A low volume, high quality source from the demand side perspective.The podcast is produced weekly. A transcript is posted on the day of.

Sunday, February 26, 2006

Forecast: Raining Frogs

Last week we reported the grim side of the state's new Six Year Outlook and presented the following chart regarding the mid-term prospects for the state's finances.

For NPI's guess, I used an arcane construction of rolling weighted averages of the state's big three taxes: Property, Sales and B&O. And I said I would be asking the state's Office of Financial Management (OFM) to define why their projection of 5% growth in revenues after 2009 and five-plus in some intervening years is reasonable.

I have the response back from the state. You may want to shield your eyes if technical details are an anathema to your brain's smooth operation.

Irv Lefberg, Chief of Forecasting, Office of Financial Management, sez:

The basis for the 5% revenue growth assumption after 2009 is as follows

Annual long term population growth forecast = 1.3%
Annual long term inflation forecast = 2.5%
Annual real per capita income forecast (productivity) = 2.0%

(sum of above three components)

Rate of revenue growth as percent of personal income growth (revenue elasticity) = 90% (historical average)

Revenue growth = Elasticity X Personal Income growth = 5.8% x 90% = 5.2%. We rounded it down to 5% for the six year outlook.

Please note that the revenues referenced in the six year outlook are General Fund State revenues only. Federal revenue is not part of the projection. [Which eliminates my conjecture that federal moneys were part of the strong growth assumption - a.]Historically major taxes have growth faster than 5% annually.

The official state economic and revenue forecast for the 2007-09 Biennium, produced by the Economic and Revenue Forecast Council, assumes a slowdown in the housing market. Including the slowdown, they also forecast revenue to grow at about 5% annually.

Please call me if you have additional questions.

I will be calling you, Irv, because there's some difficulties.

The historical average of taxes over the ten years 1995-2004 (which I used, since they were at hand in the Tax Reference Manual) was not 5%, but significantly below 5%. To wit, 4.1 for Sales, 3.5 for B&O, and 3.6 for Property. While Sales is twice as important as the other two combined, 4.1 is not 5, and the last time even the Sales Tax saw plus-five was in 2000. Beyond this, the Eyman initiatives have cut us off from historical trends, so looking backward at them now is a bit like looking through the rear window when you're driving. Not safe.

Second, while personal income is a good thing to mark from if you have a personal income tax, we don't, and we are not likely to get one soon, so maybe we'd better use something that tracks our kind of tax system better, like median income. Median income is stagnating, even while total personal income is going up, because a few at the top are doing very, very well. ["Revenue elasticity" seems to be "kinda" term. It's kinda close. Maybe it's standard. Irv would know better.]

Thirdly, the 2.5 percent inflation. We have no idea what inflation will be. It depends on energy prices, Fed policy, and whether the rest of the world will keep treating us nice. Wouldn't it be better to just figure things out in real (inflation-adjusted) terms, since inflation is built in to both expenditures and revenues? Unfortunately, we don't do it that way. I need to ask Irv about that. But in OFM's balance sheet, we seem to assume different things with regard to inflation depending on which side of the ledger we're on. On the Expenditures side we assume 2% adjustments for state employee COLAs. On the Revenues side, according to Mr. Lefberg, we're hoping for 2.5%. Nice work if you can get it. Point five percent can be $75 million or more a year.

There's more, of course, but what is fascinating to me is like filling one's head with cement to others. I'm trying to liven it up by throwing chairs at Irv, but witnessing disputes between economists always end up like watching fish wrestle.

Saturday, February 25, 2006

It may be Triple A, but it's the only game in town

Yes! I was accepted for the city services tax tacks ... er... task force! (We're still going to change the name.) This is like the only thing happening in the state in the realm of tax reform. I got a call informing me of my appointment along with an invitation to attend the Council meeting where they would be passing the resolution. It was quite the event.

The eleven of us arrived to a lukewarm greeting outside the Tacoma Municipal Building. Thirty or more picketers were crowded around the front door, union members not happy with a zero COLA and other elements of a contract proposal.

Inside, however, it was much warmer. There were nice seats reserved for us right up front in the Council chambers. We got to chat and exchange cards with each other and some of the Councilmembers came down to say hi. It was also tactful of them to put us first on the agenda and they had the grace to say some nice things from the dais into their microphones about our willingness to confront the daunting problems ahead and the seriousness of the mission and so on. Some of it sounded like encouragement for a suicide squad. Then we stood and introduced ourselves, and as a group turned to nod to whatever people might be seated behind us.

