Monday, June 09, 2014

Malloy Waiting For The Rising Tide

President John Kennedy formulated the phrase “a rising tide lifts all the boats.” In an address to the New York Economic Club in 1963 Mr. Kennedy spelled out what he meant by the phrase. In a time of sluggish growth, rising taxes and improvident spending, Mr. Kennedy proposed to reduce marginal taxation, a measure that would, he was convinced, spur business activity and INCREASE tax revenue. Following the implementation of the Kennedy tax reforms, the tide manifestly rose. After Mr. Kennedy’s assassination, his successor, Lyndon Johnson, was able to use the increased revenue occasioned by Mr. Kennedy’s reforms to water his own garden, the Johnson “Great Society” programs.

By imposing upon Connecticut the largest tax increase in state history, Governor Dannel Malloy lowered all the boats – with predictable results. Connecticut’s economy, whipped by a malingering recession, has moved forward at a snail’s pace. The national recession ended three years ago, according to the Business Cycle Dating Committee of the National Bureau of Economic Research. But here in Connecticut, a suffocating recession marches remorselessly forward. Despite the good news proclaimed from the rooftops by the Malloyalists, Connecticut is still treading water, and all the important indices point downward. Prosperity remains elusive for nearly everyone but Mr. Malloy and those few businesses in Connecticut Mr. Malloy has favored with crony capitalist tax reductions, low interest loans and property giveaways. Mr. Malloy’s business is prospering; a campaign PAC affiliated with the governor, the ineptly named “Prosperity for Connecticut,” has raised over $235,000 in the course of fifteen fundraising events, three of which were held in Washington, three in New York and the remaining nine in Connecticut.

Having been chosen as the Democratic nominee for governor at the recently concluded Democratic Party nominating convention, Mr. Malloy is now in the process of fully unfurling his campaign banner.

The legislature’s non-partisan Office of Fiscal Analysis (OFA) has projected a state deficit of $1.4 billion. When last faced with a similar deficit, Mr. Malloy lowered all the boats by imposing a massive, broad based tax on many small businesses in the state that had previously escaped the baleful eye of the tax collectors. The additional revenues permitted Mr. Malloy to offer tax deals to some mega businesses he thought might take flight in response to Connecticut’s high taxes and business throttling regulatory octopus.

Good news, Mr. Malloy advised at the beginning of June as his reelection campaign steamed forward: “We don’t face a deficit.”

The deficit projected by the impartial OFA, whose crystal ball has been considerably more accurate than the one used by Malloyalists to predict deficits and surpluses, was based on a spending projection of more than seven percent. Under the Malloy dispensation, spending will be more restrained than it had been during the profligate reign of the last two Republican governors. “Nobody,” Mr. Malloy assured doubters, “no party… is going to advocate increasing our spending by 7.78 percent… This is very much about continuing fiscal restraint.”

The current budget, Mr. Malloy said, includes a spending increase of only 2.5 percent. The difference between the two projections will offset the OFA’s projected deficit, all things else being equal. There will be no increase in taxes, no increase in spending, and fortune once again will smile on Connecticut, even though its tide is yet receding.

These are the talking points that will fuel the Democratic Party campaign this year.

The oracle has spoken – “period” as President Barrack Obama might say.

There are a few good reasons to doubt Mr. Malloy’s oracular powers. The predictions of the gods and goddesses in charge of Mr. Malloy’s crystal ball have not in the past proven accurate, possibly because their predictive models have been compromised by political ambitions.

Another reason: “All things else” are rarely equal. If you impose on Connecticut the largest tax increase in its history -- this on top of the second largest tax increase in its history, the Weicker income tax incubus – other things happen that eventually upset the static predictive apple cart. There are no balls and chains on the ankles of overtaxed people and businesses. The instinctive reaction to a regulatory anvil about to fall on one’s head is anvil avoidance.

Three years after the national recovery, Connecticut is the only state in the union to have lost population to other states.  Connecticut has fewer people in the workforce today than it did in 1989. According to a January 2014 report by the nonprofit organization State Budget Solutions, Connecticut has a state debt of over $112 billion. Its state debt per capita is $31,298. These and other figures cannot be imagined away by Malloyalist fortune tellers, nor can the state’s debt, accumulated over years of improvident spending, be fairly put on the last two Republican governors. Budgets are created by the legislature and executed by governors. Debt is a function of spending and can be reduced only through corresponding spending reductions. Either this governor or his Republican successor must knock one or two billion dollars out of the budget. That is the hard choice, and anything short of it is rhetorical sludge. 


Dan Ryan Galt said...

Another great piece Mr Pesci, thank you.

We may as well change the welcoming signs that greet motorists venturing into our state to say "Lasciate ogne speranza, voi ch'intrate", or " Abandon all hope, ye who enter here." .

Anonymous said...

The recession ended in June 2009, so we are now 5 years post recession. Also, the "restrained" spending growth of 2.5% is not an apples to apples comparison to the past because the 2.5% figure excludes the increased spending on CT's share of the Medicaid program.

Keep in mind as well that the state has not fully adopted GAAP accounting standards so in addition to any current budget deficits there remains a structural budget deficit of approximately $1 billion

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