Politics & Government
Economist predicts electricity hikes will hurt consumer spending
Wesleyan's Zelity says Connecticut needs to develop more housing to spur economic growth
By Scott Benjamin
Dating to when the Beatle Paul first sang “Band On The Run,” Connecticut politicians have tried – to no avail - to rein-in the highest electricity rates in the continental United States.
They have utilized every regulatory acronym in the alphabet – DPUC, PURA, and even put a federal spin on it – FERC. Yet, Connecticut’s electricity costs, which were already the highest this side of Hawaii 5-0, have become even costlier.
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“Electricity rate increases will cut into household budgets and will make businesses less competitive,” Wesleyan University Assistant Professor of Economics Balazs Zelity stated regarding the most recent hikes.
CT Hearst reports after rates increased January 1, the median Eversource customer will be paying $55.50 per month and the median United Illuminating customer will have an extra $44.50 on their bill.
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Connecticut News 12 reported that Eversource spokesperson Tricia Taskey Modifica wrote in a prepared statement that, “We purchase power on behalf of our customers and only charge them what we pay generators for producing the power – we do not earn a profit on the cost of electricity."
In an e-mail interview with Patch.com, Zelity, who has a doctorate in Economics from Brown University, stated that people will alter their consumer purchases.
“We have seen the same thing unfold in Europe since the outbreak of the war in Ukraine,” he explained. “Households will reduce spending on other items in response which can depress the local economy.”
“Businesses will see increased costs that they in some instances may not be able to pass onto consumers,” he added. “We have seen a wave of bankruptcies among small businesses in Europe as well as the temporary suspension of municipal services (e.g., pools, libraries, schools) due to high energy costs. I am not saying the magnitude of the impact will definitely be comparable in Connecticut, but these are some of the worst things that can happen.”
Additionally, The Wall Street Journal has reported that 2022 was the worst year for the stock market since 2008 – the beginning of the Great Recession.
Stated Zelity, “The performance of Connecticut’s finance sector strongly correlates with broader stock market trends. The third quarter [of 2022] for the CT finance sector was accordingly weak. Output in the finance and insurance sector was down 4.5% in [quarter three] on an annual basis. There is no data for [quarter four] yet, but based on stock market performance, it will likely be another weak quarter for finance though possibly better than [quarter three.]”
State Rep. Bob Godfrey (D-110) of Danbury, has said, “When Wall Street catches a cold, Connecticut sneezes.”
Zelity wrote, “Connecticut’s government is sensitive to the stock market due to the state’s exposure to finance. However, currently due to the relatively large rainy-day fund as well as the fiscal discipline of the past few years, to the best of my knowledge the state government is well-prepared to withstand a recession.”
However, the Truth In Accounting report for 2022 stated that Connecticut ranks 49th, only ahead of New Jersey, in fiscal health, largely due to its state employee debt obligations.
“It is definitely a potential obstacle that limits the state’s fiscal space.” Zelity stated. “Connecticut is among the most indebted states, so this will likely be an issue in the future. It is possible that if a future administration is fiscally irresponsible - whether by overspending or cutting taxes excessively, the issue will become more salient.”
State Sen. Ryan Fazio (R-36) of Greenwich, who has a bachelor’s degree in Economics from Northwestern University, wrote in an e-mail statement to Patch.com that, “The biggest barrier to economic growth for the working and middle class in Connecticut is job creation and investment in our state to raise real wages for workers. Our tax burden, the nation's second highest according to the Tax Foundation, and our costly regulatory burden for small businesses, the nation's thickest according to the Cato Institute, are major culprits. By cutting our income tax rates and streamlining red tape, we can create income growth that benefits all families in the short and long run.”
On another topic, in his address at the opening of the General Assembly’s regular session January 4, Gov. Ned Lamont (D-Greenwich) said Connecticut needs to add housing to be able to attract economic development.
CT Mirror reported that, “Lamont challenged municipalities to work with the state to attack an affordable housing shortage that economists and business groups say is contributing to a tight labor market and an inability to fill 100,000 vacant jobs. He did not say how but assured them he was not going to undermine local control.”
“The Connecticut housing market is extremely tight,” Zelity stated. “Not only does it price many people out of the market, but it is also difficult for those with the means to find suitable housing due to scarcity. Without adequate housing supply, potential workers will look for other states and employers will follow if they find it hard to attract workers to the state due to the housing crunch.”
Fazio has a different perspective.
He wrote, “While housing shortages can certainly limit economic development, and probably do in some places like San Francisco, the evidence does not suggest that it is the major limiting factor in Connecticut. If supply was constrained relative to demand, we would see home values rising much faster than the rest of the nation. Instead, Connecticut is in the bottom 10 for home value appreciation over the last 5 and 30 years, according to the Federal Housing Finance Agency. Furthermore, the county with the highest levels of growth in Connecticut, Fairfield, has the highest home values.”.