On a normal Tuesday at the Council meeting there are fourteen people in the seats, eleven staffers there for questions on ordinances and three citizens to take advantage of the open mike and free television exposure.

Imagine our surprise when we discovered that instead of fourteen, the place was packed. All those picketers and their families were now inside, holding their signs and looking at us. And they were happy to see us, too! I won't say they cheered or carried us from the room on their shoulders, but I do think it was more than polite applause.

Only later did I reflect that all those nice words from the Council may have been directed as much to them as us. Stressing the dire situation of the city's finances might have been a good way of softening up the opposition.

In any event, somebody indicated that we could leave if we wanted to, and we did. We congregated in the hallway outside, but pretty soon raised enough ruckus that the sergeant-at-arms came out and asked us to move along. We could show those union folks a thing or two.

This effort in Tacoma is just the first of many across the state, as cities get desperate enough to mention the "T" word (and I don't mean "task"). Eighty percent of Washington's municipalities face as grim a prospect as Tacoma, or worse. Many have had to make severe cutbacks already. And this is supposed to be a strong economy.

People do not realize the seriousness of the problem, but just as with the state's revenue picture, the light at the end of the tunnel is an oncoming train. Neither do people appreciate the importance of the services of state and local governments. These are not the accessories to our economy, but the frame, wheels and lubrication. You can't buy these out of the tip jar. Nor are they expendable. And they are good for the economy. Schools, roads, health care, police, fire protection, courts and the rest are "made in Washington."

We are lucky to have trade-related megamanufacturers like Microsoft and Boeing and Agriculture in our state, but even so, it has taken historic low interest rates and record borrowing to generate any job growth at all. Record personal borrowing. Record federal borrowing. It is not going to last.

We've got to come to some resolution of the problem of funding these most basic needs before the situation gets out of hand. Our new city manager in Tacoma has bailed us out with some skillful reorganization. At the state, the new governor is holding on with admirable determination to what little surplus she can find. We have about one more year. It's time to get to work.

Monday, February 20, 2006

6-Year Outlook sees General Fund deficit

While the short-term state budget got another $160 million bump last week, the longer term is not so rosy, particularly if we apply some realistic assumptions to revenue projections.

On Wednesday last, the Office of Financial Management and the chief state revenue forecaster Chang Mook Sohn announced an upward revision of $158.9 million to the current biennial budget. On the same day OFM released its new Six Year Outlook. That report incorporates the latest legislative actions into projections of fund balances out to 2011.

The official numbers put the state's general fund in a $1.5 billion hole in 2011. That's 10 percent of annual revenue. My alternative assumptions deepen that hole to $2.6 billion, 16 percent of revenue. (see chart) And both of us are too optimistic.

Wherein lie the differences? Mine are in the assumptions for revenue growth. OFM sees a 2.2 percent increase in '07, then increases of 5.7, 5.5, 5.0 and 5.0 percent in succeeding years.

I have instead taken a rough weighted moving average of the historic increases for the major taxes -- Sales, B&O and property -- and applied it to the top line revenue number and extended it into 2008 and succeeding years.

For the sake of drama on this very dull stage, and even though some people are answering their phone on President's day, I'm publishing it here before I hear back from OFM. Maybe the burgeoning expenses of health programs come with a federal check. Maybe the inflation numbers make more difference than I think. I'll give you the verdict next week.

The Sales Tax provides roughly one-third of General Fund revenues. Federal grants are slightly less, but still close to one-third. All other taxes and fees comprise the other third. Of this last portion, the greatest contribution, about a third of the third, comes from the B&O Tax. The state's portion of the Property Tax amounts to a fourth of that third. And the remaining revenue sources make up the last ... let's see ... five-twelfths of the third (about 11 percent of total revenues).

All of which means: As goes the Sales Tax, so goes the revenue stream. Sales Taxes averaged a 4.1 percent increase 1995-2004, but the last five-plus percent was in 2000.

Why are even my assumptions too optimistic? First, because I accept OFM's for the first two years. Second, in the absence of regime change, federal grants will increase less than federal mandates. Third, I allow the Sales Tax rate increases of the past ten years into my average as if they were simple increases in economic activity. In fact, the Sales Tax is under downward pressure from Internet sales and will also suffer along with the Property Tax when housing cools off. (It will suffer not only because the purchase of home furnishings will slow, but also from the loss of the construction labor input, which is taxed under the Sales Tax.)

