Mis-spending the Imaginary Minnesota Budget Surplus: What both the Democrats and Republicans Get Wrong

The Minnesota DFL and Republican parties are about to do it again.  The “it” is engaging in irresponsible spending or tax cuts during an election year.   If either or both get their way the repercussions will be felt as soon as the 2021 legislative session when it makes the next biennial budget for the state. 

Minnesota  Management and Budget (MMB) in its November 2019 forecast projected that the State of Minnesota has a projected budget surplus of $1.332 billion.  As a result of this forecast the Minnesota DFL has proposed spending $500  million to subsidize day care costs.  The Minnesota Republicans want to use the total $1.3 billion to subsidize permanent tax cuts.  Both proposals are irresponsible, revealing a huge misunderstanding of budgeting.

Here are the basics.

The current two-year or biennial budget for the State of Minnesota that was agreed to in May 2019 is $48 billion.  The projected surplus of $1.332 billion is 2.8% of the entire budget.  Hardly anyone fiscally responsible would argue that 2.8% is really a lot of money, especially when the fiscal forecast is merely a projection.  It could vary up or down.  Moreover, many would argue that in budgeting one builds in contingency in case estimates are wrong.  The fiscal forecast assumes current obligations remain constant.  Except they do not.

The budget surplus is not really $1.332 billion. By state law, inflation is counted when calculating inflation while obligations are not.  The 2020 projected rate of inflation for 2020 is 2.5%, almost equal to the projected budget surplus percentage.  Inflation alone eats up the surplus.  There is no surplus for this budget cycle.  Even if there were, it could change if unanticipated expenditures occur; a surplus margin of error of 2.8% is very small.

Additionally, if one looks at the fiscal forecast it is important to remember that this is a surplus for only this budget cycle.  It is a one-time and not structural surplus.  Looking ahead, the MMB forecast notes that while at present the fiscal year 2022-2023  looks balanced,  all that assumes no basic changes in the revenue and expenditure projections  and that the economy will not experience a significant slow down that would impact tax revenues.  If any of this were to change, including adopting significant new state expenditures such as to subsidize childcare, or make some permanent tax cuts, then these projections change, running new risk of a structural deficit.

Both the DFL and GOP ways to spend the surplus are equally flawed.  Consider the idea of a one-time $500 million subsidy for childcare.  This sounds good, but what happens the second year?  The State will have to go subsidize again if the DFL want to make a permanent difference in costs.  This too assumes that a subsidy will address the cost issue—it does not in the long term. The reason in part why childcare is so costly is that there is a shortage both in the Metro and Great Minnesota areas.  Providing subsidies does little to address the shortage.  Moreover, offer subsidies and one may increase demand for childcare without doing anything to increase supply.  The result?  Perhaps even more costly childcare than before.  The subsidy sounds great but fails to address the underlying supply and demand problem.

The Republican tax cut proposal is equally irresponsible.  They seek to make a structural change in the tax code when the imagery surplus is possibly-one time.    They are confusing annual operating income with structural budgetary issues—a classic apples and oranges problem.  The current operating surplus is used to mask permanent tax code changes.  The last time this happened was during the Jessie Ventura administration. 

Back then when Ventura first took office in 1999 the State had a massive surplus.  It used that surplus and tax rebates (the “Jessie Checks”) to mask short term larger structural tax changes that eventually came to hurt the State when in 2002 Minnesota faced a massive shortfall, in part because of a combination of an economic recession and these tax cuts.  The result of that was the 2002 deal between then DFL and GOP gubernatorial candidates Roger Moe and Tim Pawlenty who as legislators agreed to change Minnesota law to count inflation for revenue but not obligation purposes.  It was that deal that has now created the image that Minnesota has a budget surplus now, when in fact it does not.

It was bipartisan irresponsibility a generation ago that yielded a host of problems that Minnesota has only recently and partially solved.  The DFL and GOP proposals for what to do with the $1.3 billion repeat those past mistakes.