Remarked Zelity, “Connecticut needs to seriously rethink its approach to housing by favoring initiatives such as transit-oriented development: allowing for mixed-use higher density housing in walkable areas near transit stops.”
“Notably, housing developments need to be a good mix: apartments and condos, higher density apartments but also middle-density townhomes,” he added. “Developments also need to cut across the socioeconomic spectrum: not just affordable housing or luxury condos, but also housing for the middle class. Such broad-based housing initiatives could also get a buy-in from a larger set of voters and be more politically feasible.”
Fazio remarked, “Connecticut still needs to have policies that create workforce and affordable housing. We can protect the desirability of our towns and cities while also creating housing by empowering municipalities to create housing within the style and scope of their neighborhoods.”
Fazio stated that he has submitted bipartisan legislation with state Rep. Raghib Allie-Brennan (D-2) of Bethel “that will reform our state's unsuccessful” state Affordable Housing Appeals Act, which was enacted more than 30 years ago, He wrote that their proposal would “increase local input and advance our affordable housing goals in a sustainable manner.”
State Rep. Farley Santos (D-109) of Danbury stated in an e-mail message to Patch.com that, “Connecticut families continue to struggle under the weight of the nation’s highest housing costs with rents purchase prices being at an all-time high. The state should focus on expanding affordable housing in a more equitable fashion to address disparities.”
Forbes reported that, “A recent study by NYU professor Arpit Gupta and his colleagues predicted an “office real estate apocalypse” as research points to a 39% decline in office values, in the long run, representing a “$453 billion value destruction”.
Could commercial be turned into residential?
“This does seem like a possibility,” Zelity wrote. “There are many precedents: Hartford already has at least one residential building that used to be offices, and the conversion of old mills to residential has also been successfully done in many localities.”
“Municipalities can reimagine their downtowns not merely as a place for work, but as a place for living, shopping, and entertainment,” he stated.
“To make such new residential buildings more successful, municipalities should consider expanding services in their vicinities that are important for residents such as grocery stores or schools,” wrote Zelity. “This will allow residents to rely less on car trips and can reduce traffic and the need for parking.”
In their 2022 book “The Titanium Economy,” Asutosh Padhi, Gaurav Batra and Nick Santhanam wrote that, “The future of the American economy is hiding in an unlikely place: the manufacturing sector.”
Lamont has stated, “We want to double the size of manufacturing in CT over the next 10 yrs.” Four years ago he established the position of chief manufacturing officer.
Zelity related, “The output of the Connecticut manufacturing sector contracted significantly during the pandemic, but has since recovered fully to 2019 levels. This means, however, that compared to pre-pandemic levels there has been no growth in manufacturing.”
“This contrasts unfavorably with the US as a whole, which has seen 11% growth in manufacturing output since 2019,” he remarked. “That being said, Connecticut has fared better than neighboring large states like Massachusetts and New York.
“When it comes to attracting new business, however, it is unlikely that Connecticut will be able to compete on cost with cheaper Southern states or overseas manufacturers,” he explained. “The best path for growth would be training and retaining a high-skilled workforce that can attract high-tech manufacturing jobs to the state, which will ultimately lead to better-paid jobs.”
Lamont established a Work Force Council during in 2019.
On another component of the economy, former Greenwich resident David Stockman, who was the director of the Office of Management & Budget during the Reagan Administration, wrote in his 2022 book, “The Great Money Bubble,” that the recent surge of inflation is due to the Federal Reserve Board printing too much money since the 2008 Great Recession, which has created asset inflation.
Stated Zelity, “One could say the Fed ‘printed’ too much if the current high inflation rate can be attributed to monetary policy. It is a bit unclear to what extent this is the case. Inflation can be caused by both supply-side and demand-side factors. We’ve had a lot of supply-side factors driving prices up, think lockdowns in China or the war in Ukraine.”
“On the demand-side, the Fed was expanding the money supply, sure,” he wrote. “But there was also substantial fiscal stimulus: stimulus checks from both the Trump and Biden administrations as well as the CARES Act which expanded unemployment benefits significantly at the beginning of the pandemic. All these factors together have led to elevated inflation rates.”
“How much of high inflation is due to the Fed then?” Zelity commented. “This is difficult to answer. The primary way in which the Fed influences inflation is through its impact on interest rates. So to the extent that low interest rates (in place until the first half of 2022) contributed to high inflation rates, the Fed was indeed responsible. The Fed’s impact was likely large in sectors that are particularly sensitive to interest rates such as housing. But its impact is likely negligible on inflation in sectors such as food or energy.”
Resources:
E-mail interview with Balazs Zelity, Patch.com, Monday, January 9, 2023.
The Titanium Economy, Asutosh Padhi, Gaurav Batra and Nick Santhanam, BBS Publications, New York, 2022.
Ryan Fazio e-mail statement, Patch.com, Friday, January 13, 2023.
Farley Santos e-mail statement, Patch.com, Saturday, January 14, 2023.
The Great Money Bubble, David Stockman, Humanix Books, 2022.