The good news? The next biennium is in balance, thanks to the set-asides from this year's surplus.

Sunday, February 19, 2006

Lesson from the Heartland

It was minus twenty-six this morning. My loaner pickup didn't crank. I am visiting family in a small, snowy town in the upper Great Plains. The truck was supposed to carry me back to the Rapid City airport today. Right now I'm debating whether to drive Mom's car in and let my brother worry about the pickup later. It's supposed to get warmer over the next couple of days. Warm up fifty-five degrees to almost freezing.

A surprising number of people here are right-wing dittoheads. I say "surprising" because many of these people are otherwise intelligent folk. I saw Uncle Bob the other day and talk turned immediately to the weather. I prefer politics, so I said, "Sure, we've had a lot of rain out in Washington. There was a drought. Then we got a new Democratic governor. She declared a drought emergency. It started to rain and didn't stop for four months."

"Now, Al," said Uncle Bob, who was a math teacher before he retired and who recently restored an Allis Chalmers tractor from a pair of rusty fenders and a gear shift knob, "I don't think it was because she's a Democrat it started to rain."

"Well, Bob, you might have a point there. Democrats are competent, but not that competent."

"Ha, ha."

"You know how it is, Bob. They don't even let Republicans call the numbers at your Bingo games."

"Now, Al...."

Here between my brother and my uncle, I have discovered the core vulnerability of the Republican Right. Competence. They got none. Bush listened to years of ideologically heavy speeches and then tried to run the country. It was like trying to drive a plane after reading a couple of comic books. No wonder they're in the ditch.

As it turns out, my brother did expect me to go out there in his insulated Carhartts and start that truck. A cousin was going to drive the pickup back, she could have driven Mom's car, but ... Bro would do (and has done) a lot for me. But this is a right of sibling passage. Again, it has to do with competence. It's a test to see if the city mouse can get it done.

And I did. I was energized by the challenge. It was a bit complicated by not being able to get under the hood because the hood latch was frozen, but I stuck the oil pan warmers on it for 45 minutes and it opened. Got the charger hooked up to the battery, warmers stuck to the oil pan, and here comes the bro. It took him half a glance to figure out I was inadequate. He's out there right now running the charge out of the battery. His starter fluid didn't work, I guess. I wished he'd waited like I asked.

The lesson? A very valuable lesson: Only the other guy is incompetent. If we can get the multiple offenses of incompetence to stick to the Republicans, they will become the "other guys" in the hearts of the Heartland.

Just like right now I am perfectly able to criticize my brother (in my head). At the same time, to him I am still the city mouse, and he is the capable and self-reliant country mouse.

There aren't very many people in South Dakota, so if you want to have a very big family, or even a modest sized gathering, you have to include a variety of opinion. I don't convert any right wingers at these meetings, and us progressives just nod at each other's rants (even my dear old Mom's). The rest of the folks think politicians and their partisans are in a perpetual cat fight, and they talk about the weather or their medical problems. They vote, but they hold their noses when they do. Unfortunately it is these people we have to reach, and if we try to reach them with a line that the Radical Right is moving us quickly to an immoral, authoritarian, corporatist state, we're out of luck.

The correct line is: "These guys are stooges, the Keystone Kops, boobs, grinning boobs." The Heartland may not understand the grotesquery of Guantanamo or the looming danger of an imperial presidency, but they do understand that Medicare is screwed up, the budget is screwed up, Katrina was screwed up, military readiness is screwed up, energy markets are screwed up, et cetera is screwed up. They may not be willing to point fingers at Cheney or Rumsfeld (though they do call him "Dumbsfeld" at Ellsworth, the local Air Force base) or Gonzalez, but they do know when something is not being done right.

In the past, the Republicans have been able to paper over an inability to govern with a consummate ability to run a political campaign. Karl Rove in the Office of Character Assassination has done a particularly good job. A campaign becomes a trial government, and Presidential appearance, staying on message, and appropriate backdrops create a show of competence.

This was the genius of Bill Clinton. He was more ruthless, more capable, a better campaigner, and he kept the pressure on till their false fronts fell over and the shantytown behind was exposed for all to see. Clinton would win again, if we'd let him.

