Sunday, April 2, 2023

The Magic Asterisk * Minnesota State Budget

 

       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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