Wednesday, October 18, 2017

A Perfect Storm

If you’ve been paying attention at all to the state’s current budget crisis, you already know that legislative Republicans have been doing their damnedest to deny any responsibility for fixing the mess, let alone acknowledging they created it in the first place.  As far as they’re concerned, it’s up to the governor to balance the budget with brutal spending cuts, and they refuse to recognize, or admit, that those cuts could do serious damage to essential government programs.

Earlier this week the Republican House leadership attempted to rationalize this remarkable callousness in a Missoulian guest column claiming that “Montana has a spending problem, not a revenue problem.” It was a valiant effort, I suppose, but what it produced was a perfect storm of shoddy reasoning, mangled facts and selective memory. This gets a little tedious, but bear with me.

According to these Republican luminaries, the “root cause of Montana’s budget challenges” is that the state is “simply spending too much money,” and by way of evidence, they cite the fact that since 2012, general fund revenue is up 14 percent while spending is up by 32 percent. Now if we are trying to figure out if we have a “spending problem” or a “revenue problem,” by itself this comparison is of no earthly use. The numbers no more support a claim that we are spending too much than that we are not raising enough revenue to meet our needs. 

And there’s another problem here: it’s always possible to cherry pick starting and ending dates for a comparison like this that tend to prove whatever point you are trying to make, and in fact, that’s what these guys did in this instance. Look at the top chart below, which shows General Fund revenue and expenditures since 2002.* In 2012 taxes exceeded expenditure, and this year, 2017, it was the other way around. Pick two years like that, and necessarily (it’s just arithmetic) expenditures are going to grow faster than revenue. But what the top chart also shows is that in the long run, expenditures and revenue track each other pretty closely. And how could it be otherwise? We are required by the constitution to balance the budget, which means, in the end, that we cannot spend more that we take in.

If a transitory imbalance between spending and revenue can’t really tell us where our “problem” lies, what can? Well, to me it seems reasonable to say we have a spending problem if we’re spending more than we need to or can afford, given the productivity of the state’s economy and the income it‘s capable of generating. And we have a revenue problem if the revenue we are collecting falls behind what we can afford and is needed to fund essential programs.

Republican leaders seem to kind-of get that, when they claim that revenue growth has been adequate because it has outstripped both inflation and the growth of population combined. But that combination is not a good measure of the level of economic activity, income, or what we can afford; those are best measured by gross state product, which is basically the total value of everything - goods and services - that we produce in the state and ultimately, the source of our material well being. Look at the second chart: since 2002, the growth of state spending and revenue has fallen significantly behind the growth of gross state product. There is no indication here that we have spent beyond our means; on the contrary, we could afford to do more, and we certainly can afford to do what we are doing now. 

The House leaders also claim that 14 percent growth in revenue since 2012 must be enough because  after all, “Most Montana families have not seen their income grow by 14 percent since 2012.” Where they got this factoid is anyone’s guess,** but it really doesn’t matter: the comparison of total tax collections to individual family incomes is meaningless. What is instructive is the fact that while total tax collections were rising by 14 percent, total personal income earned by Montanans rose by 19 percent.

The House leadership tries to explain the glaring disconnect between a high performing economy and sluggish revenue growth by invoking what they call the “long term trend of trading high-paying natural resource jobs for lower-paying service and tourism jobs.” We might imagine that that shift has reduced average earnings and depressed tax collections, except for the fact that average earnings have risen, not fallen, and income tax collections have risen, not fallen, with respect to personal income.***

In the end, of course, all this Republican nonsense about a “spending problem” is intended to rid them of any responsibility for going back to Helena and working on a reasonable solution to the current budget crisis. As they see it, if the problem is spending, the solution is cuts. And if it’s cuts we need, well then the governor has the power to make them and ought to get on with the job. All he has to do is fire some of those useless, unneeded state government employees, never mind the fact that the number of state employee positions funded has fallen since 2011. Look:

The real irony in all this Republican whining about a “spending problem” is that if we have one, it is the product of budgets created by Republican controlled legislatures ever since Steve Bullock moved into the governor’s office.**** If we are spending money on things we don’t need or can’t afford, or if there are too many people on the public payroll (and I don’t think any of that is the case) then the Republicans have only themselves to blame. But instead of blaming themselves they’re dumping the whole mess on Steve Bullock’s desk and shouting over their shoulders as they walk out of the room, “Here, governor, fix this because we sure as hell won’t!”