Inept Bush jokes. Gotta have 'em. For the Heartland.

Thursday, February 16, 2006

Now back to the real world

John Edwards was not impressed that Big Oil will pay no (zero) royalties on $65 billion in oil and natural gas pumped from federal territories. Edwards is chief lobbyist and apologist for the special interest group lately identified as “those lacking a pot to piss in.”

The recent Democratic VP candidate is a friend of mine, I guess. I get “Dear Friend” e-mails from him quite regularly. And he always signs them, "Your friend, John." As close as we are, though, I doubt he would have supported my recent rant on the need for high energy prices to rectify the massive market failure that subsidizes global warming.

“Theory is good,” I can hear him saying, dripping with diplomatic North Carolina charm, “so long as it can be converted to nutritional sustenance.”

Still, he gets compassion. And he understands how energy prices are built in to all prices. On the president's plan to give up $7 billion in royalty payments for the exploitation of federal lands, he draws the appropriate context:

“Every day, I meet families who are struggling with high gas prices and soaring home-heating costs. Every day, prices go up for the things we all need because the price of fuel goes up. Meanwhile the big energy companies are hitting all-time record high profits. So why do they need another giveaway. They don’t. And they certainly don’t need another giveaway while oil prices climb to $70 per barrel.

“This boondoggle is unfolding just as the Administration is pushing for its budget – an immoral document if I ever saw one. Once again, their budget lavishes tax breaks on millionaires while it slashes programs that help the most vulnerable among us. ... 300,000 pushed off food stamps; 19,000 fewer children will go to Head Start; and low- and moderate-income people will lose $36 billion in Medicare.

“Everything people need to get ahead, let alone get by, is on the chopping block – student loans, vocational training, child care, Social Security benefits for widows, and more.”

But John, if I had my way, we’d specify what prices the oil companies could charge, make them produce on a sustainable schedule, and collect enough off the top to finance all those programs and more besides. But the price. The price has got to go up. You've got to think long run.

"As your favorite economist used to say, Al, 'In the long run we are all dead.'”

It’s Alan. I guess we’re not that good of friends.

Tuesday, February 14, 2006

The strategic price of gasoline

Governor Gregoire ought to go after Big Oil the same way she went after the tobacco companies. The cases are directly parallel, except when when this patient dies, we all go with her.

For years Big Oil has sponsored quasi-science and employed politicians such as the current president to delay and disrupt action on global warming. I'm willing to bet that, unless they’ve been destroyed, memoranda exist in the files of these companies which display the same cynical disregard for science and for human life we saw with Big Tobacco.

Costs of global climate change are incalculable, but a judgment of any scale against Big Oil would at least double the price per gallon.

Those who think the price of gasoline is too high are like cattle complaining about the discomfort of a boxcar carrying them to slaughter. The price is actually too low, and it is going to the wrong place – the vaults of megacorporations whose business it is to prey on the demise of the planet.

The pump price includes the costs of extracting, refining and distributing the product – getting it to our cars – plus the taxes that build roads without which the product would be useless. The pump price does not include the tremendous costs of pollution, greenhouse gases, and of course, the geopolitical strife inherent in securing the resource for the megacorporations.

This is a massive failure of the market.

Price is the key to getting anything done. [I am particularly frustrated by environmentalists who prefer bureaucratic regulation to price adjustments or direct government intervention.]

Oil prices do not include all costs, not by a long way. We are subsidizing the consumption of oil. Price determines consumption. It is ludicrous to subsidize the poisoning of the planet, but that is what we do.

Stability in oil prices is more important than the level of prices. When prices bounce up and down, people get stuck with SUV’s when they want hybrids. Businesses which count on one cost of manufacturing or distribution in their planning phase get stuck with a different cost at production time. Alternative energy projects are denied financing because of the risk. If energy can be produced at the equivalent of $2.25 per gallon, for example, and the price drops to $2.20 instead, very little of the alternative will be sold, and this only to granola eaters. This is a problem with biodiesel, in particular, but for all alternative energy. (How do you manage a stable price without direct government intervention? You don’t.)

High prices will ultimately be better for the economy, so long as the revenues are directed to a comprehensive energy solution. Why would that be? First, again, higher prices discourage the consumption of fossil fuel and prolong the useful life of the planet. Higher prices make alternatives more economically attractive. Alternatives involve technological development and investment; many would be produced domestically. Good. All good. High prices which serve to inflate Oil company profits are not so good, so without the stipulation that revenues be directed to a comprehensive energy solution, the price level by itself produces a far weaker and less reliable benefit. Plus we continue to send money off to Saudi Arabia and to finance wacko Texas oilmen.

