Former C.A. State Rep. Mike Gatto on how to recover from the pandemic
“The thing that we need from a leader right now is calm reassurance — and there is nothing like that emanating from the White House.”
The following is a transcript of the interview conducted between GovSight Editor Josh Henry and former California State Assembly Member Mike Gatto — legislator of the rainy-day fund, which has helped California brace itself for the pandemic — on COVID-19’s pervasion, the state of the economy and solutions for both. The interview has been edited lightly for clarity.
Josh Henry: Mr. Gatto thanks for joining us on The InSight by GovSight Podcast. We’ll open with the coronavirus. COVID-19 has swept over the U.S. and has hit your home state of California hard as well. A Stanford University study, concluded today, stated that cases are being heavily underreported in California, numbering possibly in the tens of thousands. Several counties in the Bay Area are now requiring workers and residents to wear face masks while using public transportation. What impacts have you seen in the Los Angeles area stemming from this pandemic?
Mike Gatto: Gosh, it has been just a completely devastating pandemic on Southern California. I’ve seen things ranging from a total economic collapse: Today it came out that well over 50% of workers in L.A. County, think about that, are out of work. I’ve seen depression. I’ve had friends call me and articulate that they’re just profoundly depressed. And of course there’s the human toll. The human medical toll where hospitals were told to be prepared to be overwhelmed. I think, thankfully, that hasn’t happened yet. But we still have lost a significant amount of life in Southern California.
JH: You mentioned the mental impacts, the social impacts, workers being out of work. Do you see this going back to normal anytime soon? Even after we let everybody out and economies start to re-open as normal? Do you think that the way we interact will be normal after this?
MG: You know, I don’t. I think that we are going to face at least another six months of strangeness and disruptions. What I mean by that is, the stock market will be volatile, small businesses will be suffering. People will be paranoid and full of fear, and there will continue to be loss of life. We will get back to some degree of normalcy, but that normalcy for the foreseeable future will probably be one where we all frantically wash our hands and don’t touch as many surfaces as we would typically and wear some degree of protective gear when we go on things like typical errands.
JH: I know that in your legislative history, you’ve pushed for all kinds of different things socially. In California, in the Los Angeles area, one of those things was housing reform. What kind of an impact has the coronavirus had on both low income folks who are struggling to pay their rent, if you’ve seen that, and also homelessness in the California area?
MG: Well, you know, we’re just starting to see the effects on a wide variety of things. I read a statistic recently that already something like 4% to 5% of homes are in foreclosure. Obviously, foreclosure is a very long process and these were probably households that were already impacted by something, it could have been a job loss or medical issues. But then coronavirus of course made it worse with all the people out of work.
As for the homeless population, that has been one of the mysteries of coronavirus. So far, a lot of people forecasted that the homeless population would be devastated and particularly hard hit. And we have not seen that so far. And it’s really not clear whether that is from a lack of testing. Obviously, the wealthy and connected can get tested a little easier. Or if it’s something else at play, it’s possible that they’re, you know, that these are largely isolated populations that perhaps aren’t interacting with the people who had it originally. But that has been something that a lot of people scratch their head about.
In terms of the renter-landlord dynamic, that has also been fascinating because many local governments here in Southern California and state governments have offered some relief for renters. They have said that you can put pause on certain rent payments or at least there will be a pause on evictions, even if the rent is still due eventually. But there has been no relief at all for landlords. I saw something where someone commented that we know government’s are serious when they start to say that landlords don’t need to pay their property tax. But, you know, April 10, property taxes are due and they still required it. So it seems like, frankly, landlords are getting squeezed. Tenants are getting squeezed, everybody’s getting squeezed, it seems like, except for big business.
The statistic I read today was that over 50% of workers in Los Angeles County are out of work due to coronavirus and that is astounding. You think about the Southern California economy though of course and, you know, so many people here work in the entertainment industry. There is still some aerospace, which is not really occurring anymore. You know, manufacturing has been largely shut down and put to other things, then you have a lot of service professionals, right. And those things have been dramatically affected. But the Los Angeles Times reported that just 45% still hold a job in Los Angeles County.