* All three charts in this post are from a report prepared by the Legislative Fiscal Division at the Montana Legislature.

** It may be right, of course. Given the growth of income inequality, it is true that a majority of Montana families experience below average growth in income. A disproportionate share of all income growth is captured by a relatively small segment of the population.

*** The impact on average earnings of the shift away from natural resource employment is really pretty small (shameless plug: see Post Cowboy Economics, by Tom Power and yours truly) and the Republican writers can only bizarrely defend their claim that the shift has crimped tax collections by citing budget director Dan Villa’s observation that “Timber mills paid property taxes. Hospitals do not.” Of course that has nothing to do with wages: hospitals pay lower property taxes because they are largely tax exempt. And in 2016, hospital pay per job was 143 percent of average pay per job across all industries, making them a pretty poor example of “lower-paying service and tourism jobs.”

****Please note: The budget passed by the 2017 legislature contains more spending than the governor asked at the start of the session. 

Monday, July 31, 2017

Lean Times

No less a news outlet than the Washington Times is reporting today that House Speaker Austin Knudsen, whose economic ideology fits that of the Times to a tee, is defending almost $100 million in looming budget cuts because they are “doing what they are supposed to: Reducing the size of state government in lean economic times.”

Well, that’s not really quite right. What those cuts are supposed to do is balance the state’s budget at a time when we are collecting less tax revenue than we expected.  The Montana constitution says that the budget must be balanced, and as long as the Republican majority obstinately refuses to increase any tax at all, the only way to do that during “lean economic times” is to cut spending.*

Of course for the Republicans, if a collateral effect of balancing the budget is to reduce the size of state government, they’re all in. What the hell: in their world, reducing the size of state government is always a good idea, even if it means reducing spending and the provision of vital government services at the moment they’re most needed, i.e. during lean economic times. It’s a notion that flies in the face of the common sense observation that government spending ought to be counter-cyclical; it should grow faster that the economy during downturns, and slower than the economy during booms.

It’s provisions of Senate Bill 261 from the 2017 session that are creating the mess we are currently contending with. In the long run, the bill establishes a reserve fund that will stabilize the budget by allowing a modest decoupling of spending and taxes; when that happens, it will be a good thing. We won’t be forced to reduce  the size of government during lean economic times.

But the way SB 261’s written, spending in the immediate future - over the next biennium  - is very sensitive to the amount of revenue we collected last fiscal year.  I’ll spare you the grizzly details; but suffice it to say that the cuts that are triggered will severely impact agencies serving the elderly and the disabled, the university system, and the schools. That may gratify the Speaker by reducing the size of state government, but it’s really not what we want to be doing.

*During the 2017 session there were bills to increase taxes on tobacco products, alcohol, the profits that corporations doing business in Montana hide in tax havens and very high individual incomes. Needless to say, not one of those bills passed.

Sunday, July 30, 2017

Sticking with the Paris Accords

In the wake of Donald Trump’s decision to withdraw from the Paris climate accords, a bunch of governors, mayors and business executives have announced their intention to stick with the Paris commitments. There has also been active organization in support of the agreement among state legislators (you can read the details at the National Caucus of Environmental Legislators website); in Montana, a group of us sent the letter below to Governor Bullock, urging him to join in the effort.

Dear Governor Bullock:

As legislators who are profoundly concerned about the threat of climate change, we applaud your recent statements regarding the danger to the people of Montana posed by President Trump’s decision to withdraw the United States from the Paris climate accords. Like you, we recognize that climate change can only be arrested through international collective action that includes the committed participation of the United States. In withdrawing from the Paris accords, the President has abandoned that commitment, and, sadly, American global leadership in general. While it is true that the remaining signatories have pledged to forge ahead, we believe that the accords have been seriously destabilized, and the potential consequences of that destabilization, for Montana and indeed the whole world, are extraordinarily serious.

