February 1. While providing no metrics to determine the success or failure of this policy, this move likely led to significant reduction in earnings for service businesses and their employees over the winter holiday season.
Research linking viral transmission to restaurants is inconclusive, but that didn’t stop the Mills administration from forcing these rules on already-struggling Maine workers.
As seen in the Yelp data, business closures slowed significantly in the early summer, but began to climb again in July, with more permanent closures among them. Could this show that the continuation of pandemic-related restrictions on businesses throughout the summer meant that fewer and fewer businesses could hang on into the fall? The Bangor Daily News recently reported on the growing open restaurant spaces in Portland, denoting a 26% increase in restaurant closures across the state’s largest city since October 2020.
Effects of “nonessential” business shutdowns will be with us for many years. Governor Mills’ executive orders that forced Mainers to stay at home unless their employment was deemed essential created a stark divide between those who could afford to stay home to help “flatten the curve” and those who could not. “Pressing pause” on the economy knocked traditionally-stable supply chains completely off-kilter. Due to shortages of household staples like meat, flour, and toilet paper, combined with Maine’s anti-price gouging law, grocery stores were forced to limit purchases to prevent hoarding.
Continued and sustained mandates on businesses throughout the summer and fall also contributed to depressed economic confidence. Requiring public-facing businesses to limit capacity, install barriers, and police the governor’s universal face covering mandate meant that many had to reallocate labor to managing compliance, while trying to appeal to a pandemic-weary customer base. Even though the Maine economy has recovered about half of the jobs lost since the economy bottomed out in April, a June study suggested that 60% of those losses were the result of heavy-handed state action, not the virus itself.
The decimation of Maine small businesses in 2020—especially within the tourism and hospitality sector—will affect the lives of many thousands of workers. State budgets must reflect this fact and move to encourage more private-sector job creation. Government may only spend that which it has taxed from the people who have created value for others. In order to move the state on a path of opportunity, economic growth must be driven by industry, not government.
Restrictions on events and gatherings and their concomitant enforcement persist despite adequate empirical evidence to suggest that they have worked to suppress or eliminate viral spread. Unfortunately, because of this, Maine is likely to see a long, slow recovery, especially among tourism-related industries.
BUDGET IMPLICATIONS
In order to return to a level of economic adaptability and vitality needed for growth, state leaders must recognize that Maine’s business owners should be trusted to serve their communities and support the lives of their employees. Governor Mills’ constantly shifting, arbitrary, and often draconian executive orders issued and reissued during the year-long Civil State of Emergency have done much more damage to Mainers’ lives and livelihoods than COVID-19 has wrought. The virus carries a serious disease, and for some, severe illness and death. This should not be understated, but by refusing to trust the people to care for each other while making a living, the current administration has done enormous damage to Maine’s future.
For many months, Governor Mills lobbied Congress to allow the use of federal pandemic relief funds as “revenue backfill” in order to fill gaps in tax revenue resulting from her orders to shut down and restrict business. After more than six months of negotiations, Congress declined to send more aid to state and local governments in the massive $2.3 trillion stimulus-plus-budget bill signed by former President Trump in December. Mills has found a more receptive audience with President Biden, but with unsustainable levels of federal debt, financial solvency should be key focus for Congress as well.
In September, the Congressional Budget Office (CBO) issued a report projecting that the United States’ national debt would reach 98.2% of Gross Domestic Product (GDP) by the end of 2020. Most recent estimates as of March 2021 peg the national debt at over $28 trillion, nearly 130% of GDP. If including unfunded federal liabilities, the nation owes nearly $160 trillion.
Instead of begging for another debt-fueled bailout from Washington D.C., Maine politicians should look inward and make the hard choices necessary to right-size government spending amid a persistent recession. Balancing budgets on the backs of everyday workers and business owners through higher taxes and fees, instead of meaningful spending cuts, is a strategy of the fiscally tone-deaf.
Check back tomorrow for Part III, which focuses on FY 2022-23 revenue projections and the accounting gimmicks the Mills administration is using to keep its biennial budget proposal balanced.