Sunday, September 4, 2011

Jobs, Jobs, Jobs

I was recently in my car listening to one of those personal finance shows on public radio on a day when the Dow dropped 250 points due to a weaker than expected jobs report. Given that the news about the disappointing jobs report was being replayed every 30 minutes, the show’s host said in jest to the guest being interviewed that he would try to get through the interview without using the word “jobs.” Needless to say … he failed miserably.

Public officials of all political stripes now appear to have a renewed focus on jobs, as they are coming to realize that the term “jobless recovery” is nothing but an oxymoron. You simply cannot have a full economic recovery with 9 percent or more of your workforce sitting idle and unemployed. At the same time many politicians are acting schizophrenic in deciding what they want our government to do. Some point out forcefully that government does not create jobs … the private sector creates jobs. Yet without taking a second breath they are quick to chastise the government for not doing enough to create jobs. Only in politics can such contradictions make sense.

So now that it’s official that jobs will be the central focus of our economic and political debate between now and the 2012 elections, I thought I might offer my take on the matter. Below I have outlined two simple principles that comprise my thoughts on stimulating a full jobs recovery:

Principle # 1 Every Job Counts: Our economy is comprised of jobs in the private, public and nonprofit sectors and they all are important to our economy. A worker in the private sector making $40K per year pays the same income taxes, property taxes and affects consumer spending the same way a government worker earning $40k. And a job layoff in state or local government affects the unemployment rate the same way a layoff in the private sector does. So if your priority is getting the workforce back to work understand that ALL JOBS COUNT. Accordingly, political efforts designed to directly or indirectly reduce the size of the public or nonprofit workforce may yield some other benefits, but it will certainly work counter to and slow down the recovery to full employment. As I noted a few months back it’s like dancing the Cha-Cha, taking two steps forward and one step back.

Principle # 2 The Demand Curve Drives Jobs: For decades state and federal governments have tried gimmick after gimmick to encourage private businesses to create more jobs. These include tax credits and various forms of tax relief, de-regulation, tax increment financing, low-interest loans … the list go on and on. Former Governor Pawlenty was proud to call his JOBZ program “tax increment financing on steroids.” The truth is that most of these schemes have had limited success in creating long-lasting jobs and they create other economic inequities that are more problematic in the end.

Of course the rationale behind these programs is the belief that if a company has a stronger bottom line it is more likely to create a job; but in many ways this is a false premise. Creating a job is not an act of generosity, charity or a quid pro quo for a government tax break. Rather creating a job is a rational business response to changing business conditions. When the demand for your goods and services exceeds your capacity to satisfy your customers’ needs, you expand your workforce or risk losing customers to your competitors. Simply put, you can give the owner of the local car dealership all the tax breaks you want - heck - you can eliminate his taxes all together. But unless more people come through the door seeking to purchase cars or to have more of their cars serviced, there is absolutely no reason for the dealer to create jobs and expand his workforce.

And that is exactly where I believe we are with the U.S. economy today. Many corporations are in fine fiscal health sitting on significant amounts of cash, but the sustained demand that will spur job growth is simply not there. And in an economy where 70 percent of economic activity is associated with consumer spending, increased demand will always be directly tied to the resiliency and strength of the middle class. Unfortunately, many economic indicators suggest that the health of the middle class is not that good. In fact there are many economic indicators that suggest that the middle class has been shrinking for decades as income inequality continues to grow. Average wages have been stagnating or shrinking, and their faith in the stability of home ownership, which has been for many Americans their largest economic asset has been severely tested. So where will this increased demand come from? Not from another tax break!

Recently both President Obama and Governor Dayton have been on parallel tracks, holding forums across communities soliciting ideas on how to grow jobs. So here’s my two cents: stop trying to create another tax credit or other jobs gimmick. Focus on stabilizing and strengthening the American middle class, for they are the true job creators. A strengthened and confident middle class will create a sustained surge in consumer spending and the jobs will take care of themselves.