A rational price is the key. Without it our market economy will march along oblivious to its epic miscalculation and down the road to our own destruction.

Sunday, February 12, 2006

Forecast: Iraq graft will top $10 billion

Because their is no Congressional oversight, more than ten billion dollars will be lost to direct corruption in Iraq. This is not a facile prediction, nor an easy one. It is based on the first law of economics, "When the cost goes down, people buy more."

In this case, the cost of corruption is very, very low. A handful of contractors and a few military officers have been charged in some small-scale operations. Rumsfeld points the finger at the Iraqis, but the failure to prosecute American corporations, the construction and security contractors, will match the Iraqis and add a factor of two.

I am not talking about incompetence, which must be rampant for the infrastructure to still be down after all these years. I am talking about war profiteering on a scale never before seen in our history.

Democrats controlled Congress and the Presidency during the Second World War. Virtually the entire economy was dedicated to war materiel and support. But it was a Democrat in the Senate who led the investigation and exposed shoddy manufacturing, crooked contractors, procurement waste, and more. His committee went outside the lines of traditional politics. Its investigations were thorough, vigorous and completely out in the open.

Their findings embarrassed Congressmen and ruined dishonest businessmen. But he was not muffled by his party, nor by president Franklin Roosevelt. Instead FDR drafted him as his running mate. The head of that Senate committee was the junior senator from Missouri, Harry Truman.

We will never see integrity and energy like that with this president nor with this Republican Congress. Coverup, secrecy and disinformation are the hallmarks of the Bush administration, both here an abroad. Ten billion dollars is not a modest number -- ten thousand millions -- and I could easily have aimed lower. On the other hand, it's not the only pot of money in the running and we will be there a long time.

Instead of defending what is obviously a speculative number, and one you may have a better line on, I'd like to draw a further contrast between this reconstruction effort and the Truman era, namely the extremely successful reconstruction effort after World War II, the Marshall Plan.

George Marshall, the "great man" as Truman called him, twice Time's man of the year, once during the War and once afterward, constructed a European-based rehabilitation of Europe. He did not impose US companies and workers to rebuild Europe for them. Europeans identified the needs of their regions, organized the projects, ran the projects and depended on the US for technical assistance, material and machinery, and food.

The process organized and employed a devastated population and co-opted a strong anti-capitalist movement. (Much is made of the fact that Europeans, unlike Iraqis, have a history of democratic government and thus were more tuned to American efforts, but the Marshall Plan engaged the communists and the whole society in its own reconstruction. When you hear "Social Democrat," think in terms to their direct forebears, the communists.)

A Marshall Plan for Iraq would look nothing like the corporatist boondoggle we are now confronted with. At a minimum, such a plan would identify the credible political and industrial leadership in the domestic population, put them in charge, and provide the material and technical help to do what they identify as needing to be done. By empowering labor, technocrats and business types in this way, we at least provide a basis for stability, a stability which cannot be found in our current focus on political/religious leaders. The employment of the people in productive enterprises would be the biggest step possible toward peace and stability.

The problem of such a scheme lies not in the risk of further corruption, it lies in the probable partition of the country that would result, or at least a very loose federation of Sunni, Shiite and Kurdish states. The alternative to partition, unfortunately, is .... well, there is no alternative, is there? The outcome of the current mess is partition, whether before or after a subsequent civil war.

The outcome is not ours to control, and is not going to be what we might choose, but it would be far healthier, both in terms of the society's base and of that society's political independence from surrounding nations, if it came as result of our help to the people rather than in spite of our frustrated manipulation of them.

Of course, had we listened to George Marshall, we wouldn't be in this mess today. He adamantly opposed the establishment of a Jewish state in Palestine. Perhaps we should listen to him now, rather than continue to model corruption and hypocrisy for the world's people, even as we self-righteously declaim on the virtues of democracy.

Friday, February 10, 2006

Sonics Redux

The Sonics are setting up the town and the legislature for a $225 million renovation to Key Arena, to be paid for by the grunt taxpayers. It would be one thing if this were for the benefit of the average fan, but the average fan can't even afford parking, much less a ticket.