JH: And do you see anything like that easing up anytime soon, people getting back to work, any kind of economic help in a stronger fashion than what we have now?
MG: Well there [are] of course, discussions federally to extend some of the provisions of the CARES Act and the other provisions of federal law that were recently passed that were designed to help small businesses and struggling workers and so on so forth. I’ve been a little disappointed at the federal gridlock in the last week. The much ballyhooed small business programs ran out of money. They were plagued with delays. I know one small business that was telling me that, let’s see, she applied for three different small businesses at three different banks. Basically she had submitted 18 applications and zero had gotten funded. And obviously that’s a problem. Small businesses employ over 50% of the workforce. And if they fail, then we’re going to be in a lot of trouble.
And when I think of small businesses, by the way, I think about the young man who you know, at age 30, finally broke out and opened up a gym, which had been a lifelong dream of his, I think about the Cambodian immigrant who came here with nothing in her pocket and has a successful nail salon and employs you know, 10 or 15 people. Gyms, nail salons, clothing, boutiques, massage therapists: these businesses are devastated. You cannot do nails from a social distance. And that also is something of course that people are probably doing themselves because of lack of funds right now. I don’t see these businesses surviving.
JH: Do you think there is anything more that L.A. county or even the state of California at large can do right now to help out small businesses or even could private corporations get involved and give a helping hand?
MG: I think the relief has to come from the federal government. And I hope that answers your question.
Los Angeles County has a lot of money and a lot of residents, Los Angeles City, you know, the state of California has a lot. But all of these state and local governments are completely hard pressed. For example, California’s tax code is so dependent on a healthy stock market and healthy property market and people paying lots of income tax. As incomes dive, you know, the projected hole in this California budget is billions of dollars. So obviously we don’t have anything that local governments can do really for small businesses. What they could do, of course, is they could allow businesses to pay things like sales tax. They could give them a break with sales tax, if they could give them a break with property tax. Those are things I mentioned already.
It’s going to take the federal government, I think, doing something simple and clean and elegant. And so far, that it’s not been the way that things have gone. I never thought I’d say this, but George [W.] Bush actually did one thing right. And that was after 9/11. He said, “Gee, you know, it’s March and this is when people file taxes. We’re going to make a retroactive across-the-board tax break for everybody who filed retroactive to last year.” So the refunds that came were bigger. That is really what’s needed. A small business owner, of course, doesn’t qualify for the $1,200 one-time grant. They also don’t get the billions and bailouts that the big businesses get. What they need is some sort of retroactive tax relief commensurate to the taxes that they paid last year. And that has to come from the federal government.
JH: Did you happen to catch one thing that’s been publicized this week, speaking of tax relief: The fact that the limit is being removed on non-business expenses for individuals on taxes and they can be retroactively applied from 2018 to now? Now granted, I know the J.T.C. came out with a brief report that it sent to two congressmen that said, essentially, most of the help would go to the wealthiest in America. 82% of the benefit would go to millionaires, but do you see any other other things like that — loopholes, fine print — that could be easily either taken out or put in that can help people?
MG: You know, I don’t see anything like that. [Nothing as] easy other than, you know, broad tax relief. I, you know, unfortunately, I have seen what you’ve talked about where there are some corporations that seem to be taking advantage of certain loopholes. I also really questioned the way that the small business programs rolled out. It was with individual banks as opposed to the government itself. The government already knows what businesses pay in taxes — it knows what individuals pay in taxes — and it could have been helpful in that manner. Going through it, you know, banks? Well, I mean, there are some banks like Wells Fargo that said, “Gee, we’ve got a massive delay in implementing this.” And then they said, “Gee, we’re full.” And other banks were lending on the same day. It just seems like it was such an uneven response based on happenstance. That doesn’t give people a sense of fairness that that is needed for a program like this.
JH: And what do you think the biggest issues with that response were? I know you mentioned essentially that the information wasn’t centralized because it’s going to multiple other banks. Do you think that it could be a communication issue between the banks and the government in that respect? Or is it just simply the government not taking on the risk that it needs to?
