Schmudget Blog


Five Facts About the Economy and Deficit Fact 4: The Economy Needs a Big Push

Posted by jeffc at Jan 22, 2009 12:40 PM |
Filed under: State Budget, State Economy

As everyone knows by now, our state economy is in a recession. People are feeling the pinch at home and so are retailers and manufacturers. The question we all want answered is, how do we get the economy moving again?

It helps to understand what exactly is meant by the term “recession.” The economist Jared Bernstein, who is my former boss and is now Vice President Biden’s Chief Economist, sums it up well:

Economies depend on robust demand. When folks stop buying, when investors leave the room, when governments stop building and improving public goods, growth grinds to a halt. And when that happens, the job machine stalls, unemployment rises, those with jobs work fewer hours, wages rise more slowly, and incomes decline, especially for the lowest earners and many minorities.

Lately there has been much talk of a federal stimulus plan to quickly get more money flowing in the economy. There are lots of ways to do that, but some of them are better than others. Mark Zandi from economy.com suggests the best route is to target dollars at lower and middle income households who need the cash and will quickly spend it.

In fact, he estimates the biggest “fiscal economic bank for the buck” (his phrase) comes from increasing unemployment benefits and food stamps. Spending on infrastructure would come next, followed closely by aid to state governments. By comparison, tax cuts seem like a waste of money in terms of stimulus.

When it comes to state government, economic recovery can be more difficult because most states need to balance their budgets. Basic economics says that both tax increases and spending cuts are harmful to the economy during a recession. Using our nascent Rainy Day Fund helps a little. Washington also expects federal aid for health care, economic security, and education, but there’s still a large gap.

So what do we do? Do we choose tax increases or spending cuts?

The Governor’s budget proposal comes down on one side of this question. During the election campaign last fall, she promised not to raise taxes and her budget plan for 2009-11 calls for deep spending cuts to the tune of $3.6 billion.

This is not a position backed up by economic research. Nobel Prize winner Joseph Stiglitz who is the new head of the federal Office of Management and Budget says, “Tax increases on higher-income families are the least damaging mechanism for closing state fiscal deficits in the short run.”

The Governor has also made some smart decisions to help get the economy moving. She has proposed using money from the Unemployment Insurance Trust Fund to temporarily increase benefits for unemployed workers. That plan does not require tax increases and puts money quickly into the economy. It also helps struggling workers. The Governor and legislative leaders have also proposed moving quickly on ready-to-go capital infrastructure improvements.

Five Facts About the Economy and Deficit Fact 3: People Are Losing Their Jobs

Posted by jeffc at Jan 20, 2009 06:00 PM |
Filed under: State Budget, State Economy

Washington State is facing a sustained period of high unemployment. The unemployment rate is projected to rise to 8% or higher (see graph below). That would mean that one of every twelve Washingtonian workers would not be employed despite their efforts to find work.

unemp012009.jpg

Additionally, the Economic and Revenue Forecast Council projects that the number of jobs in the state began to fall in the second quarter of 2008 and will continue to fall until the second quarter of 2009—five straight quarters of job loss. Employment will start to grow in the third quarter of 2009, but will not reach the previous level until the end of 2010 (see graph below). In the meantime, the size of the labor force will have grown and many more jobs will be needed to lower the unemployment rate.

jobs012009.jpg

Lasting spells of unemployment can be devastating. Families and individuals rely on employment to provide basic necessities including food and housing. When people lose their jobs, they often lose their access to affordable health insurance as well. The negative impact isn’t limited to the unemployed; it also drags down wages and economic activity more broadly.

Shoring up programs that provide economic security should be a top priority of the state budget in these tough times. As we’ve discussed, the Governor’s budget would do the opposite; it would harm the ability of the state to provide economic security.

A potential bright spot is the Governor’s proposal to provide a temporary increase in benefits for unemployed workers. More on that tomorrow in "Fact 4: The Economy Needs a Big Push."

