Relevant and even prescient commentary on news, politics and the economy.

Wisconsin, fiscal responsibility, and power

From the Capitol Times op-ed (hat tip juan):

In fact, like just about every other state in the country, Wisconsin is managing in a weak economy. The difference is that Wisconsin is managing better — or at least it had been managing better until Walker took over. Despite shortfalls in revenue following the economic downturn that hit its peak with the Bush-era stock market collapse, the state has balanced budgets, maintained basic services and high-quality schools, and kept employment and business development steadier than the rest of the country. It has managed so well, in fact, that the nonpartisan Legislative Fiscal Bureau recently released a memo detailing how the state will end the 2009-2011 budget biennium with a budget surplus.

In its Jan. 31 memo to legislators on the condition of the state’s budget, the Fiscal Bureau determined that the state will end the year with a balance of $121.4 million.

To the extent that there is an imbalance — Walker claims there is a $137 million deficit — it is not because of a drop in revenues or increases in the cost of state employee contracts, benefits or pensions. It is because Walker and his allies pushed through $140 million in new spending for special-interest groups in January. If the Legislature were simply to rescind Walker’s new spending schemes — or delay their implementation until they are offset by fresh revenues — the “crisis” would not exist.

The Fiscal Bureau memo — which readers can access at — makes it clear that Walker did not inherit a budget that required a repair bill.

Where is the Budget Crisis?

Brendan Fischer via PR Watch writes on the budget process in Wisconsin, with links here: Where is the Budget Crisis?.

Wisconsin Governor Scott Walker alleges that dismantling public sector collective bargaining rights is made necessary by a $3.6 billion deficit in the next budget, and a $137 million shortfall this year. Setting aside the fact that the ability to negotiate shifts, seniority, benefits and conditions of employment would have a negligible impact on the deficit, and looking beyond Walker’s deceptive claim that the alternative to union-busting is to kick 200,000 children off Medicaid (called “false” by Politifact), how deep is the state’s economic crisis?

Representative Mark Pocan (D- Madison) has looked more closely at the numbers and writes that the $3.6 billion deficit is bogus. The alleged deficit is based on $3.9 billion in new agency requests for the 2011-2013 budget, a 7.2% spending increase. However, these are merely requests, not dollars actually allocated or spent, and Pocan writes that the legislature never votes to grant 100% of agency requests: “I don’t think there is a member in the legislature that would vote for [the requested budget increase]. In fact, I asked [Legislative Fiscal Bureau] Director [Robert] Lang when was the last time we gave agencies exactly what they requested and was told he couldn’t think of one and he’s been here decades.”

For example, the state’s non-partisan Legislative Fiscal Bureau reports

The Best of State Tax Expenditure Disclosure:

The Best of State Tax Expenditure Disclosure is worth some comment:

While the federal government offers no insight into where an estimated $1 trillion in tax breaks go every year, some states are beginning to provide information about which corporations benefit from local tax spending programs. None of the state websites are perfect, but their strong suits could be combined to create tools for disclosing federal corporate tax expenditures.

My Governor, as usual, Fails Math

You have to love Chris Christie. The man who said NJ couldn’t afford a tunnel whose cost with overruns was expected to be less than $10B is now backing a tunnel whose initial cost estimate is $13B.

That the great state of New Jersey has sent an actual physicist to Congress, let alone supplies and hosts most of the talent in the Pharmaceutical and Financial Services industry,* and is run by a man who says we couldn’t afford $10.5B that PATH would control but should give $13B to something Amtrak will continue to control is rather close to proof that G-d is either non-existent or a thug with a sick sense of humor.

And now, he’s saving money again (h/t Thers):

Bill A3273 would have expanded New Jerseys’ Medicaid program, essentially reversing action Christie took in July 2010 to ensure $7.5 million in taxpayer money would not go to supporting family planning clinics, most of which [29 of 58 is half, not “most,” but apparently conservative reporters can’t do math either] are run by Planned Parenthood.

“In Fiscal year 2012, it is anticipated that the state’s Medicaid program faces a budget shortfall of $1.1 billion,” said Governor Christie in a statement. Expanding Medicaid to more people “does not make sense from an overall fiscal and health care policy perspective,” he said.

Words can confuse numbers, so let me, er, “spell this one out.”

