Sunday, January 16, 2011

Governor Malloy On Connecticut’s Economic Doldrums

Gov. Dannel Malloy appeared recently at the editorial offices of the New London Day, where he unburdened himself cautiously on matters involving taxing and spending:

“’We have people who for political reasons are inserting uncertainty into the bond market, and we’re seeing the bond market reflect that,’ Malloy said. He went on to criticize some of [New Jersey Gov. Chris] Christie’s other recent exhortations to fellow Republicans to hang tough against established interests and to eliminate tenure for schoolteachers.

“’Hopefully I take a slightly more intellectual approach to this discussion than Governor Christie has demonstrated,’ Malloy said, adding that his counterpart ‘certainly understands the nuts and bolts portion of it.’

“’There are proven economic theories about sustaining economic growth, and we ignore those theories that have proven themselves at our own peril,’ Malloy said.

“’We’re going to see large-scale additional unemployment caused by governmental entities: local government and state government primarily, and perhaps the federal government,” he said. “Can you tell me what the impact of that is going to be on the recovery?’
One of the proven economic theories about sustaining economic growth is this: When expenditures outpace receipts and you still think you do not have to cut back spending, you are kissing the lipstick on a pig. An unsustainable national debt of $14 trillion, massive governmental regulation and excessive governmental borrowing introduce uncertainty into both bond and stock markets. The value of state bonds is secured by the economic wellbeing of the state. If California is bankrupt, its bonds will be correspondingly valueless because few would be willing to buy such bonds.

Moody lowered Connecticut’s general obligation bonds more than two years ago from stable to negative because the state used deficit bonds to resolve a budget shortfall.

“Connecticut,” Moody said in a report issued in 2009, “used one-time solutions to close slightly over half of the (biennial budget’s) shortfall … these solutions create future structural budget gaps and leave the state with significantly reduced flexibility to address additional fiscal pressures that may arise due to a delayed and/or weaker than expected recovery from the worst economic recession since the depression.”

A political writer from Rhode Island crowed after citing the report, “Break out the champagne! Another state has done worse than us in the budgeting department!

Connecticut is now running a deficit of some $3.5 billion or more for each of the next three years; the state has borrowed money to pay for budget deficits rather than capital improvements, and it has raided pension funds to pay for state debt. No “intellectual approach” – what ever that means -- will change the facts on the ground. If the state of Connecticut were to borrow less and spend less, if its pension liabilities were offset by suitable pension payments, its bond rating would be more secure.

An alternative solution, from Moody’s vantage point, is to pay debts and pension liabilities from tax increases. But recent national elections have suggested to some intellectually wide awake Democrats that this is a route leading to political unemployment, and so they have been cautious of late in proposing tax increases. It is always possible that Connecticut Democrats are more courageous than Democrats in other states. Here in the “Tax-Me State”, Democrats survived an election in which the U.S. House reverted to Republicans, many state legislatures fell to the GOP and many gubernatorial state houses also were captured by Republicans.

One would like to hear from Mr. Malloy what impact he thinks tax increases would have on Connecticut’s business environment now that Mr. Christie of New Jersey and Governor Andrew Cuomo of New York have pledged not to raise taxes. Those pledges may seem to some in Connecticut a little too close for comfort. Over the long haul, the impact of spending cuts – provided they are permanent -- will be salutary. When government shrinks, personal wealth, one of the more important drivers of the economy, increases, which is good for the economy. Mr. Cuomo, a Democrat, appears to share this intellectual approach with the less intellectual Mr. Christie, possibly because he does not wish New York businesses to migrate to New Jersey, a possibility that does not disturb the snoring of caucus leaders in Connecticut’s General Assembly.
Mr. Malloy, during his appearance at the Day’s editorial office, also ventured some views on history:

“The current economic plight is ‘not unlike 1935, ‘36,’ Malloy said, referring to the years when the administration of President Franklin D. Roosevelt had seen some success but also heard calls to roll back its most aggressive economic interventions against the Great Depression.

“’Do you pull back from a level of investment that has shown some ability to get the economy moving?’ Malloy said. ‘Do you pull back now or do you pull back over a period of time? The Republicans in Washington want to pull back now. What I would argue is you need a better thought-out withdrawal from that market, which we’re not going to get.’

“But Malloy also expressed sympathy with the intentions of politicians such as Christie, who say their goal has been to shrink the size of state government and improve its efficiency. Those same goals, which were central talking points of Malloy’s campaign, have many in Hartford anticipating a clash between Democratic leadership in the legislature and the new governor, who seems more prepared to make cuts.
“An ultimate reduction in the size of government is, ‘over the long haul ... probably a good thing,’ Malloy said, but he returned to his concern about driving unemployment. ‘Over the short run, all of that at once is a very dangerous thing."
None of the terms used by Mr. Malloy are qualified. How much time is a “long haul”? How much time is a “short haul”? No one but local anarchists are proposing that government in the state of Connecticut should be reduced a modest 25 percent “all at once.” But Mr. Malloy should at the very least be able to tell editorial page editors what percentage of state government should be reduced to insure solvency “over the long haul” and whether the reductions will be permanent or temporary.

And at this point, only a few weeks before his budget will be written in stone and presented to a rubber stamping Democratic majority in the legislature, Mr. Malloy should be able to disclose what percentage of tax increases to reductions in spending he thinks will stabilize Connecticut’s bonds and reverse a flow of jobs from Connecticut to other states in which state debts are lower, bond rating is more secure and taxes are less punishing.

That kind of information, elicited by editorial writers and demanding reporters across the state, will greatly sooth the minds and hearts of taxpayers, those who receive government services, bond rating agencies and any stray intellectuals who have not already found employment in the Malloy administration.
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