Underlying data come from the Economic and Revenue Forecast Council.

Five Facts About the Economy and Deficit Fact 2: People Aren't Buying Real Estate

Posted by jeffc at Jan 20, 2009 12:30 PM |

The boom and bust of the real estate market in recent years has had a significant impact on the Washington State budget. The extreme volatility of the real estate market in recent years has given a relatively small tax—the real estate excise tax (REET)—a disproportionate role in the state fiscal situation.

When the current budget was passed, a precipitous drop in revenue from the REET was expected and built into budget projections. The real estate market further deteriorated, however, and it became clear that the pessimistic projection had been overly optimistic.

The graph below shows the REET as a share of general fund revenue from 2003 to 2007 and the current projections for 2008 through 2011. From 2003 to 2007, revenue from the REET grew quickly alongside the booming real estate market, moving from 4.4% of general fund revenue to 7.4%. The real estate bust has had the opposite effect. The REET is expected to raise $560 million less in 2009 that it did in 2007.

reetshare012009.jpg

As I pointed out yesterday, the total amount of general fund revenue in the 2007-09 and 2009-11 biennia has fallen by $2.7 billion since the current budget was passed. Declining retail sales tax revenue explains 68% of that change. Declining REET expectations are the second largest factor, explaining 19%.

The direct effect of the real estate slump on state revenue isn’t limited to the REET, however. While autos are the most significant factor in declining retail sales, sales in real estate-related industries such as home furnishings, building materials, and specialty contractors have also fallen dramatically.

There has also been a direct impact on employment. The Economic and Revenue Forecast Council (ERFC) projects that construction employment will decline by 12% between the fourth quarter of 2007 and the 1st quarter of 2010.

We’ll talk more about employment tomorrow in Fact 3: People Are Losing Their Jobs.

Underlying data come from the Economic and Revenue Forecast Council and the Department of Revenue.

Five Facts About the Economy and the Deficit Fact 1: People Aren't Buying Stuff

Posted by jeffc at Jan 19, 2009 07:50 AM |

The Washington State budget relies heavily on the retail sales tax. When people buy less stuff, the state collects less revenue. Much of our current deficit problem can be attributed to the precipitous drop in retail sales tax revenue over the last year.

The graph below shows taxable retail sales for each quarter from the first quarter of 2007 through the second quarter of 2008. The percentages are the change in sales from the same quarter in the previous year. At the beginning of 2007, sales were growing by 8% year-over-year. During the last half of 2007, they were growing by less than 6%. By the second quarter of 2008, sales were falling by 2%.

retailall.jpg

The Department of Revenue will be releasing data for the third quarter of 2008 in a few weeks, but it’s a safe bet that sales have continued to fall. The Economic and Revenue Forecast Council (ERFC) expects that taxable retail sales will be lower in fiscal year 2009 than the prior year. That’s only happened twice in recent history: in 1984 and 2002. The current decrease is expected to be deeper than the two previous times.

The recession has hurt some industries more than others. The graph below shows taxable retail sales at auto dealers. Sales of automobiles, which make up about 8-9% of total sales, have plummeted.

retailauto.jpg

Remember a year ago, when we were worried about a $2.4 billion deficit for the 2009-11 budget? It’s more than doubled since then to become the largest deficit since 1981-83.

Most of the difference between the deficit expected last spring and the current projection is due to reduced revenue expectations. The total amount of general fund revenue expected in the two biennia has fallen by $2.7 billion since the current budget was passed. Sixty-eight percent of the difference is from falling retail sales tax revenue.

Another important factor is the real estate excise tax. More on that tomorrow in Fact 2: People Aren’t Buying Real Estate.

Governor's Budget Undermines Progress

Posted by jeffc at Jan 15, 2009 01:30 PM |
Filed under: State Budget

cuts011509.jpg

We released a detailed analysis (pdf) of the Governor's 2009-11 budget proposal today. It approaches the budget from the standpoint of how it measures up against four widely shared values: Education and Opportunity, Thriving Communities, Healthy People and Environment, and Economic Security.