No, this whole thing for the benefit of high-rollers. The owners are high rollers, the players are high rollers, the improvements are for suites for guys who averaged $100,000 in tax breaks from George W -- that's a high roller (and they don't pay anyway, they charge it off to the company which deducts it from taxable income).

But we have to do it, Ollie, so they can buy the best players and coaches. There's competition from the Seahawks and Mariners who have this fancy stuff and now the guys with dough want it at the Arena. The Sonics might run off to ... ah ... Kansas City. Besides, you want us to win the championship, don't you? Our Sonics.

Right. Mr. Sonic is coaching the Portland team because they gave him a $27 million contract. If not for a salary scheme that encourages it, a lot of these multimillionaire players wouldn't be here either.

It happens year after year. Here or somewhere else. Pay up or we'll leave. These national sports leagues extort new facilities for the benefit of their players and owners. They may have psychological needs that make them thrive on the competition of the game, but they never really lose. The only real losers are the cities and their taxpayers. The race for the championship is a one-up game, a race to the top for the team, but a race to the bottom for the city.

The Sonics say they are losing money, but if they sold the franchise today, they would recoup every penny they've spent and pocket a bundle besides. I went over it in a post last year.

It's time for a National Basketball Cities Group, a cartel of cities so they can talk on the same level to the NBA owners and the NBA Players Association. Competition on the court is fine, but competition between cities on who can give away the most money? No. The group could set a standard for the support they're going to give these teams. If the teams didn't like the standard, let them build their own arena. What a concept. If they moved, that city could offer the arena to a team in the other league for free.

You've got it all wrong, chile. There is no other league. The other league is the CBA. Guys there don't make but one percent of what they make in the NBA.

No other league? Man, that looks like an opportunity to me.

Thursday, February 9, 2006

Who is counting the bodies here at home?

The AP counts the Americans who die in Iraq and Afghanistan, but is there anyone who counts the lives lost to the Bush incompetence here at home? With the Hurricane Katrina fiasco with Michael Brown at FEMA, the elimination of the long-promised but never delivered help on winter heating bills, the Medicare Part D debacle (overseen by Mark McClellan, brother to presidential spokesman Scott McClellan), and now the Scroogian budget cuts, Americans are making sacrifices not for principles or ideals, but for incompetence, elitism and cronyism.

These are real people, real lives, real suffering, and they deserve to at least be a number on a list somewhere, and not swept under the rug with the forgotten promises and pyrric victories.

All the damage is not accidental or a result of ineptness. Much of it is intentional, driven by ideology and hubris. CBPP reports that the president's budget cuts for 2007 are only the tip of the iceberg (or the fin of the shark, since the icebergs have melted). OMB omitted explicit information about the out years, those after 2007, from its budget documents, but CBPP obtained Administration computer runs that allowed it to piece together the story.

Relative to OMB's 2006 baseline:

Veterans programs would be cut $10.3 billion over the next five years, primarily health care services, a cut of 13% in 2011.

Energy programs touted in the state of the union get a big 29% cut by 2011

Environmental and natural resources cut by 22%, $28.1 billion over five years.

Education. Higher education cut 20%, K-12 and vocational education cut 13%, including community college funding and job training.

Health programs down 13% by 2011, a cut of $21.9 billion over five years.

And so on. Cuts in programs like this, also hurt the economy's base. These are economic depressants, or whatever the antonym to stimulus is. These cuts do not significantly alter the projected deficits, but they do give some wiggle room for more tax cuts.


Sunday, February 5, 2006

Rainy Day Fund

"First, assume the can opener," said the economist to his fellow castaways. The motley group was tranded on a desert island, surrounded by miles of open sea, but blessed with the unlikely good fortune of having cases of canned goods float in on some wreckage. Unfortunately they had no way to open the cans. All the suggestions were messy or impractical, like hurling cans from atop the palm trees onto rocks or gnawing them open with their teeth. The economist penetrated the situation with logic.

You might say those of us who advocate a rainy day fund are like the economist assuming the can opener. We call for it when we need it, but forget about it when there is a surplus. (You might say that, I don't.) Here we have a budget shortfall. Wouldn't it be nice to have a rainy day fund so we don't have to raise taxes. Sheesh, of course, a rainy day fund instead of taxes. A no-brainer. So we set about creating a rainy day fund from our imagination. See how practical we are?

