What if the State of Minnesota spent money when it did not have a plan for how to pay for it? This is essentially what Minnesota is doing now–budgeting with a promise or a floating asterisk that spending today will pay for itself in the future. This is the DFL version of Reaganomics from the 1980s all over again.
Asterisk One: The Smoke and Mirrors of Reagan Supply Side
Economics
The Reagan tax cuts were based on a
fiction. The fiction was supply side
economics and the famous Laffer
Curve.
Arthur Laffer at a restaurant drew a
curve on a napkin. He argued that
cutting taxes would eventually spur more investment and therefore the increased
economic growth would pay for itself and therefore no cuts to social-welfare
programs would be needed.
In reality, this was a facade. It a 1980 president debate when then
candidate John Anderson was asked how Reagan could cut taxes and increase
military spending while balancing the budget, he responded it was possible only
with smoke
and mirrors. He was correct.
Eventually Reagan, with Democratic
Party complicity, did cut the top rate on taxes in America, with the affluent
and corporations benefitting the most. David Stockman, his budget director,
recognizing that the cuts would not pay for themselves, indicated in his proposed
budget that there would be $44 billion is future cuts, marked by a “magic
asterisk” in the budget.
What eventually happened is that the
US recession and tax cuts hemorrhaged the US budget, thereby becoming the
cudgel to force additional cuts to social welfare programs.
In effect supply side economics
forced economic choices upon a future Congress and president, the implications
of which we still face more than 40 years later.
Asterisk Two: The
Minnesota Budget
Minnesota has a $17.5 billion
surplus. The source of the revenue is
both one-time federal money tied into Covid relief, the other is taxes.
Covid funding is ending and is not
returning, especially with a divided Congress unlikely to expend more money and
a Republican House looking to cut.
Future tax revenues are not
guaranteed. Fears of recession are
about as the Federal Reserve raises interest rates to slow inflation and fears
of future bank failures are chilling consumer confidence. Moreover, Minnesota’s economy is performing
more slowly than many other states.
Altogether, continued tax revenue along the path Minnesota has recently
experienced is not guaranteed.
Yet despite this the Minnesota DFL,
who hold a trifecta in the state government, are prepared to spend all the
surplus, and then some. It is spending
for many worthy causes, but the sustainability
of the spending is a problem.
The spending of one-time money is
not for one-time projects. It is for
structural commitments to education, housing, and many other needs. By structural one means that these are not
one time spending commitments coming from onetime money. They are the down payment on multi-year
spending and priorities. After the
surplus is spent in the next biennium budget and beyond there will be a need to
fund these commitments. And the current
and proposed taxes may not be sufficient to cover the expenditures.
I have taught economic development
and budgeting. I am well versed in Keynesian demand side economics and how
government spending can encourage economic growth. But overused, over stimulus by government
spending can be inflationary and lead to budget deficits. Government spending does not always pay for
itself, at least not in the short run.
And in the long run, as John Maynard Keynes once said, “We are all
dead.”
Perhaps the idea is that spending
all this money now on popular programs will ensure a DFL re-election. Or
perhaps the popularity of the spending will create a powerful constituency for
these programs and therefore they cannot be cut.
Or perhaps this spending is
the new floating asterisk. We do not
know where the money to pay for these commitments will come from, but we will
mark the savings or benefits with a floating asterisk as a placeholder until we
do figure it out.
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