In Christie-world, not spending $7,500,000 upfront is going to solve a deficit of $1,100,000,000. Those three extra zeroes on the deficit number are, after all, an Arabic creation, and can be ignored if you’re a blithering idiot or a Republican governor.**

Ignoring, of course, that an increase in conceptions and undesired births, combined with a decline in available prenatal care will lead to more underweight, premature, under- and malnourished babies that will grow up to require more services than they would have had they been healthy and/or desired.

In Christie-world&mash;that’s where you go, remaining out of touch, knowing that your Lieutenant Governor is visiting her dying father out of the country, so that the Senate president is left to declare a State of Emergency—proper prenatal care doesn’t pay for itself.

In Christie-world, being the state most tasked with subsidizing the Red States enables one to position to quit and run for higher office.*** Or at least that’s the only simple, direct, “rational” explanation for not investing in human capital and spending more on a less-desirable project.

If Chris Christie isn’t planning to be a short-timer, he’s certainly making certain that his legacy will be one of higher debt and lower preparedness. The next generation of New Jerseyites may be as innumerate as he is.

In which case, who do the Blue Staters think will pay for all their wars and welfare?

*Non-hedge fund financial services talent, that is. They generally live and work in Connecticut, from which they pillage with impunity.

**See also Daniels, Mitch, and Schwarzenegger, Arnold.

***I would say this is part-wishful thinking on my part, but the result would be a mix of Glenn Beck and Sarah Palin appearing regularly on CNN or Faux News while—in the grand tradition of previous budget pillager and “centrist” Christine Todd Whitman—the rest of us are left to clean up the mess.

Illinois’ deficit reduction scheme

by Linda Beale

Illinois’ deficit reduction scheme
crossposted with Ataxingmatter

States have generally suffered during this economic crisis much the way most people have–there’s been less money coming in as sales receipts slowed during the recession, more services needed as many become homeless, insuranceless and generally more vulnerable during the recession, and bills have continued to pile up (including for mundane things like utilities and print jobs and more long-term commitments like pension promises made to state employees to secure competent workers often at lower-than-market wages for those competencies).

States have a number of options for dealing with the demands.  They can layoff employees and freeze salary increases, taking the brunt of the recession out of the hide of state services and state employees and at the same time likely making the recession worse as the state is unable to provide the kinds of assistance to its most vulnerable populations that it otherwise would have been able to do.  They can utilize accounting gimmicks to delay a few bills and accelerate a few revenue items, making this year look better at the cost of next year.  They can use reserve funds that they’ve set aside for a rainy day, though when such funds are used for basic operating expenses, it guarantees that a truly rainy day will come and there will be no funds to meet the unexpected needs.  Or they can raise taxes–either sales taxes, which will fall primarily on the most vulnerable, since consumption taxes are a kind of flat, across-the-board tax that is regressive since the poor spend all of their income (and pay taxes on all of it) while the rich spend a small share of their income (and hence pay minimal taxes in proportion to their ability to pay).

Some states have dealt with the problem with the perennial accounting gimmickry.  All  that does is paper over the problem and pass it along to the next budget year.  That’s what Schwartzeneggar did in part in California, meaning that Jerry Brown has a huge budget gap to face that will require a mix of cuts and tax increases.  Treating accounting gimmicks as a real solution is sort of like George W. Bush saying that the $1.3 Trillion of tax revenue losses created by his 2001 tax cut bill  wouldn’t really ever materialize, because of the “laffer effect” that tax cuts would be so conducive to economic growth that the government would actually get as much revenue as before or even more! Laugable, of course, since any serious economist will tell you that tax cuts do not pay for themselves.  Even more laughable now after the experience of the 8 years of the Bush regime when a new tax cut bill passed every year and we had at best an anemic job creation record  and no sharing of productivity gains with workers.  Tax cuts that just leave more money in the pockets of overly compensated managers and already wealthy shareholders do just about nothing towards creating jobs.  Mainly that give more money to people that already have a lot of it, and those people are more likely to put it in emerging economies or some other kind of vehicle that does nothing to support entrepreneurship or create jobs here in the USA.

Some states seem to be dealing with the fiscal crises by cutting workers pay and cutting workers.  That is likely merely to make the crisis worse over the long run.  It increases unemployment–thrusting a number of former public employees on the dole.  It leaves businesses facing less purchasing power–especially in and around the state capitol.  It creates an atmosphere of austerity which breeds its own consumer pessimism that feeds negatively into the recession cycle.  It leaves state services shorthanded, with a likely result that accidents and crimes will increase (as state parks and large public events are understaffed), and other indicators of a good quality of life will go down (long lines at the department that issues drivers’ licenses, etc.).