MG: Well, I think it’s the way that they wrote the legislation. They took legislation that should have been very, very, very simple. And they made it very complicated. You know, you look at the $1,200 payment, right? They could have put something in there that said, if the lockdowns continue, that this will be $1200 a month. They didn’t do that. They could have said, even though we’re capping this based on income last year, if you lost your job this year and you have no income, we’re going to give you a payment as well. They didn’t do that. And then for the small business programs, they made it this very complicated process that has to go through a private commercial bank. And that of course was the biggest holdup for just about everybody out there. And they didn’t adequately fund the program. So, you know, it’s full, it’s done. And I gotta say, I don’t know anybody who’s gotten funding. And I know a lot of small business owners.
JH: Let’s actually look at the long term impacts of this. Let’s start in California. What do you think the biggest long-term toll on California’s economy will be stemming from the coronavirus?
MG: Wow. I mean, you know that that’s a very good question. I hope it doesn’t seem like a dodge when I just say that it’s going to be a profoundly comprehensive toll. Our governor has been using the term “nation state” recently, just to reflect our size. We’re a very big state. Our tax code, however, is very dependent on capital gains and income much more so than the other states of the union. We’re always the state that suffers the most during an economic crisis. So the state is going to have an immediate shortfall in revenues, that’s going to lead into a profound reduction in government spending.
And so if you think about all the industries that are dependent on government spending — hospitals, some of the law enforcement related industries, everybody from all the vast numbers of people that the government spends on building roads and things like that — those businesses are going to suffer. And then you look at the businesses that cannot practice social distancing, the ones that involve, you know, like I said, a gym and nail salon, those businesses, I don’t think will come back, because you’re going to tell them essentially that they’re going to be shut for three months at least. And then you know, they might have a 30% or 40% patronage rate when we come back because people are still scared out of their minds.
JH: Now, let’s take this to a macro level. Do you think that the U.S. government will also have to cut spending after this crisis? After having to put trillions and trillions of dollars into stimulus packages just to keep people and businesses afloat?
MG: Well, gosh, that is a very complicated macroeconomic question. And it’s one I hope I don’t make your listeners eyes glaze over when I get into this. But I mean, the difference between a state and federal government is that the federal government can print money. And it’s not technically the federal government: It’s the Federal Reserve. But the Federal Reserve prints money and then lends it to the federal government at a very low or nonexistent interest rate. That can continue until people outside of the United States stop needing dollars or wanting dollars — until they stop wanting or needing American debt.
So far, we have not had to pay the piper for a variety of different reasons. But at some point those bills will become due. We are essentially borrowing of course from future generations and we’re relying on future growth and future inflation and things like that. But so far that inflation and that growth has been very slow going in our country. Our country is aging. We’re experiencing something that the Japanese experienced a generation ago and that the Europeans are experiencing now.
So what I see this doing to the macroeconomic outlook for the United States is profound income inequality. And I’m not the only one who thinks that. People like Ray Dalio think the same thing. People on the left like Robert Reich, people on the right, like David Stockman. And the reason why is when the Federal Reserve prints all the trillions and trillions of dollars, it doesn’t result in price inflation. It results in asset inflation. Who owns assets? Well, the wealthy, you know. Someone who owns a vacation home in the Hamptons and residences and maybe some rental properties; the value of property goes up when dollars are printed. Who owns stocks? The wealthy. So, whereas wages have largely remained flat and will probably continue to remain flat, the price of assets will go up as a result of all the money printing that we had to do to survive this crisis.
JH: Staying on the money printing topic for just one more question. You have a deep economic background. During your time in the state assembly, you served on several committees, you handled billions of dollars of appropriations funds. You’ve served on banking and finance committees. Do you think that this crisis is actually showing a situation where — in 2008, the banks were too big to fail? Have we gotten to a point where the American economy is too big to fail?