But all is not lost. Numerous governors, state legislatures, mayors and businesses have stated their intention to honor the United States’ Paris commitments despite the President’s decision to withdraw them. We believe that these actions are essential to sustaining the Paris agreements until the Federal government is once again able to conduct itself in a responsible manner, and we believe that Montana should join in that effort.

Specifically, we believe that Montana, under your direction, should commit itself to firm, quantitative, and verifiable reductions in statewide greenhouse gas emissions.

We recognize that technically, economically and politically such a commitment will be very challenging, but we are confident that it is within the resources of your office to initiate the analysis and planning required to put emissions reduction efforts in place, and we stand ready to work with you as we move forward. We believe that the efforts of Governor Schweitzer’s Climate Change Advisory Commission in 2008 and of the Department of Environmental Quality in 2014 (in response to the EPA’s Clean Power Plan) provide useful models of how to proceed as well as an important existing cache of information regarding emissions reduction strategies.

Regardless of how they are undertaken, we believe that the following are the minimum necessary steps for developing and implementing an emissions reductions plan:

1.     Development of an emissions inventory and monitoring system capable of verifying that target reductions are being met.
2.     Identification of effective strategies for reducing emissions. Many of these - particularly those associated with electrical generation, such as improved efficiency, replacement of fossil fuels with renewables, carbon capture and storage, and so forth - are already well known. Others, especially those related to the transportation and industrial sectors, less so.
3.     Determination of the cost of various strategies and of the least cost combination of strategies capable of producing targeted emissions reductions.
4.     Analysis of the policy measures and, in particular, the legislation required to implement the least costly combination of strategies. This analysis should include market-based policies such as carbon taxes, offsets and bubbles, cap and trade, interstate and intraregional emissions trading, and the like.
5.     Because capping emissions will inevitably lead to a transformation in the way energy is produced and transportation is managed, an assessment of the impacts of the policy on adversely affected communities, industries, occupations and income groups is essential, as well as the identification of measures needed to ameliorate those impacts.

We understand that mandating and achieving meaningful reductions in the state’s greenhouse gas emissions is going to be no easy feat. We understand as well the compelling logic of doing nothing, avoiding the costs of action, and benefiting from the efforts of others. But that logic, compelling as it might be, is myopic. If it applies in Montana, it applies with equal force in California and Hawaii and China and France, and ultimately leads to paralysis. To see beyond that wrongheaded logic requires vision, creativity, and the courage to risk self-sacrifice. In a word, it requires leadership. In our view, to the grave peril of the nation and the world, President Trump does not understand and refuses to exercise the leadership required of him. And so we ask you to step forward, and pledge to support you in this effort.

Rep. Kim Abbott
Rep. Laurie Bishop
Sen. Dick Barrett
Rep. Bryce Bennett
Rep. Zach Brown
Rep. Willis Curdy
Rep. Amanda Curtis

Rep. Mary Ann Dunwell
Rep. Janet Ellis
Sen. Tom Facey
Rep. Dave Fern
Rep. John Fleming
Rep. Mofle Funk
Sen. Jen Gross
Rep. Jim Hamilton

Rep. Ellie Boldman Hill
Rep. Denise Hayman
Sen. Margie MacDonald
Sen. Sue Malek
Rep. Shane Morigeau
Rep. Andrea Olsen
Sen. Mike Phillips
Sen. JP Pomnichowski
Rep. Marilyn Ryan
Sen. Diane Sands
Rep. Kathy Swanson
Sen. Cynthia Wolken
Rep. Tom Woods
City Commissioner Andres Hallway, Helena
City Commissioner Rob Farris-Olsen, Helena
Mayor Bob Kelly, Great Falls
Mayor Carson Taylor, Bozeman
County Commissioner Jean Curtiss, Missoula
County Commissioner Nicole Rowley, Missoula
County Commissioner Dave Strohmaier, Missoula