Kevin Warsh, a Federal Reserve governor during the Great Recession, noted in a Wall Street Journal op-ed earlier this year, “If you’ve seen one financial crisis, you’ve seen one financial crisis.” That is to say, all financial crises have unique causes and characteristics, and this current one certainly does too. Warsh noted that simply cutting and pasting the response to the last financial crisis is unlikely to be the appropriate response to the next one. Yet, one thing that is consistent from crisis to crisis is that the federal government steps in to provide some sort of fiscal stimulus in an effort to restart the economy.
Let me take you back to Macroeconomics 101. GDP is comprised of four components: personal consumption, business investment, net exports and . . . government spending. During steep fiscal crises like the current one caused by the COVID-19 pandemic, those first three components are in free fall, which leaves the federal government to counter their deterioration through spending. Keynesian economists assert that when GDP falters, the government must step in (and if the situation is dire enough, adherents to other economic theories reluctantly go along).
Though not yet formally reported, we are undoubtedly cast into a pronounced recession. Industry sectors across the economy are suffering deeply, and, meanwhile, the federal government is growing—at least by some measures. Spending is the most obvious area of federal sector growth, but with that spending comes actual growth in employment to manage that spending, at least at some agencies. Even where the federal government isn’t growing, it isn’t shrinking. We aren’t hearing about layoffs in the federal government because there have been none.
In times of fiscal distress, the federal government as a sector is countercyclical by design. While general property investors are fretting over the viability of their tenants and their ability to meet rental payments, government-sector property investors are sleeping easier. The following are two graphs to illustrate the countercyclical nature of the federal sector.
Countercyclical #1: Federal Spending Increases When the Economy Collapses
The graph above illustrates the trends for all of GDP (net of federal spending) and for just the federal spending component. The two trends are aligned to be equal at the beginning of the Great Recession, so it’s easy to see how they performed relative to one another after that point. During the Great Recession, defined as beginning in December 2007 and ending in June 2009, GDP (net of the federal spending component) decreased 10% while federal spending increased by 21% in the form of stimulus. This stimulus funding primarily took the form of the Economic Stimulus Act, the Emergency Economic Stabilization Act (which created TARP, the Troubled Asset Relief Program) and the American Recovery and Reinvestment Act. Together, this legislation generated about $1.6 trillion of new federal spending.
These stimulus packages resulted from legislative intervention, yet there are other ways that federal spending naturally increases as the economy worsens. These are known as “automatic stabilizers,” and they include a variety of safety-net programs such as the Supplemental Nutrition Assistance Program (SNAP, formerly known as the Food Stamp Program), Medicaid and unemployment insurance (these latter two programs are administered by the states but established, supervised and largely financed by the federal government in times of fiscal crisis).
On a related note, see how federal spending outpaced the remainder of GDP, not just during the recession but also before and after? This is due to Wagner’s Law, which observes that government spending in developed countries tends to grow as a percentage of GDP.
Countercyclical #2: Federal Employment Remains Solid in Recessions
As in the previous graph, we plotted the percentage change in two trend lines such that they were equal at the start of the Great Recession in December 2007. In this case, we look at employment, which is more directly relevant to real property owners. Here again, the federal government outperforms the nation as a whole. During the recession period and continuing slightly beyond, civilian non-farm employment (excluding federal workers) decreased by a total of 6.3%. During that same period, federal employment increased by 11.8% (we ignore the large spike which is related to temporary hiring for the decennial census).
The reasons for this federal employment growth are varied. While the stimulus legislation from the Great Recession was primarily focused on transferring federal funds to state and local governments or directly to individuals and businesses, the requirements to administer that stimulus generally led to hiring. We are seeing similar effects now. For example, the Coronavirus Aid, Relief, and Economic Security (CARES) Act established a $349 billion fund for the Small Business Administration (SBA) to administer loans to small businesses, and the SBA is needing to ramp up employment to meet that challenge.
During the Great Recession, there were other unrelated reasons for employment growth too. President Obama took office in January of 2009 and, in his first two years, enacted his Affordable Care Act and moved to insource some functions previously performed by contractors. So, perhaps we can argue that in some recessions the related stimulus can spur federal employment growth, but more reliably we can say that federal employment simply outperforms the private sector during recessionary times. This point was affirmed in a 2014 National Bureau of Economic Research Working Paper, examining employment security at all levels of government employment during recessions. The authors concluded that “public sector jobs do offer more job security than private sector jobs, and this advantage widens during recessions.”
Real Estate Impacts
The two trends identified above are among several we could identify as evidence of the federal government’s countercyclical behavior. Does this behavior accrue to the benefit of government-leased property investors? I believe it does, especially for owners of federally-leased assets. We found in an earlier blog article that rents for GSA properties during the Great Recession appeared to remain more solid than for the market as a whole. We’ve also seen that the inventory of GSA-leased space continued growing rapidly through the Great Recession. Both of those trends are good news for federal property investors. Further, the fact that the leases are backed by United States of America credit (the same as U.S. Treasuries) ensured that in the previous crisis there were no instances of default.
Yet, all news is not positive, and here again we may learn from the Great Recession. Ultimately, federal demand for leased space declined as a cost reduction measure in response to the rapidly rising national debt resulting largely from the aforementioned stimulus programs. The federal discretionary budget has been the target of austerity measures through much of the decade immediately following the Great Recession, and the GSA-leased space market has been shrinking since the end of 2012. All of these outcomes are not because the federal government is actually getting smaller as measured by employment or spending, but instead resulting from efforts to reduce costs through space reconfiguration, realignment, consolidation and other measures.
With the national debt forecasted soon to exceed the historical peak reached at the height of WWII, we can anticipate that pressure will remain on GSA and other agencies to reduce their real estate costs. But, in the meantime, U.S. government-leased assets should provide a relatively safe harbor for real estate capital, just as they did in the last fiscal crisis.