I was reminded of this when I was visiting Bellingham last weekend [to see a brilliant student production of Jean Anouilh's Antigone directed by Emily Harvey, a junior in the theater program there]. I stayed over with some friends, and the next morning opened the Bellingham Herald and found a piece by Dick Startz of the UW's Economics department.

Professor Startz does better than most. For example, he understands that job growth is the most reliable general-purpose economic indicator. He recommends not allowing a raid on the rainy day fund unless job growth is below 1%. That's fine.

But, a reminder: We don't have one to raid. Professor Startz implicitly suggests constructing one from the current state budget surplus. But as I've said here before, this surplus is really only a temporary cash flow anomaly. The "plus" now is from the housing boom. It will be a minus later, probably carrying over the same exclamation point.

Governor Gregoire has the right idea. Her $900 million in reserves does not constitute a rainy day fund, but a simple set aside for next biennium. Mandatory expenditures await us there that will swallow up the $900 million and come looking for more. (Did you see her State of the State speech where she was gesturing up and down to demonstrate the roller coaster. Made me queasy just to watch it.)

Now, on this stage, your humble servant is going to do what the economist on the desert island could not, what in spite of his endowed chair and many honors Professor Startz could not. I am going assume a rainy day fund that could actually come into being. Now. Today. Present tense. (Could. I'm not saying should.) Ready?

Debt-financed! Ta-da!

Yes. We borrow it now before interest rates get out of sight, and pay it back in good times.

Why is this better? One: We could have it when we need it. Two: Reducing state spending to fill the fund in good times, even if it were politically possible, would depress economic activity without a good reason. We might be forced to use our rainy day fund before we could even admire very long. State spending and services are key supports to our economy. The idea that government is a vampire feeding on the vigorous private sector economy is nuts. It is a story repeated often enough to gain currency among the easily persuaded, but it is still nuts. Three: It's cheaper to borrow in bad times. Not so much competition.

Objection 1: We cannot borrow like that. The state is required to balance its budget.

Wrong. Washington has a limit on the percentage of the budget going to debt service, and traditionally this has been reserved for capital construction bonds. But there is no constitutional requirement that the budget be balanced. (If you're about to rant about spendthrifty liberal pinko queers, check the federal budget deficit and your party affiliation, or log onto Tim Eyman and the Renegade Right. Then come back for a little liberal responsibility.)

Objection 2: You assume we can pay it back. With the current revenue architecture, that day will never come.

Touche. (Remember I said could?) It doesn't make sense to create a fund if we can't pay it back. And if you don't like debt financing, you're out of luck anyway, because we will never have a surplus big enough to fill such a fund. Our current revenues are barely adequate this year. They won't be in the next biennium and in all biennia thereafter. Budget drivers like health care costs on one side and eroding revenue from Eyman, et al, on the other, will open a gap that will never close.

Objection 3: We have no idea how big a rainy day fund should be. Downturns typically last more than a year. We want to get off the roller coaster, not just delay the drop.

Ouch. That's right. Some national groups have suggested five to fifteen percent of expenditures is a good size for a rainy day fund, but that not much more than an arbitrary, generalized guess. Individual states have idiosyncratic tax schemes and will thus have different variability from high to low. They have different economies as well, and different expenditure patterns. (The state with the biggest rainy day fund as a percentage of expenditures is Alaska. Alaska subsists on oil revenue, completely stable, not requiring any rainy day fund at all.)

I once calculated on the back of an envelope that Washington would need about 85 percent of its annual operating budget to completely iron out its historical ups and downs. That's $20 to $25 billion. Much more than the $5 billion that is most commonly talked about. Also much more than we could possible borrow for such a purpose.

But there is a concept that was once used at the federal level (when they knew what they were doing). It is called the "full employment budget." You may remember "structural deficits." Structural deficits were calculated from what revenues and expenditures would be at a level of "full employment," assuming away the current actual economic situation. This revealed the underlying adequacy of revenues (or excess of expenditures, if you like). The state of Washington has a structural deficit. A "structural budget" could tell us not only what size a rainy day fund should be, but would help us know what the baseline level of revenue should be.

A rainy day fund is only practical in the presence of a balanced and adequate revenue architecture -- the ultimate can opener.