The graph above is from the report and shows the percentage cuts in each of these budget areas. Health care and economic security would take significant hits, including:

  • Cutting tens of thousands of people from state-funded health insurance programs and lowering benefits for many others.
  • Eliminating cash and medical assistance to adults who cannot work due to disability.
  • Terminating benefits for some families receiving temporary assistance.
  • Not only does this reverse the progress we have made in these areas recently, but it couldn't come at a worse time given the economy.

    But don't think education is exempt; outside of basic education, the K-12 budget would be cut by 28 percent. These are programs that are designed to update our schools for the new economy, to attract and retain the best teachers, and to close the achievement gap for lower income students and students of color.

    In short, it's a budget that takes a step in the wrong direction.

    For more information on the four values listed above, see the Progress Index.

Homelessness Likely to Rise under Governor's Budget

Posted by remyt at Jan 13, 2009 05:00 PM |
Filed under: State Budget

A decade ago, I was the primary author of the annual survey on hunger and homelessness published by the US Conference of Mayors. During the intervening years, there have been significant new efforts to reduce homelessness in America. Cities, counties, and states have adopted 10-year plans to significantly decrease or eliminate homelessness. There was wide agreement that we all need public supports and services that provide avenues to economic security.

Washington State has a statutory goal of reducing homelessness by 50% by 2015. As part of this 10-year plan the state has made significant investments towards that goal including doubling the size of the Housing Trust Fund and towards helping offenders that are being released from jails and prisons transition into the community without ending up homeless.

This plan (and the complementary plans of cities and counties across the state) are apparently not a priority now. That's the message one would infer from the budget that the Governor submitted. Half-way through our ten-year plans have we decided that the goal of ending homelessness is no longer of value?

After much progress, the Governor's budget undermines this goal by proposing cuts in mental health coverage for adults who don't qualify for Medicaid, reducing transitional housing funding for offenders reentering community settings, reducing the investment in the housing trust fund by 50%, and eliminating cash assistance and medical coupons to disabled adults who can't work.

Homelessness is already on the rise in cities across the nation. According to a report by the Center on Budget and Policy Priorities, a fall 2008 survey of 22 cities found 16 showed an increase in homeless families with children. In another national survey, one in five responding school districts reported having more homeless children in the fall of 2008 than over the course of the entire 2007-2008 school year.

Is this the future we want for our cities and hometowns here in Washington? Now more than ever, the state should invest in reducing homelessness through public supports and services that provide economic security and pathways out of poverty.

The State Budget Over Time

Posted by jeffc at Jan 08, 2009 01:20 PM |
Filed under: State Budget

revspend010809.jpg

The Governor's budget (released last month) proposes deep cuts to the state budget that would limit our ability to pursue public investments in health, economic security, and education.

The stark proposal is in response to a large budget deficit. In part, this deficit is the product of the economic crisis. But, as the attached graph shows, the economy is only part of the story. The ability of the state tax structure to pay for normal growth in government spending has been deteriorating for over a decade.

This graph follows the standard of showing budget amounts as a share of total personal income. This provides insight on the resources we have to fund public investments and also recognizes that the cost of government grows along with economic and demographic trends.

The purple line shows that revenue has been eroding since long before the recent economic downturn. It’s a combination of significant tax cuts, spending limitations, and a tax system that doesn’t grow along with the economy even during good times. So while the current fiscal crisis has obviously been exacerbated by the economic crisis, it’s a longer-term problem.

The green line shows spending trends. Up to now, the state has been able to use reserves and stopgaps to hold spending a little steadier than our revenue stream, but we’re out of reserves now and are facing the largest deficit since the 1980s.

The budget cuts proposed by the Governor (shown here by the dashed green line) would be the largest, relative to the economy, in over a decade.

So what does that mean for Washington? Can a budget of this size truly reflect our values and move our state in the right direction?

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