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Last month, Bob McDonnell won a landslide victory in his bid for the Virginia governor’s mansion. But by early next year, he may well begin to wish that things had turned out differently.
He is inheriting what is probably the worst budget crisis in living memory. In January, the General Assembly will take up consideration of Virginia’s 2010-12 biennial budget. According to guesstimates, balancing that budget will require closing a $3.5 billion gap between expenditures and revenue.
But before we look at ways to cut, let’s examine how this happened. Between September 2008 and September 2009, Virginia’s economy contracted by 114,900 jobs, and our statewide unemployment rate went from 4.1 percent to 6.3 percent (peaking along the way at 7.3 percent in June 2009). In September 2009, sales tax collections were down 6.6 percent from the year before, personal income tax 6.8 percent, and corporate income tax 10.6 percent.
Although many economists, such as Richmond Federal Reserve President Jeffrey Lacker, have recently concluded that modest improvements in housing, construction, and consumer spending indicate that the economy has started to improve, it is important to realize that employment, and therefore state tax revenue, traditionally lag behind other economic indicators. The worst of our fiscal challenges lay ahead.
And the easy fixes have already been used up. In responding to the most recent $1.5 billion deficit in the state’s 2008-10 biennial budget, Gov. Kaine relied heavily on federal stimulus funds and other one-time funding sources (e.g., expending almost half of the rainy day fund and delaying state contributions to the Virginia Retirement System). With the easy fixes exhausted, only the more difficult ones remain.
But as we look farther out, we may well benefit from the fact that necessity is, or at least can be, the mother of invention. Among the policies that Virginia could pursue to better prepare for the inevitable next economic downturn, I humbly suggest the following:
• Accept that Keynes is dead. The main reason that the $787 billion “stimulus” bill has not been very stimulating is that it has largely been used as a slush fund to protect government jobs. Those jobs were on the chopping block because tax revenue from the private sector declined as the economy declined. Siphoning off future tax dollars from the private sector to protect government jobs does almost nothing to generate private sector jobs, and therefore almost nothing to solve the underlying problem.
• Bust the ratchet. Politicians are rewarded for handing out goodies, not withholding them. As a result, there is always an accretion of new government programs in every expansion that we have no way to pay for when the economy turns south again. The options for fixing that problem range from the simple – like Colorado’s TABOR legislation that constrains growth in government spending to growth in population and inflation – to the sophisticated – like Virginia’s own Performance Budgeting Project, which provides tools that policy makers (and Joe Citizen) can use to evaluate precisely what specific government programs accomplish and at precisely what cost.
• Realize that public goods don’t have to be publicly produced. Virginia was an early leader in the privatization of certain government functions (e.g., interstate highway maintenance) and is one of only three states that maintain a central body to manage government efficiency initiatives (i.e., the Commonwealth Competition Council). Privatization has a proven track record of reducing government costs, and other states are starting to catch on. In 2009, Arizona, California, Illinois, Louisiana, and New York either proposed or enacted major privatization initiatives.
• Don’t be afraid to ask questions. The General Fund (tax funded) portion of Virginia’s annual budget increased from $12.3 billion in fiscal 2001 to $16.2 billion in fiscal 2009. The bulk of that $3.9 billion increase (approximately four-fifths) occurred in two areas – Medicaid and K-12 education. Whereas growth in the Medicaid budget is largely a function of federal mandates, growth in the K-12 budget is largely a function of the state’s Standards of Quality funding formula. The SOQs have been described in some quarters as a “black box.” And given that an 8 percent increase in K-12 enrollment between fiscal 2001 and fiscal 2009 was somehow sufficient to drive a 42.2 percent increase in the state’s K-12 budget, it may be time to take a look inside that black box.
A. Fletcher Mangum is Managing Partner of Mangum Economic Consulting, a Richmond-based firm.
A. Fletcher Mangum makes easy to address his ideas by making a list, so let’s go straight to it:
• “Keynesian economics remains the best framework we have for making sense of recessions and depressions,” Paul Krugman concluded in his book, “The Return of Depression Economics and the Crisis of 2008.” As I understand it, the stimulus bill funds were used protect government jobs with the hopes many state and local economies would recover enough for governments to not have to dismantle and then re-start programs, especially in education. In the worse case, the federal government jobs spending should allow for a careful wind-down or re-grouping–and that needs to happen. Local pols should not stick their head in the sand. It wasn’t a magic wand, but the federal funds did help address the crisis.
• “There is always an accretion of new government programs in every expansion that we have no way to pay for when the economy turns south again.” We’ll have to take Mangum’s word on this, since he offered no general or specific examples. In any case, it’s amusing to read how we need government programs to rein in government programs. A much bigger problem in Virginia are programs that continue long after they have outlived their usefulness. For example, the state’s Cooperative Extension Service, especially its 4-H programs, should have been shut down years ago.
• “Public goods don’t have to be publicly produced,” Mangum says and it’s difficult to disagree with such a broad statement. Alas, after the legislators decide that a public good will be produces, the “public goods” have to be produced in some shape or form no matter what the demand turns out to be in the real world. As appealing outsourcing as this sounds, the amount of risk the government can transfer from the public sector to the private sector is limited. There has been some successes and perhaps more can be done in outsourcing, but it is not going to make a worthwhile impact on the crisis facing the new governor next year.
• “Don’t be afraid to ask questions,” Mangum says, then he tosses out the scary vision of a “black box” driven by a out-of-wack formula costing us billions. But, taking his numbers at face value and unwind the percentages: 80 percent of 3.9 billion is 3.1 billion. Divide that by nine years: $345 million a year. Now, take out of that what went to Medicare… You get the idea. As best as I can determine, the Virginia’s funding of public education is not among the highest in the U.S (about in the middle) and the state’s funding of Medicare is among the lowest. Here’s a question we shouldn’t be afraid to ask: How long will Virginia’s reputation for being good for business can last if we aren’t being competitive in funding education and transportation? Maybe he’s right about the need for cuts in state funding for education. I doubt we can avoid it. But what kind of program would Mangum stop? Some clarity would have provided more credibility.
So,…
–Keynes is not dead. (Keyes did NOT want the government to run the economy. Free markets, however, do need a minder.)
–New government programs to weigh new government programs are not needed, old leaders need to show some good ol’ leadership instead.
–Outsourcing government will still be government, and may or may not be better or cheaper.
–We don’t need vague questions as much as we need clear answers.
If current economic conditions result from a failure of government, it was the failure of government to provide the necessary regulation to stem unbridled free market speculation, which led to a false sense of prosperity (said with the assumption that a relatively few persons made a great deal of money as a result of that speculation) . As for the Commonwealth, the failure of the legislatures, and previous executives – those prior to Warner – to balance projected programs and services with appropriate fiscal management, can only be expected to continue with the new Governor.
So, I guess we should let the private sector build roads and put tolls on them. They would have to finance them at a higher rate and make a profit and somehow this is supposed to be good for the taxpayer.
This opinion piece is long on opinion and short on substance.