No Matter What Happens in November, the Democratic Party Agenda is Already Dead

No matter the electoral results this November, the Democratic Party agenda in Congress is already dead.  Dead because Democrats yet again will have to pay the price of Republican irresponsibility,

giving them and the nation no fiscal room to act.  Yet this irresponsibility is no accident, it is the playbook of the Reagan era, and Democrats have yet to figure out how to respond.
Republican Congressman John Anderson’s 1980 presidential debate performance against Ronald Reagan was devastatingly accurate when asked of  him “How is it possible [for Reagan] to raise defense spending, cut income taxes, and balance the budget, all at the same time?,” he said it was possible only with “smoke and mirrors.”   David Stockman, Reagan’s budget director, confessed famously in an Atlantic Monthly article and later in his book The Triumph of Politics, that supply-side economics was simply a facade for tax cuts for their rich supporters and that the fear of a large federal deficit would be used to leverage down the size of the welfare state.  They both told the truth about a Republican strategy that continues into the Trump era.
As a result of the Reagan era, the federal deficit exploded, the national debt expanded, and ever since  the real legacy of the Reagan era has been to leave a fiscal mess that has constrained the ability of the federal government to act, crippling efforts by Democrats to enact their own agenda who are hemmed in by low taxes, large deficits, and little fiscal room to manoeuver. History is now repeating itself, this type not just as a tragedy but a farce since we ought to know better.
Many seem astonished now that the Republican Party has  abandoned  fiscal austerity for deficit spending by enacting large tax cuts and spending proposals.  There should be no surprise here.  When Republicans were the party in power during both the Reagan and second Bush eras they spent heavily without regard for the bill to benefit their supporters.  They generated the largest deficits ever. Second, as David Stockman pointed out, running up deficits was a strategic decision.  Generate huge deficits and it will eventually place pressure on both discretionary spending and entitlements, serving as a ratchet to cut them.  Big deficits also will limit the ability of Democrats, when they eventually take control, to push their agenda.  They will be forced to deal with these deficits by either cutting spending or raising taxes. Pressed into this situation, Democrats either cannot move their policies, reward their supporters (to stay in power), or are required into raising taxes, thereby reinforcing their image as the tax and spend party.
This is what happened to Bill Clinton and Barack Obama.  Republican spending sprees forced Democrats deeper into their neo-liberalism.  They had to be the party of fiscal austerity, tax cuts, and  minimal government.  Clinton spent most of his time cleaning up the Reagan-Bush era, Obama did the same for the second Bush.  Republicans under Trump have and will ass trillions to the deficit and national debt, already dooming the agenda of Democrats whether they seize control in 2018, 2020, or later.  Additionally, the exploding budget deficit will strength Republican calls for cuts to social welfare programs.  Already Speaker Paul Ryan has said that the exploding deficit (since the passage of the tax cuts) are a result of social spending. 
Should Democrats fail to capture at least one house in Congress come November, Republican-induced fiscal irresponsibility will provide the cover for a new round of cuts.  But even if Democrats do manage to take over, their economic room to maneuver is just about gone.  They will not have a large enough majority to make major tax policy changes to shift spending priorities.  Trump will veto them.  And assume that Trump’s trade wars backfire and that repealing restrictions on bank regulations help bring an end to economic growth.  Democrats will then inherit a recession
that just about closes the door on anything they can do to move public policy.

Politics in the Age of Silver Bullets and One-Trick Ponies

Note:  My latest blog was originally published on August 22, 2013, in Politics in Minnesota where it and other good political news can be found.

“Simple solutions from simple people.”  This is how one of my graduate school professors used to deride flavor-of-the-month or single-minded ideas proposed by many politicians, interest groups, and advocates for a cause.  He was correct.  There is a penchant in business, and now in politics these days, to believe that there are a simple solutions to our problems and that all that  needs to be done is to do one thing and poof, the problem is solved.  The reality is that there are no silver bullets and those who believe they exist are at best one-trick ponies who are conflating marketing and ideology with governance and public policy.

            The world of business and marketing is all about silver bullets.  Marketing is selling simple solutions to our complex problems. Can’t lose weight?  Try this pill or this diet.  Unpopular? buy this car, use this toothpaste, or wear this overpriced clothing with a logo on it.  Conversely, managers and leaders look for the silver bullet to solve a problem, sell a product, or save a company.  They believe there is a “killer app,” feature, or marketing solution that will do it all.

            Even the art of management has been reduced to silver bullets and one trick pony ideas. Just consider some of the titles of leading business books over the last few years.  There is the One Minute Manager, apparently a guide for those lacking time to think.  Then there is Emotional Management for Project Managers–a book for those who do not or cannot think and need to do it with emotion.  Conversely there is The Intuitive Mind: Profiting from the Power of Your Sixth Sense and A Sixth Sense for Project Management–books with titles that seems to conjure up your inner clairvoyant or ESP to be a successful manager.  And then there are silly titles such as The Lazy Project Manager, Winnie-the Pooh on Management, The Zen Leader, and of course Managing for Dummies, Project Management for Dummies, and Leadership for Dummies.  I guess you do not have to be an Einstein, or even close, to be a successful manager.