MG: Yeah, that’s an excellent question. It’s one that a lot of second guessing will continue to occur on the economic stuff and then we can get to the medical stuff, you know, if you want as well. But on the economic stuff, I mean, it is astounding to me that we continue to bail out big corporations. And people say, “well, why? Don’t you care about the jobs, you know, at airlines or Boeing or what have you?” Well, of course I do. But the reality is when a company goes bankrupt, nine times out of 10, the workers are not laid off. What happens when a company goes bankrupt, it is the equity holders that lose out. It is the shareholders who lose out. And the bondholders take a haircut, but the company continues as a going concern. There have been very few — I won’t say zero — but there have been very few major American companies that when they filed bankruptcy, they go out of business. People think it’s, “Gee, it’s going out of business.” That’s not the case. The workers continue to get paid. Pensions, in many cases, continue to be funded. It is the shareholders and the bondholders that end up having to take haircuts.
So when we talk about bailouts for these multi-billion dollar companies, it’s very important to be clear what we’re talking about. We’re talking about bailing out the shareholders and making sure that the bondholders don’t have to take even a small haircut. That to me is strange. It’s a strange sort of capitalism, right? Where we have companies getting the risk-reward premium, as if there is a risk. They’re getting rewarded handsomely, as if there is a risk. But the reality is there is no risk because Uncle Sam is standing there, willing to pick up the tab and hand it then to the American taxpayer. And there’s something very wrong with that. You know, I get that there are certain entities that are too big to fail, but the reality is a lot of them are not. And as long as we take care of the worker, there really should not be any harm with some of the risks actually coming true that allegedly investors were planning for when they invested.
JH: One last economic question before we head to medicals. Do you think that this crisis will highlight some of the economic deficiencies in the U.S. and possibly lead to changing them? Or do you see it continuing as the status quo when everything does get back to normal? Whenever that is.
MG: I think this crisis will not only highlight economic deficiencies in the U.S., but it will make them worse. We talked a little bit about how the money printing will exacerbate inequality. That is absolutely certain. But I also believe that what is often cutting edge and shocking at one moment in time quickly becomes the status quo in the future. And what I mean is, you have a president, Donald Trump, who has shown a willingness for the first time in history to meddle with the Federal Reserve. He scolds them, he tells him what he wants them to do. No president has ever done that in the past, at least not to this level. And, you know, I think the temptation for leaders to say, “Gee, I didn’t plan well, and gee, the economy is just horrible, and gee, my policies have completely failed. But hey, bail us out by just printing money and give the tab to future generations.” That is something that I think we’re going to see more of. It becomes normalized, right? It just becomes something that people expect.
I also think this idea of — whether you want to call it modern monetary theory or universal basic income — this idea that the government can just create money with no consequences and just hand it out to people who are idle for one reason or another. They could be willingly idle, they could have been idle because of the economy. That might actually catch on now because people are so desperate. They are just saying, “the only thing that’ll save us right now is a government payment.” I fall into the camp, sort of what I think a lot of the mainstream center-left economists do, which is that that is nonsense. There’s always a consequence to something. If you continue to print money, at some point there will be massive inflation. At some point the value of the dollar will go so far down that our purchasing power and our standard of living will commensurately go down. Nothing in life is free. You can’t continue to do these practices without there being some type of repercussions. But I see that type of attitude diminishing as people become more and more dependent on the government, because of, ironically, the government’s own actions.
JH: Let’s turn to the medical crisis going on associated with the coronavirus. We’ve briefly mentioned in this chat about how health care systems and doctors and hospitals will be overwhelmed by this. What is happening right now to show the cracks in our health care system? And is there anything that we can do about it in the short term or is this a long-term problem that we have to consider after the effects of the coronavirus?
MG: Look, the American health care system has a lot of deep cracks and they’re too vast for this podcast. But the cracks that have manifested have been entirely of our own doing. We had a situation where the state of California and lots of states around the country told hospitals that they must — by executive order, without the legislature doing it, without without any type of different, targeted approach based on what the hospitals do — that hospitals must clear out all their patients and stop doing any type of procedure that could be characterized as nonessential in any way to prepare for this vast influx of coronavirus patients.