Thursday, September 1, 2011

A Real All-Cuts Budget

After the recent resolution to the $5 billion budget deficit that ended Minnesota’s 21-day government shutdown, many are still upset that an all-cuts (i.e. no new taxes) solution was enacted. But in reality the resolution was far from what I would consider being comprised of all cuts. In fact, less than half was comprised of real cuts to the general fund, with the remainder comprised of more accounting shifts and borrowing from future tobacco revenues at rates that might turn out to make a pawnbroker blush. If there was any truth in political advertising, one could never call this an all-cuts resolution.

The truth be told, I was a strong proponent of an all-cuts resolution if legislators would have actually invested the time to closely examine all government spending; not just appropriations to the general fund. Sounds confusing? Well the truth is that government spends money in lots of ways. That is why every two years the Minnesota Department of Revenue is required present to the legislature a report called the Tax Expenditure Budget. What exactly is the tax expenditure budget? Well the simple answer is that when legislators pass a law to exempt certain products or groups of people from specific taxes that the rest of us have to pay, it is recorded as a tax expenditure. Some may consider it a special tax break. And when government revenues get tight just like those who argue that we can no longer afford certain programs or expenses, it seems reasonable that the same can be said for special tax breaks; i.e. maybe we just can’t afford them anymore.

Worse yet, while the appropriated general fund budget must be debated and approved line-by-line by legislators and signed by the Governor every biennium, once a tax expenditure is approved by the legislature it remains in place until the legislature intentionally modifies or repeals it. In simple terms, these tax expenditures are on “auto-pilot,” and most of them have been in place for decades without any legislative discussion or review.

So early in the 2011 session facing a $5 billion budget deficit, Senate Tax Committee Chair Julianne Ortman declared her intention to conduct a complete review of all of these tax expenditures, as the state just may not be able to afford some of these tax breaks anymore. But unfortunately such a review never happened, as some in leadership positions argue that because the repeal of a special tax break brings in added revenue it is the same as a tax increase; and new revenues were off the table. A good example was Rep. Runbeck’s bill to eliminate former Governor Pawlenty’s JOBZ initiative that provides income, corporate, property and sales tax breaks to selected businesses locating or expanding in selected rural areas. Whether you agree with this bill or not, the reality is that it was introduced on April 18 and then died a peaceful death as it never even received a hearing.

So how big is this hidden tax expenditure budget? Well according to a 2009 report by the Public Strategies Group, there are over 200 of these special tax breaks that add up to a projected $11.9 billion. Now please understand that many of these tax breaks, such as the exemption of groceries and prescription drugs from sales tax are exemptions that we all would never want to repeal; but over 200? Clearly there are others we could agree that may no longer be appropriate or that we no longer can afford; and repealing these special tax breaks would have helped close the budget deficit without the gimmicky budget shifts and borrowing. For example, we all heard that if we repealed the sales tax exemption on clothing it could increase state revenues by approximately $250 million per year. But did you realize that according to the Minnesota Department of Revenue, repealing the exemption on consumer and business services such as legal or accountancy services from sales tax could yield more than $2 billion per year? We actually shut down the government over a figure less than that! How about repealing the sales tax exemption on newspapers and magazines ($65 million); the exemption on telecommunications equipment ($26 million); or the exemption on farm machinery ($36 million)? In fact these tax expenditures that were written into Minnesota law are seldom discussed or reviewed during budget hearings, but are worth billions of dollars and are long overdue for a complete review.

The bottom line is that during times of budget deficit we all recognize that reduced spending is required and painful cuts must be made; but don’t confuse such cuts with real reform. Real reform is about changing the way our state government collects revenue, spends money and conducts its business. Unfortunately, unless the Minnesota economy gets revved up pretty soon, this most recent budget fix is projected to simply push another $2 billion structural deficit into the next biennium. Now is the right time for legislators from both parties to work towards real tax and expenditure reform. Just as we can no longer afford government spending to be placed on auto-pilot, we can no longer afford all these special tax breaks on auto-pilot either.