            We also have six sigma, balanced scorecard, dashboards, and strategic management.  All these are supposed to be tools that solve all of our management problems. MBA programs drool over Machiavelli’s Prince and Sun Tzu’s The Art of War as models of successful management, believing that good leaders are like ruthless military or political leaders and that you need to have a my way or highway approach to management.  And then there are those dreary books by Jack Welch, Donald Trump. and other former corporate CEOs telling you how you can replicate what they did, even though GE actually underperformed according to many analysts (and did not pay taxes and had a record of serious pollution) or that’s Trump’s success comes the old-fashioned way (he takes over his father’s successful real estate company) and his companies have filed for bankruptcy four times.  For that he deserves to be fired!  Instead, he has his own show telling others how to manage their businesses.

            All of these books, programs, and leaders promise the same thing–some simple technique that will make you an effective manager.  They all seem to say that the gateway to success is adopting their simple single technique and it alone will transform you into a great manager and improve the performance of your business, non-profit, or government agency.  It is a surprise that they do not claim it will cure baldness or help you lose  20 pounds–much like the old quack miracle elixirs of the old days.

            It’s bad enough that business is so simple minded, but politics has increasingly turned down that road.  Yes there has always been zealots who told what Plato called the “big lie”–proposing a single comprehensive solution to solving all of our complex social, economic, or political problems.  Hitler of course was the most extreme–the Jews were the problem and their extermination was the solution.  But less extreme than that, over the course of American history racial minorities, communists, and more recently, welfare queens, immigrants, and gays and lesbians have been singled out as the cause America’s budget deficits, economic woes, or decline in morality, thereby demanding simple solutions such as elimination of welfare, building armed walls around our borders, or banning same-sex marriage.

            It is not enough to single out one group to persecute as a cure for our political problems, There are also the silver bullet solutions, often proposed by those of the political right these days. (Remember when they criticized liberals as simply wanting to throw money at a problem?)  Cutting taxes is the best example.  It seems no matter what the problem is, cutting taxes is the solution for some.  Unemployment too high?  Cut taxes.  Spending too much or deficits too high?  Cut taxes.  Government waste?  Cut taxes.  Government running a surplus (as it was during the end of the Clinton era)?  Cut taxes.  Need to lure business to the state?  Cut taxes.  Cutting taxes cannot be the answer to all these questions or problems.  Cutting taxes is not public policy idea, it is a marketing gimmick.

            During the 2012 presidential debates Herman Cain proposed “9-9-9" as his tax plan.  He was quickly followed by Rick Perry and Newt Gingrich who also proposed catchy but generally meaningless and impractical tax ideas.  Michele Bachmann talked of wanting to reenact Reagan’s tax cuts, whatever she meant by that.  None of these ideas were really well thought out, researched, or evidence-backed theories.  They were simple-minded slogans to sell a candidate or a cause, not solve a problem.  They are ideas proposed by zealots who have confused sloganeering and ideology with thoughtful public policy deliberation.

            Look beyond taxes to see other examples of this.  The gun debate is a great example.  More guns mean less crime and more personal security for the NRA types.  Privatization and choice is the solution to failing schools or bloated uncompetitive bureaucracies.  Deregulation will cure business competitiveness.   And, until very recently, arresting more people for longer periods of time is the solution to our drug problem.  Less anyone think that Republicans, Tea Partiers,  and conservatives have a monopoly on being one-trick ponies with silver bullets. Spending more money alone will not solve underachievement problems with students, and banning guns will not solve all the problems surrounding crime, suicide, and domestic abuse.

            Legal philosopher Lon Fuller once declared that many of society’s problem are “polycentric.”  By that he meant there was not one center or problem but that often social ills have many interconnected causes and problems, demanding complex solutions with many parts. The reality is that except in the movies where a silver bullet kills the zombie or gets the bad guy, there are no silver bullets.  There are no single solutions or one-size fits all fixes that can solve all of our problems.  For those interested in improving governance and making more effective public policy, this is an important point worth remembering.