Sunday, December 07, 2008

No Time To Slash State Spending, a Commentary

A commentary on “Major Cuts, Tax Increases Will Only Accelerate Downturn,” by Demetrios Giannaros, D-Farmington, deputy speaker of the state House of Representatives and a professor of economics at the University of Hartford specializing in macroeconomics and public finance.

When your car is skidding on ice, the first reaction is to slam on the brakes. But experience tells us that a lighter touch will actually keep us from careening off the road. This is the dilemma facing state officials as they confront rising budget deficits and consider drastic spending cuts. I suggest we take a more deliberate approach to keep on course, avoid inflicting more pain on state residents and give us the best chance for economic recovery.

Connecticut legislators hadn’t considered a deliberate approach to spending control until right now. And now the fierce urgency of now is knocking at their door. In the past, free spending legislators slurped down surplus after surplus, thus adding to bottom line spending. The pain we are now feeling is directly related to their past indifference. Where was the gentle tapping on the break, one may ask Giannaros when the state needed it?

Our state, like the nation, is facing the greatest economic challenge since World War II. The major differences are that we are up to a year behind the national trends and we depend more extensively on the financial, insurance and export businesses. These private market sectors, combined with the severe contraction in construction, are undergoing further retrenchment, hurting our state's economic health. So, a smart state budget policy is to stimulate growth rather than contribute to the downturn, which causes increased unemployment and human suffering.

And, of course – read on – Giannaros does not quite see the necessity for significant cuts in state spending. There is in the state of Connecticut a direct correlation between the growth of government and the shrinking state economy, though one would never guess it by reading this piece.

Our state's budget has been stable in the last 15 years at approximately 11 percent of Connecticut's total economy. That means more than one in 10 dollars in overall spending relates to our state budget. Our private sector and exports drive our state economy. These economic components, however, are contracting. The private sector is slowly being crippled by fear, which, in turn, causes further contraction in spending and investment, a rise in unemployment, loss of income and loss of tax revenue resulting in increased deficits.

Eleven per cent is a little to high for comfort. Further on in his piece, Giannaros argues that the contracting private economy does not necessitate a corresponding contraction in the public sector. He has a few rabbits to pull out of his hat.

The state budget deficit widens with a reduction in spending and investment by either the government or the private sector. The greater the reductions, the faster our economy goes down. Then it is citizens who pay the ultimate price in lost jobs, salary reductions, loss of retirement funds and, perhaps, increased dependency on the state for survival.

Here we go: The private economy has shrunk. State revenue therefore has diminished, creating budget deficits. People become more needy. Previously relying on their own resources, now that their fortunes have diminished, they must turn to government for succor. And this means…

Because the state budget represents over one-tenth of the state economy, balancing the budget with either tax increases or spending decreases will worsen the state economy. These were policies applied in the 1930s by President Herbert Hoover, along with significantly tight bank credit, that brought us the worst U.S. economic disaster ever. Smart state budget actions would be to apply a simulative budget policy that assists in our economic recovery and prevents rising unemployment by doing the following:

Avoid tax increases and significant reductions in needed spending.

Behold -- the rabbit…

Expedite long-term public investment infrastructure projects that have been approved by the General Assembly for bonding, such as transportation, bridges, colleges, universities, schools, public safety and environmental protection projects, among others. This would activate the ailing construction-related industries and create employment and income, which encourages purchases and sales throughout the economy, results in higher tax collections and reduces the budget deficit.

Bonding, which creates a defict – an obligation to pay back a loan – is an off budget deficit, a charge to future taxpayers to pick up the tab. The beauty of bonding is that the deficit does not appear in the bi-annual budget, and so this deficit is not hemmed about by constitutional obligations to pay it off within a specified period of time. Accountants who read Giannaros’ recommendation will notice the sleight of hand immediately. If the economy is worsening, creating a shortage in revenue, how can legislators plausibly argue that spending should not be proportionally reduced to discharge the deficit? Remember, Giannaros does not want to cut spending severely or to increase taxes. Solution: Move spending from the bi-annual budget into the bonding budget. And hesto-presto, the miracle has been accomplished.

To solve the current fiscal year 2009 budget deficit problem, reduce spending where there is clearly waste. Use the $1.4 billion rainy day fund (our state's savings account for use in economic crises) to cover the rest of the deficit. These actions, with the expedited infrastructure investments, will help stabilize our state's economy, especially in coordination with the pending economic recovery stimulation actions to be taken by President-elect Barack Obama.

There is not too much waste around in state government, or surely legislators would have eliminated it by this time. All of the rainy day fund will not cover the biannual deficit, now approaching $6 billion. In fact, Giannaros’ plan covers the defict by charging a portion of it to our children through bonding and hoping that a generous President Barack Obama will foot the rest of the bill in the form of grants for expenditures on public works projects. These expectations are highly risible. Giannaros and other state officials traveling to Washington with their beggar bowls expect manna from Washington will settle their deficts. Connecticut’s economy is reliant on finance companies, not heavy industry.

Avoid actions that reduce the income sources of the poor and needy, for humanitarian reasons but also because they spend 100 percent of their available income. During a recession, a dollar taken from the poor reduces economic activity more than does a dollar taken from other income classes.

At bottom, this is an argument for increasing welfare, which no doubt would satisfy the public sector at the expense of the private sector. We’ve been here before, done this. Increased welfare roll create pathologies that can be very expensive.

For the 2010-11 biannual budget gaps, reduce future spending commitments — through things such as a more aggressive use of smart growth and regional government to take advantage of the economies of scale — and cover the difference through an "economic recovery bonded fund" financed by the federal government. This policy approach was applied during our last two recessions. As the economy recovered, it eventually created significant budget surpluses for five years in a row, allowing us to repay the economic recovery bonds ahead of maturity.

According to Donald Poland, executive director of Connecticut Partnership For Balanced Growth, so called “smart growth” is, in part, an attempt by a slew of special interests to stop growth in the suburbs in the hope that economic flower gardens will once again bloom in the cities. It won’t happen. What the Smart Growth folk call “sprawl” is, in fact, ex-urban expansion growth. Stop it and you will impoverish both the state and state coffers. “The problems facing Connecticut,” Poland says, “are not growth or sprawl. Lack of growth (economic and population) is a significant problem facing Connecticut, and this is compounded by efforts to combat the perceived ills of suburbanization.” Poland, by the way, is the one who first coined the term “smart growth,” which thereafter was hijacked by anti-growth pirates. He has abandoned the term as misleading and inappropriate. Mr. Poland’s site may be found here: Connecticut Partnership For Balanced Growth.

The legislature and the governor must work as a team for the common good. A prudent biannual budget and use of our rainy day fund, combined with significant immediate investments in infrastructure without tax increases, can work to avoid massive unemployment and human suffering.

“In the past Giannaros' "teamwork" has involved conspiratorial work on the part of Connecticut's governors and the legislature. The "work" more often has benefited special interests representted by both; if not, why would we now be be bathing in deficits? George Bernard Shaw’s warning should be kept in mind here: “Every profession is a conspiracy against the laity.” Giannaros and his friends are nothing if not “professional.” Democrats who dominate in the legislature are in thrall to powerful special interests. The expected incoming speaker of the House, Chris Donovan, is closely affiliated with the “rob Peter to pay Paul” ethos, and his Tonto, Deputy Speaker of the House Giannaros is but a baby step behind him on the latter of success in the state legislature. As we all climb aboud the greatest good for the greatest number express, we should bear in mind another Shavian apothegm: “Any government that robs Peter to pay Paul is bound to satisfy Paul.”
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