Friday, February 3, 2006

The Globalization of Christine

Apparently I alone was disappointed in the Guv's trade missions this fall and winter. She liked it when she flew into China on a Boeing jet. She was impressed when she was driven past an office tower with Microsoft on the side. Then there was a Starbucks across the street from her hotel. Very cool. But best was when nobody in China had a problem distinguishing our state from the nation's capitol. In their eyes Washington is "like a small nation to itself," she said.

At some point in her travels she sat down with Flatworld Friedman and was wowed by the tremendous changes astir in the world, revolutionary changes. The bottom line is education, infrastructure, keeping us competitive in the global marketplace, keeping our citizens. Just wait till his next book.

Washington is a player. Christine is a player. The global industrial giants and brave new industries are players.

We do not want to be a player. Being a player means there are people in the stands. Those among us who are not endowed with the intellect, resources, or interest in the latest technological movement are just left to watch, sad victims of our own inadequacy. This includes continents full of people. It includes teachers and nurses and bus drivers, who are just quasi-players, assistant players, would-be players.

Friedman's Flat World is sandwiched between grotesque mass poverty below and a collapsing environment above. (You'll remember Friedman. He is the NYT columnist who was a major intellectual apologist for the Iraq invasion. He's given up on trying to explain how that misbegotten adventure might have turned out okay, if only.... Now he's gone back to his stock and trade in globalism. Friedman is not an economist. He took one class in college, and I'm not sure he passed it. He is a journalist).

No doubt this high-tech Flat World is going to be very profitable for some, but it is not going to be satisfied with Washington (state) unless we keep upping the ante. Outsourcing and developing new crops and revolutionary drugs and information architecture are in their most essential essentialness portable. Investment will turn a profit, and that profit will go wherever it's given the best deal. Citizens there can man the drive-up windows or trim the hedges or whatever.

Gregoire should remember her fight with the tobacco companies. Corporations have no loyalty except to themselves. A basic amorality is built in. Look at Boeing. Headquarters in Chicago. Look at North Carolina. Gutted its own business taxes and in so doing gutted them for every state. Phooey.

China is the big deal now, but where are they going? They make stuff for us, and we want to make stuff for them. They add the equivalent of two New Englands to their power grid every year. They pump untold tons of pollutants into their environment every day. Their rivers are sewers. Their aquifers are dropping like the drain plug has been pulled. They make everything cheaper because they're discounting the future as much as we are and they're paying their people less.

The technology we need is for clean water, clean air, rail and schools and roads for those who have none, for a transportation scheme that does not suck the life out of the planet, and for an energy technology not based on poisonous gases. Not just in Redmond, in Africa. Let's leave nobody in the stands.

Thursday, February 2, 2006

This is the good stuff

The connection between Kitzhaber and Gregoire on evidence-based medicine was confirmed recently in a hearing before the House Appropriations Committee. John Kitzhaber is former governor of Oregon who is mounting a full-scale promotion of organized, sane health care. Chris Gregoire is the new Washington governor bent on making changes that make sense.

The podcast link to that hearing is here. The Appropriations Committee does it in other media too. It's great stuff. It is also leadership, figuring out where we need to go and setting about getting there.

I guess I'm behind the curve on this. I didn't realize drugs weren't measured against each other to gauge effectiveness. They're measured against a placebo. Part of evidence-based medicine ("evidence of effectiveness and benefit") is setting up comparisons between drugs and drugs or drugs and other procedures.

Surgical procedures are analyzed for effectiveness. The gastric bypass, for example, was determined to be effective, but only for the morbidly obese.

Providers are judged, too. If one clinic has a significantly higher success rate than another, why are we not funneling state business to that clinic?

What makes most sense is having independent analysts examine the material, the studies. People without a horse in the race judging providers, discounting biased trials and phony findings. They're doing this at the Oregon Health and Sciences University. John Santa from that school's Center for Evidence Based Policy was there to testify.

While Kitzhaber has said, "It's too late for incremental change," a good first step is getting state capacity in this area. State Health Care Authority administrator Steve Hill estimated 25 to 30 percent of the $4 billion spent on health care annually is wasted (compare to $350 million per year total budget for projects under the 9-cent gas tax). Only a fraction of this waste is in administration, the rest is "overuse, under use, and misuse in health care treatment."

Administrative savings in the health care field can be found aplenty, too. But don't look at government programs. That address is Private Corporate Health Care Insurance Company, Inc. For a good look at the enormous waste of private sector providers, see the folks at Health Care for All - Washington