So that leaves thinking about tax increases.  Even those who think state taxes should increase–especially in ways that make them more progressive (think Michigan–where a very low income tax rate that is constitutionally capped means that the wealthy benefit hugely from the state’s expenditures but pay very little in taxes)–may hesitate to recommend large tax hikes during recessions, in part because of the psychological impact of a tax hike, on top of all the other “bad” economic news.  If people have a choice, they might just move to a state that doesn’t have such a tax hike.  And since tax increases are most likely to impact people with higher incomes who have a choice, it is possible (though certainly not inevitable) that a tax increase on higher incomes will lead to some exodus from the state of those high income earners who are mobile.  But there are reasons that a tax increase might make the most sense out of the various unpleasant options.  The fears about exodus are probably exaggerated–people have any number of reasons for choosing where to live, and a business that has established ties (customers, vendors, workers) cannot so easily just move lock stock and barrel to another state.  Tax money in state coffers will be spent as it comes in–it really isn’t taking that money out of the economy, but just reallocating it to preferential uses.  To the extent that the money is used to support vulnerable populations who would otherwise create a burden on local and state government anyway, it is clearly a win-win proposition.  And of course if the state funds are used in ways that encourage business startups or new types of businesses to move to the state (and use supplies, hire workers, etc.), the state expenditures will give greater bang for the buck than leaving them in the hands of weathier state residents who would have invested them abroad.  When tax increases permit a state to satisfy the various obligations it has entered into, that fosters a climate of business certainty and trust–state employees know that the contract they have entered will be honored, businesses in the state agree to contract with the state because they will be paid, and the state and its municipalities can successfully borrow in the muni market to meet those capital expansion needs that require longer term financing.

All in all, it seems that reasonable tax increases should be a win-win proposition, even during difficult economic times.  What is reasonable?  A tax increase that will be paid by people and businesses that can afford it and that will be used to support worthy state endeavors.

At any rate, that is the decision that Illinois Democrats reached today, as an income tax increase “squeaked through” the Illinois House (60-57 vote Tuesday) and Senate (30-29 vote Wednesday) before the new legislative session began this afternoon.  See Karen Pierog, Illinois Lawmakers Pass Big Tax Hike to Aid Budget, Reuters, Jan 12, 2011.  The bill temporarily increases the individual and corporate income tax rates, and sets a spending limit through fiscal 2015.    For a description of the proposal put together by the Governor and Speaker and Senate President, whichapparently had stiffer rate increases and other provisions than the bill actually passed last night (which is not yet available on the Illinois website), see here (Phil Milsk legislative update on January 7 for Illinois Association of School Social Workers).

Math is Math: There Was No "Second Stimulus"

One of the best rules in mathematics is that, to determine the value of all the variables, you need only as many distinct equations as you have variables. (previous sentence edited for clarity.) So let’s combine a couple of recent articles (h/t Mark Thoma for the first, Digby for the second.)

Richard Florida finds three studies of State Government Spending Multipliers. The three studies find multipliers of 1.5, 1.7, and 2.12. Let’s be nice (in context) and use the lower one. StateMultiplier = 1.5

David Dayden notes that budget cuts in just two (large) states can be matched against the Fed’s “stimulus” monies. Let’s see how much, putting the best face possible on the data (i.e., taking the most optimistic projections). CADeficit (ignoring “reserve”): $26.4B (12.5 + 12 + 1.9). ILDeficit: $19B (13 + 6).

That gives us a CA-ILEconomyCost of (26.4 + 19)*1.5 = US$68.1B

The Federal Stimulus is $55-60B. Again, let’s be optimists and say $60B. The required multiplier is then:

FedMultiplier * FedStim = CA-ILEconomyCost

FedMultiplier * $60B = $68.1B

FedMultiplier = 1.135

That’s the minimum multiplier needed just to counter those two states. Add in Texas (whose shortfall appears to be on par with California’s, and is larger than Illinois)and you’re at 1.77.

Only 47 states to go.

The maximum multiplier needed just to solve the CA-IL gap is 1.71. Add in TX and you’re at 2.63 with 47 states to go.

The Right-Leaning Econ Bloggers (e.g., Tyler Cowen and Greg Mankiw; I apologize to the former for linking him to the latter) argued in 2008-2009 that Federal Stimulus has a multiplier of 1.3 or less.*

1.3 would put the economy at neutral if the multiplier is 1.7 (median estimate) and most but not all of the CA ambiguities break the wrong way.

