Wednesday, July 06, 2011

Iceberg Sighted, Full Speed Ahead

Two reliable economic forecasters, Goldman Sachs and Macroeconomic Advisors, have downgraded their previous economic forecasts, according to The New York Times:

“Two months ago, Goldman Sachs projected that the economy would grow at a 4 percent annual rate in the quarter ending in June. The company now expects the government to report no more than 2 percent growth when data for the second quarter is released in a few weeks.

“Macroeconomic Advisers, a research firm, projected 3.5 percent growth back in April and is now down to just 2.1 percent for this quarter.”

Chief United States economist at Goldman Sachs Jan Hatzius, peering through clouded skies, said he could not rule out yet another recession:

“We’re still a reasonable way off from that,” he said. “But I’m not as confident as I would like to be.”

Connecticut is in the grip of a long hard recession. During the state’s last soft recession, it took about ten years to recover jobs lost, and this was at a time when the federal government was not wading knee deep through a $14 trillion deficit.

To put the matter brutally, Connecticut, first in the nation in per capita debt, cannot rely on an impoverished federal government to throw it a life line should Mr. Hatzius’ shaky confidence abandon him altogether. If the nation does tailspin into a double dip recession, Connecticut cannot and should not expect to be rescued by a morally and economically bankrupt federal regime.

Someone should tell progressives in the General Assembly to prepare for stormy weather. The sun they expect to shine someday will be a long time coming in a state that soon will withdraw about $4 billion from the private economy to finance yet more improvident spending on a busway to nowhere and a costly project in Farmington presumed to rehabilitate – yet again – a UConn Health Center that already has absorbed millions in tax money.

Every dollar drawn in taxes from the private economy is a stimulus dollar lost to private enterprise at a time when the private marketplace in Connecticut is diminishing.

These dollars will be spent by politicians on dubious public works projects that they claim, without blushing, will stimulate the economy. The surplus that solicitous state Democrats have tucked into their as yet unresolved budget package will, as usual, be deposited either in a exhausted “rainy day” fund or flushed into the general fund. Either way, this money will be used, immediately or later, to pay for current expenses. Taking money from the private economy and using it as a so called stimulus is on a par with taking a bucket of water from the deep end of the pool and dumping it into shallow end of the pool; it does not increase the net gallons. And depending upon how the tax money is distributed, the transfer may result in a net loss of revenue.

If investment dollars are spent unwisely in a private economy, the private market punishes poor decisions by driving out of business the business that has made them; and, assuming the business is not propped up by tax dollars, the investors do – and should – lose their shirts. In a public market place fed by tax dollars administered by politicians, tax providers and consumers do not determine the fate of public projects, because there is no nexus that connects the supply of product or service with consumer satisfaction. That is why urban public schools, proven failures, continue merrily along as damaged institutions. That is why the UConn Health Center did not fail when it began to lose tax dollars or, as politicians sometimes put it, “tax investments.”

Once a pipeline is driven by politicians from taxpayer’s wallets to state supported business, their “investments” can only fail when politicians withdraw their support. And, as a general rule, their support depends upon political rather than economic outcomes. Every state financed enterprise, in other words, is fail-proof – provided the business does not lose favor with politicians who are willing to finance it, as usual, with other people’s money. In this kind of a scheme, decision makers are punished by the prospect of non-election, a remote eventuality in a state, like Connecticut, that has been dominated for a decades by a single party.

The remedy for business slowdowns and recessions is to lower the cost of business by reducing taxes and regulation, allow failing enterprises – public or private -- to fail, recover the lost service or product through privatization or increased competition, and depoliticize private markets whenever possible. An approach of this kind will not win politicians many union votes. On the other hand, a plan to save the state that really does save it from drowning in eternal indebtedness would be a vast improvement over Plan A, Plan B or any other silly concoctions the General Assembly may serve up to vex and bedazzle us.
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