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.