And that’s just eliminating the effect of those two states. Add in TX and the multiplier goes to 2.64—rather close to Christina Romer’s 3.0 that was attacked continually by Mankiw et al.

Repeat after me: There was No “Second Stimulus.” If the economy is going to go into full recovery—i.e., can I have jobs with that?—it will have to be from Private Sector Investment, which has been (let’s be nice) on the sidelines so far,* and really doesn’t appear to be warming up to replace TARP.

*Strangely, this was not argued by them as an argument that the initial “stimulus” was too small for the even-then-obvious shortfalls in C and I; I can’t believe they thought MX was going to cover the difference, but that’s a side discussion, perhaps.

*We can quibble over whether that was and remains the correct decision. As has often been noted here, a lack of demand is not exactly an incentive to expand, unless you think that will be changing soon. A true recovery should have convinced firms that a change is gonna come.

State budgets and finances

The National Association of State Budget Officers reports on the growing concern for state budgets. (hat tip MG)

Spending Remains Lower than Pre-Recession Levels State general fund spending is forecast to rise 5.3 percent in fiscal 2011 as 35 states enacted a fiscal 2011 budget with general fund spending levels above those of fiscal 2010. However, declines of 7.3 percent and 3.8 percent in state general fund spending in fiscal 2010 and fiscal 2009 respectively mean that state general fund spending remains nearly $42 billion, or 6.2 percent below its fiscal 2008 level. The fiscal 2010 general fund spending decline of 7.3 percent is the largest decline in state spending in the history of this report. See chart below.

Rainy day funds a quite low:

Additionally, in fiscal 2012 a significant amount of state funding made available by the American Recovery and Reinvestment Act of 2009 will no longer be available. The end of this support will result in a continuation of extremely tight fiscal conditions for states and could lead to further state spending cuts.

James Pethokoukis with a hat tip to Naked Capitalism suggests this thought:

Congressional Republicans appear to be quietly but methodically executing a plan that would a) avoid a federal bailout of spendthrift states and b) cripple public employee unions by pushing cash-strapped states such as California and Illinois to declare bankruptcy. This may be the biggest political battle in Washington, my Capitol Hill sources tell me, of 2011.

That’s why the most intriguing aspect of President Barack Obama’s tax deal with Republicans is what the compromise fails to include — a provision to continue the Build America Bonds program. BABs now account for more than 20 percent of new debt sold by states and local governments thanks to a federal rebate equal to 35 percent of interest costs on the bonds. The subsidy program ends on Dec. 31. And my Reuters colleagues report that a GOP congressional aide said Republicans “have a very firm line on BABS — we are not going to allow them to be included.”

In short, the lack of a BAB program would make it harder for states to borrow to cover a $140 billion budgetary shortfall next year, as estimated by the Center for Budget and Policy Priorities.

Medicaid Dilemmas – Part 1

by Tom aka Rusty Rustbelt

Medicaid Dilemmas – Part 1

Medicaid is a federal/state program covering poor people, with general services for all ages and long-term care (nursing home) services for the indigent elderly.

State budgets are extremely tight, and many states are cutting reimbursements, including nursing home reimbursements.

The majority of long-term nursing home residents (as opposed to short stay rehab patients) end up being Medicaid funded.

A typical long-term resident is an 84 year widow, suffering from moderate senile dementia, having ambulation problems and problems with activities of daily living (eating, dressing, bathing), with late onset diabetes symptoms, osteoarthritis and congestive heart failure. So, grandma is not a candidate for home care or assisted living.

Many residents are in much worse health. Some receive joint services from the facility and from hospice.

Nursing homes have the toughest regulatory regimen of any health care providers, including piles and piles of mandatory paperwork by nursing and administrative staff.

So, not much room to cut (the best profit comes from selling the facility later). Now what?

In Part 2 we will discuss the possible next phase for state Medicaid budgets.

(The wife, aka the world’s greatest nurse, works part time in long-term care, and will now do more work and take a pay cut. She understands the deal, but one of these days she is going to hang up her stethoscope, a real tragedy for the elderly. Maybe she will become an investment banker – nah, too honest.)
Tom aka Rusty Rustbelt

RIlands Governor, Stimulus money means Trickle Down policy

by Divorced one like Bush

So you have been reading about the southern GOP’ers that are refusing parts of the stimulus money. Something about being true to their crede. Well, we here in RIland have a GOP governor who is doing one better. He want the money! The problem is in how he plans to use it to stimulate our economy.

