Illinois among 20 states dragging down U.S. economic recovery

The pandemic caused the largest and shortest economic contraction in U.S. history. But as other states recovered, Illinois’ economy remained $17 billion below the pre-pandemic trend through the first half of 2021.

U.S. economic growth has slowed in the wake of the COVID-19 pandemic as state economies struggle to rebuild to pre-pandemic levels and business investment declines across the country.

According to advance estimates from the Bureau of Economic Analysis, U.S. economic growth declined to 2.1% nationally between July and September 2021, down from 6.7% during the second quarter.

Contributing to the slowdown are many factors: the risk of COVID-19 infections, worker shortages, supply chain chaos and unexpected surges in prices.

But another factor is Illinois, which along with 19 other states is dragging down the national recovery. Their economies remain below pre-pandemic levels.

Illinois had the 13th-worst economic contraction in the country, with gross output shrinking by 11.4% during the worst of the pandemic.

At the onset of the pandemic, the federal government provided nearly $6 trillion in pandemic relief to states. The disbursements were accompanied by the Federal Reserve slashing interest rates to near zero to encourage spending and pumping money into the economy through monthly asset purchases.

The value of goods and services produced in the state – measured by gross domestic product – shows a smaller Illinois economy by 3.6% in the last three months of 2020, compared to the same quarter in 2019.

The worst contractions were seen in the arts, entertainment and recreation industries. They shrank 63% compared to 59% nationwide. Accommodation and food services output declined 47% while transportation and warehousing production fell 26.3% – both experiencing steeper declines than the U.S. averages.

Although the economy contracted in the first half of 2020, Illinoisans saw personal income increase by roughly 6% for the year. This was because income from government assistance rose 40% across the state.

Despite this increase in income, Illinois’ economy remained $17 billion short of its pre-pandemic trend six months into 2021 as businesses and residents still struggled to recover from the COVID-19 shock.

While states that depended heavily on international migration and tourism were most hurt by the pandemic, other states lost residents to states with relatively lower taxes and better amenities. States that benefitted from domestic migration saw surges in labor supply and housing demand.

The difference? Public policy. Americans moved to states where they could get more for less. States that recovered quickly such as Utah, Arizona and Idaho boast the lightest regulatory burdens on businesses. They are states that are more affordable, business-friendly and impose less red tape to hurt job prospects. These states are all near and even surpass pre-pandemic employment levels.

Another 11 states, including Arizona, Iowa, New Hampshire, Missouri, Montana and Wisconsin, jump-started their economies by reforming their income-tax systems to reduce residents’ overall tax burden.

Unfortunately, rising public pensions costs hurt states such as Connecticut, Illinois and New Jersey. While the federal bailouts helped most states’ finances recover quickly, these states were less able to prevent business failures, to provide additional tax breaks for cash-strapped businesses, or to avoid massive cuts in state and local government payrolls. Although job openings exceed the number of unemployed workers in many states, data shows labor market tightness – job openings per unemployed worker – is worse in these states.

Illinois’ public employee retirement costs now account for nearly 27% of the state budget, which throttles government’s ability to support the state’s fragile economy. In the past, Illinois has tried to solve its pension problem with tax increases, yet the pension debt grew to the nation’s largest. Public pensions take money away from investments in education, infrastructure and even assistance to the state’s poorest residents.

But more significantly, a decline in the quality of government services despite frequent tax increases made Illinois less attractive to potential residents. After years of sluggish economic growth and declining population, the pandemic just served to highlight the magnitude of Illinois’ mistakes.