Gavin Newsom put in writing a letter to President Trump on March 20: He said that there will be 25.5 million people infected with coronavirus by April 15. He’s told the hospitals that they have to clear out all their patients and stop doing anything and prepare for this influx. Now, thankfully, we have not had this influx. Hospitals are largely surviving. But hospitals are in the business of performing procedures. It could be somebody who wanted a mole removed that might possibly be cancerous but it’s not. It could be somebody needing to have some other type of procedure that is not deemed emergency at this time. But that’s where hospitals make their money and so hospitals are on the brink of failing. Which makes zero sense because if you think about it, the one sector that everybody right now believes is doing okay is health care. They open up the newspaper every day, they see that there’s another biotech company whose shares are surging because they’re doing something coronavirus related and everybody expects it. Hospitals are doing okay right now. But the reality is, most hospitals are on the brink of utter failure because of our government-imposed policies.
JH: Speaking of those government imposed policies, let’s bring it back to your state of California. What are your number-one priorities that California should tackle beyond this crisis and how many of them do have to do with the health care industry? Let’s start with coronavirus related and then go to “return to normal.” Because what is the future like after this? What is normal?
MG: Well, so, it’s important when we look at the state’s response to coronavirus. What we’ve done right and what we have done wrong. So we already talked a little bit about how there was a little bit of unnecessary fear mongering and the projections were way off by a factor of 10 maybe by a factor of 100. Way off. What we’ve done right? Well, the state has been good at social distancing, residents have been good at it. And the governments — cities, counties and the state — were pretty strict. And they were fairly good at it.
But it’s amazing with all the kudos going around — and everybody is praising certain states for locking down. It’s also important to remember that California locked down on March 20. I can’t tell you that I have some sort of magic crystal ball. But I was already flying with a mask on in January, because I had read about what was going on in China. I was starting to see the cracks in Italy. And I thought maybe it’d be wise to fly with a mask on. People thought I was crazy. I can tell you that on my flight, no one else was wearing a mask. I got into a discussion with a flight attendant and she was laughing. She said, “oh, yeah? I don’t know what you’re worried about.” That was really the attitude in January.
By February though, I was scheduled to fly twice and I was so concerned about flying that I didn’t even fly, I drove. I drove a very long distance. It was a big pain in the butt. But that’s where I was in February. And I know other people in the field of health care and other people who have an internationalist outlook who were doing that. There were reports from U.S. intelligence as well that [said] this was going to be a big issue. And that has been reported on. The first state to close, which was California, closed on March 20. And you think about that. We were talking about January and February. And the question becomes, should we have closed earlier? Would this have been perhaps handled better had we closed earlier? The answer is clearly: yes.
JH: So do you think it’s a matter of preparedness then? Is that the kind of issue that we’re going to have to fix and focus on in the future after we get back to normal?
MG: There’s that saying — it applies in politics — “the generals always fight the last war.” And we’ve seen that literally with wars in the 20th century. And we see it a lot with, you know, the last financial crisis. Of course, everybody was reacting about banks, as you noted. But, mark my words, we’re going to see an overreaction to coronavirus. We’re going to see governments in the near future stockpiling supplies and paying great money to stockpile supplies. And some of those supplies will disappear. Some will expire. Some will prove to not be necessary, because we will be continuing to fight the last battle.
It appears like this, and I hope I’m right, that this outbreak was a “once in 100 years outbreak,” right. The last time that history witnessed something like this was probably the influenza outbreak at the end of World War I in 1918. But we will still see this sort of overreaction in things like stockpiling medical supplies. But when it comes to preparedness, preparedness means so much more than having masks in a warehouse somewhere. It means being nimble enough to react, [having enough] common sense to put in place restrictions that actually make a difference. Trump has been much criticized for his preparations. But I think governments at all levels need to take a good hard look at themselves and determine what they did right and what they did wrong. There’s a whole lot of things that they did wrong — and we need to learn from those and we need to genuinely learn.
JH: Speaking of Donald Trump, what do you think his impact was — or rather his administration’s impact — on our national preparedness for such an event? How do you think his administration has handled the coronavirus and what do you see from them going forward?
MG: I think it’s very clear that I’m not a fan of Mr. Trump, but I have tried to evaluate his response dispassionately. His response has just been, I think, a total catastrophe. Everything from the tone he takes to a country that needs reassuring; when he’s out there talking about rating points and things like that, that make him look very insensitive.