Are you ready? Here it is: Tax Cuts! Is this not kind of like living with grand parents who refuse to acknowledge that the times have changed? Hey Grandpa, have you heard the news? Trickle down never fixed those shoes.

Our governor Carcieri is proposing the following for RIland’s share of the stimulus money: Reduce the corporate income tax from 9% to 7.5 in 2010 with a continued reduction to 0% (zero percent) by 2014. (Mass is lowering theirs to 8.75 next year, we are currently second to Mass.) Savings next year for business: $14.5 million The Chamber says this will help start up companies. I didn’t know start ups paid corporate income taxes. Based on the states own data, 3500 companies of 50,000 pay the current 9%.

Next tax cut: Lower the annual business tax from $500 to $450. My two businesses pay this tax. I’ll get a $50 break, but the big guy’s will get to share millions.

Next tax cut: Raise the estate tax to $1 million from $675,000 which was set in 2001. It would match the Mass threshold. Estate tax filers would save $1.5 million.

Next tax cut: Reduce the income tax from 5 levels of 9.9% to 3.75% to 3 levels of 5.5 to 3.5%. We already lowered the top once so that more rich would come live in RIland ’cause you know, they’re the only ones that make an economy. Well, the rich population has not increased.

RI has already had this discussion and guess what? The rich make out every time.

The best-off Rhode Islanders pay 9.9 percent of their income in Rhode Island state and local taxes, while middle income families pay around 11 percent and low-income families pay over 14 percent.
Furthermore, the well-off have recently received significant reductions in Rhode Island taxes. The state has chosen to phase-down the percentage of federal personal income tax used to calculate Rhode Island tax–from 27 percent to 25 percent. When the rate reduction and the pass-through of the federal cuts are combined, Rhode Island’s well-off have already received a large tax cut. When the rate cut is fully phased-in, the average cut will be $5,200 for the highest-income one-percent, but average only $97 for everybody else.

And the State loses every time:

State income taxes are deductible on the federal tax return. Thus, when a state cuts its personal income tax, the amount deducted on the federal tax return is reduced. With the lower deduction, the federal tax goes up. For example, for most taxpayers paying at the top federal marginal rate, every dollar in reduced deductions due to cuts in the state income tax will cause federal tax liability to go up by about 40 cents. Thus, the net cut for the taxpayer is 60 cents even though the state loses a full dollar in revenue.

Here is some more on RI’s taxes.

He does want to treat capital gains as ordinary income. Currently our rate is 1.67% “…or .83% in some circumstances.” There has to be a catch here somewhere.

Back in 1999 when we were having the discussion the alternative was:

For a tax cut of this size, there are some attractive alternatives. $42 million could hire 1,000 teachers. 1,000 teachers could reduce the average class size for 50,000 students from 25 to 17. It is a perfectly fair question to ask which is more important: giving an average tax cut of $7,900 to the richest people in the state, or improving these children’s education?(2)

Education is not the only option. 1,000 police officers could be hired instead, infrastructure improved, drug rehabilitation programs initiated or job training programs funded. Or a tax cut could be targeted to lower income taxpayers.

Kind of sounds like what the president and congress had in mind when they just passed this stimulus plan.

He’s going to end a variety of deductions: mortgage, property taxes and charitable contributions. Being that property taxes range from 5.9% (bottom 20%) to 4.7% (96 to 99%) but only 2.8% for the top 1%, I guess it’s bend over time for the majority.

In the end:

An estimated 110,179 filers will each pay an average of $1261 more in income taxes according to Carcieri’s tax study commission. The vast majority of them are individuals and couples making less than $75,000 annually…

It doesn’t end there. Oh no. He want to use the stimulus to pay the $10 million settlement in the Station nightclub fire. Well, at least the money would get in the hands of those who could use it and would put it to work (as in spend it, as in stimulate the economy).

Lastly he’s going to use the stimulus to close our deficits. $192.3 million for 2009and $239.2 million for 2010. What we do after that, I have no clue. But then again, we’re the state that used the tobacco settlement money to close our past deficits. It is why we are in the mess we are in now. I guess we’ll just hope another uncle dies and leaves us a fortune again when year 3 rolls around.

And finally, to help reduce the spending, he’s going to reduce the revenue sharing to the towns and abolish the Pharmaceutical Assistance to the Elderly program. Hope those 1%’ers say thank you to those elderly who will take the bullet for them.

So, what’s your governor proposing?