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.

The Scream! Thoughts on the Iowa Republican Debate

No question about it–the lunatic fringe has taken over the Republican Party. The August 11, Ames, Iowa Fox debate featured calls for the return to the gold standard, the right to choose light bulbs, criminal prosecution for doctors who perform abortions to save the lives of mothers, obtuse readings of the Tenth Amendment, and petty and personal squabbles attacking one another and the media. All we needed was for someone to assert that the Earth was flat and that it was located at the center of the universe. It was enough to make one what to scream!

The debate lacked substantive and constructive ideas. It was devoid of facts, researched ideas, and any sense of real research across the areas of economics and law. While all the candidates were correct in contending that Obama lacked a economic plan for America, none of them offered anything of substance either based upon research and evidence regarding what works or not. It was all pure ideological pandering to a crowd, with sound bites crafted by speech writers. All seemed to think that the only solution was more tax cutting, giving businesses even more breaks than they have now. It was a collective pep rally for trickle down economics, contending that too high of corporate, capital gains, or other taxes were the cause of the economic slowdown. Cain at least was honest in saying that he was not bothered if the tax cuts to corporations resulted in them paying more dividends and not investing. So much for the veneered justification of supply-side economics as a jobs producer.

Moreover, other candidates had equally dismal and shallow assertions about economics. Paul wants to dismantle the central bank and return the US to the gold standard. Pawlenty thinks we can achieve 5% economic grown for many years if we enact his nonexistent economic plan. Bachmann thinks she can turn the economy around in 90 days. Gingrich blames it all on Dodd-Frank and Sarbanes-Oxley–repeal them and all will be fine. Huntsman and Romney simply said trust me–I was in business and I know how to create jobs.

But perhaps the most interesting part of the debate was when pressed about a bipartisan deal to cut the deficit and asked if they would sign off on a deal that would have 10:1 spending cuts to tax increases. None supported it.

None of the candidates seemed to have a sense about job creation or about a role for government investment in the economy to build infrastructure. In doing so, they forget even that Adam Smith in the Wealth of Nations called for this. Or that this is what Alexander Hamilton called for in creating the national bank and in supporting credit and manufactures. All seemed to endorse Ayd Rand economics, a libertarian free for all market place of the survival of the fittest.

But economics was not the only place where crackpot theories prevailed. Constitutionally, they were all horrible. Bachmann stated that the Constitution does not allow the government to require individuals to purchase anything such as insurance. She was unable to square that with her reading of the Tenth Amendment which gives states broad power to regulate, even traditional topics such as marriage. By her logic, states could not require individuals to purchase auto insurance and perhaps even licenses for practicing medicine or doing anything else. Moreover, despite all her defense of the Tenth Amendment, she would take away the power of states to pass legislation allowing for same-sex marriage. At one point the debate degenerated into a discussion of whether the Tenth Amendment would allow states to enact slavery or polygamy.

In 1984 a challenger to Senator Fritz Hollings demanded the senator a take a drug test and release the results. Hollings replied by stating that he would take such a test if his opponent took an IQ test and made it public. Last night’s debate gave me new appreciation for Hollings’ suggestion. Candidates for the presidency should be better informed about the world of economics, politics, and the law. We talk so much about civics education and literacy tests for citizens. Maybe candidates should be required to pass such a test as a condition for running for office.

Final Thoughts: Bachmann v Pawlenty: Pawlenty’s Sexism

The Bachmann/Pawlenty feud is the media highlight of the debate. Both came off looking petty and small. Pawlenty is correct that Bachmann has no real legislative record, Bachmann is correct that Pawlenty has switched on many issues. Leave it there. But both felt they needed to dig at one another, underscoring the deep animosity the two h ave always had toward one another, not only enhanced by their rival Iowa strategies. Yet Pawlenty came off worse. He was given a second chance to criticize Romney and again soft-peddled it. Thus, he was too weak against Romney and too aggressive and petty against Bachmann. This attack reveals a deeper sexism with Pawlenty.

Recall in 2006 his attacks against DFL Lt. Gubernatorial candidate Judy Dutcher when she blanked on a reporter’s question about E85. At one point DFL Gubernatorial candidate Mike Hatch stated about Pawlenty: “Look at how desperate he is, he is attacking a woman.” Hatch took heat for that statement but in retrospect he seems prescient. Pawlenty’s sexism is his inability to confront and challenge men, preferring to pick on others he perceives as weak, such as women. This is the the wimp factor.

Conversely, Bachmann competed for the dumbest answer of the night. When asked to defend her legislative record against Pawlenty's criticisms, she replied: "I introduced the Lightbulb Freedom of Choice Act so people could all purchase the lightbulb of their choice." I am not sure what is worse, that this is the sum of the legislative record that she is proud of, or that she wants to give individuals more choice to select light bulbs than gay people to marry or women to control their reproductive choices.

The Winners are...?

Who won?

Gingrich had real policy answers even if they are wrong. He was correct to trash the super-committee as a lack of leadership and at least his comments about Sarbanes-Oxley and Dodd-Frank, even if wrong, were real ideas.

Romney wins since no one attacked him and escapes with no bullet holes.

Huntsman has the single best answer of the night. When asked about his support of civil unions he said he stood by his position. But more importantly, when criticized for accepting Obama’s request he become ambassador to China, Huntsman replied: "I’m proud of my service to this country. If you love your country, you serve her. During a time of war, during a time of economic hardship, when asked to serve your country in a sensitive position where you can actually bring a background to help your nation, I’m the kind of person who’s going to stand up and do it, and I’ll take that philosophy to my grave." If we had more answers and people like that our country would not be in the shape it is today.