The thing that we need from a leader right now is calm reassurance — and there is nothing like that emanating from the White House. We also need a response that takes care of the most vulnerable and the people who are suffering. And we’ve already talked on this broadcast about, you know, his response has just left so many small businesses out in the cold and has told the average American that they need to survive on $1,200 for weeks and weeks and weeks. They have failed economically as well. And then you look at some of the medical and logistical related stuff — obviously, he took a long time to react. It really didn’t even take the wonderful intelligence reports that our wonderful intelligence agencies provided him to understand that something was wrong. One only needed to look at the newspapers and realize that we live in a very connected world. And when you have a part of China, [where] it was so profoundly effective, and when you started to have the cracks emerging in Italy and Spain and other places: At that moment, it is time to react.
Again, I don’t mark myself to be some type of genius or anybody with a crystal ball. And I’m not in office anymore, at least at the time being. But the fact that my household started wearing masks, that we stopped flying, that we minimize travel, that we started to buy toilet paper before the rushes: That proves that it can be done. If folks with average intelligence like us can do it then we should expect and demand more from the president of the United States.
JH: We can only hope that in the short term and the long term — essentially, that responses are better. Now we’ll end the podcast with a bit of a lighter note. Obviously, we’ve talked about some serious things — the coronavirus hitting the US with incredible intensity.
But let’s bring it back to you. We’d like to know about you a little bit personally. One of the things we do here on Insight by GovSight is anytime we have a new contributor on, we like to ask them how they got into politics. So we actually have two questions for you today, sir. What inspired you to run for office the first time and two, if you’re willing to answer us: are you considering running again?
MG: Sure. So, what really bit me with a political bug was when I was a small child, my father and I used to watch the Democratic conventions with me and the Republican conventions, too. But, you know, up until the 60s — most people know — we still had conventions where the nominee might not be certain until the convention actually voted. And very much in the 70s and 80s, when I was a child, that spirit sort of remained. The conventions were electric environments, very exciting. It was very interesting to see all the different people gathered and to just realize that this could be a role in deciding the leader of our country. So I really credit my father with getting me interested in politics and really the power of what someone in government, if their heart is in the right place, the good that they can do.
When I actually ran for office the first time, I had left politics, I was practicing law. I had a pretty darn good life. I was living in Los Feliz, I was driving to downtown Los Angeles and it wasn’t a bad commute. I was making good money. But then the Great Recession hit. And I looked around and I saw so much suffering. And I saw a state government that was really, really dysfunctional at the time. I think at the time when I was running, the legislature had an approval rating of 11%. You had a state budget that had to be cut because nobody could get it together with tax reform.
So I had this epiphany where I was waking up every morning and reading the news and you know, sort of shaking my fist at the latest round of bad news. But then I decided to challenge myself. I said, you know, it’s one thing to be an armchair quarterback and to say I could do better or I have ideas. It’s another thing entirely to drop everything, to drop your life and to run for office. It is a sacrifice. I’m not looking for sympathy at all, but it’s a sacrifice for everybody who runs for office. If you’re a single mother, If you’re a grandfather: it doesn’t matter. It does take some sacrifice. And, you know, I was not a favorite by any stretch, but by some miracle I won, and I was so thankful for the opportunity to serve.
The first piece of legislation I introduced was the “rainy-day fund.” And it has been so nice to hear people say that the rainy-day fund is what’s saving California from financial disaster right now. It took over 100 years to get that rainy-day fund passed. It took a constitutional amendment. And I’m so pleased that it seems like it’s functioning to its greatest extent.
Will I be back in politics again? I never say never, but right now — and it sounds so cliche — but I hope you take it at face value: I have three wonderful children. I have a 10 year old, a seven year old and a two year old. My father, when I was a child, had three jobs. And he did that to pay the bills. I never saw him growing up and you know, I felt a tremendous vacuum when I lost him because I felt like I didn’t know him that well. And with respect to my children, I just want to make sure that I’m there for them. So, you know, they’re so young and I take such joy with being with them every day that I have decided to put my political career on pause for the moment.
But look, I never say never: I like to think I will be back at some point someday.
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