Sat, 31 May 2008

Investment, fine. But in what?

Last week, Governor Carcieri convened a meeting of the newly-reconstituted Economic Policy Council to ask the question, what's going on with our economy and how can we make it better? He was quoted in the Providence Journal this way:

The state is "making some real progress," he said, in making large investments in its infrastructure. He said that the relocation of Route 195, the rebuilding of the Washington Bridge, as well as other major projects amounts to a total investment of $5 billion to $6 billion over four to five years.

This is an impressive figure, but a bit less so when you consider that not a dime of it has gone to create new capacity.

We have the I-195 and Sakonnet River bridge projects, both intended to replace bridges that already existed but needed repairs. There's also the highway access to Quonset Point, designed to replace a road with just one stoplight, on which people routinely traveled at 50 miles per hour. This new road shaves about a minute or so off your travel time to Quonset. Then there's the new freight rail to Quonset. There already were rails, but new and taller freight cars and a busier Amtrak schedule were in danger of making them obsolete. We are making the Washington Bridge wider, and that will be of comfort to the commuters of Barrington and Rehoboth, but to whom else?

In other words, all that money went to defending the current capacity of our transportation system, not to creating anything new. When it's all finally done, exactly what will you or any business be able to do that you couldn't do twenty years ago?

The whole point of investment is that when you're done with the investing, you can do more and better stuff than you could before. If that's not true, you may as well be digging holes and filling them in again. Six billion dollars isn't chicken feed, and it paid a lot of construction workers, but what did we get for it?

When you talk to people about the economic impact of investment, you'll often hear World War II used as an example. It was the government spending of WWII that pulled us out of the Great Depression, you'll hear. I heard that in my first economics class. That's also where I learned that economists love to talk about the importance of big aggregates: the aggregate demand of the US is all the goods we buy in a year, the aggregate production is all the stuff we make. But hidden in those aggregates are some pretty important details, and we overlook them at our risk.

Government spending on WWII and the Cold War pulled us out and kept us out of the Great Depression, but look at what that spending did. Spending on aircraft created a new domestic aviation industry. Spending on nuclear energy created a new nuclear power industry. Spending on high-speed electronics and communication technology created a new electronics industry and ultimately created the computer. All this spending, and much more, was investment that transformed our lives, and the nation. It's no wonder that the 1950's were a boom time in the American economy.

According to the textbook macroeconomic analysis, however, all that really mattered was the aggregate level of government spending. The theory is that high enough spending will spur investment, even if the spending isn't investment itself. But to imagine that market-driven investment would have been as transforming is missing the trees for the forest; the details are important. We might have created minor improvements to existing products, or invented self-freezing popsicles instead. Unfortunately, to a typical US-trained economist, government spending is government spending is government spending. The bottom line is all that matters, and don't bother us with details.

And this is why someone like our Governor can boast about spending $6 billion on roads as if it will make an ounce of difference to our economy over the long term. Sure that's a lot of construction crew salaries, but what else did it get us?

A couple of times a week lately, I find myself navigating the high-tech canyons of Kendall Square, in Cambridge, hard by MIT. As I walk down Main Street, I'm surrounded by research institutes and technology companies of every stripe. Huge new buildings have sprung up (and are springing up) since I last spent much time there, 15 years ago. The growth and activity are nearly breathtaking. MIT is a phenomenal place, in many ways, but one thing it isn't is an accident. MIT happened because people who cared about science and technology invested time and money to make it happen.

Here's what they didn't do to create MIT: skimp on the library's book budget; encourage the early retirement of dozens of faculty who will be "replaced" with adjunct faculty Ftwithout research funding or even a campus presence; fail to support research faculty between grants; close departments that weren't making "enough" money; and build shiny new buildings without a commitment to staff them. But we do all that at URI. Our university could be an economic engine -- check out the industrial area near the oceanography school sometime -- but we need to support it.

So when you hear the Governor boasting about our investment in roads and bridges, think to yourself what our state might be like had we just patched those bridges and used the leftover money to invest in a real transformation of our higher education. At the same EPC meeting, Robert Carothers, the president of URI put it best:

"Last year, we were 50th in the nation in investment and research. We were the only state in the nation that didn't increase higher education funding from year to year... No amount of smooth talking makes those things go away."

00:32 - 31 May 2008 [/y8/cols]

Fri, 23 May 2008

Asphalt vs. Milk? Which side are you on?

I'm writing this on the kitchen table, and as I look to my right, there's a carton of Rhody Fresh milk. My family drinks it because we like the idea of our food coming from as close to home as possible, and because we like to support local businesses if we can.

This isn't just a commercial plug; it's a serious story about agriculture. There are many fewer farms in our state than there used to be, and some of us think that's a problem deserving more attention than it gets. The way our towns levy taxes is putting farms out of business. As a farm, an acre of land is worth much less than it is as a house lot. Lots of towns have agricultural zoning, but few tax agricultural land at anything less than the value it would have if divided up into house lots.

The predictable result is the steady loss of farms in the state. Since World War II, we've lost about 80% of the land we had in agriculture, and most of it has been built on.

If, like me, you wonder where the food will come from when all our land has houses on it, you might find this worrisome. If, like me, you remember when a place called "Butternut Farm" was more likely to grow food than McMansions, you might also be worried. Especially if you liked it that way. (And, in case you're wondering, agriculture is still a $100 million piece of our state's economy.)

There is a solution, and it's to purchase the development rights to this land, and deed them to a land trust. Land without development rights can never be built on and so is worth less (though it's not worth zero), and it brings the taxes down closer to where farm income can cover them. In 2004, a DEM bond issue provided $15 million to purchase farmland development rights (among other things), and this has been the engine behind the Farmland Protection Program, which is what DEM calls it.

Typically, the state funding represents less than a third of the funding necessary to secure the rights, but it is also commonly the first funding that makes the rest possible. After that, it's up to towns and local land trusts to scrounge what they can. In other words, it's a pretty good deal for the state, allowing us to leverage a lot of private (and some federal) funding with a minimal investment. It's popular with towns, too. Sounds pretty good? Too bad. The program appears to be another casualty of the 2008 budget fiasco.

According to DEM, that fund is down to a balance of about $70 now, and as of January there were 23 more farms approved for preservation, including Schartner's farm in Exeter and North Kingstown and Harmony Farm in Glocester. Another 19 farms have applied, and are awaiting evaluation by DEM. The Governor's budget did not include even the possibility of a bond referendum on the subject in the fall, and there is no obvious support for it in the Assembly quarters that matter. As of last week, 20 towns had endorsed the idea of putting such a referendum on the ballot this fall, but that may not be enough.

Contrast this with the Department of Transportation. Over the past 20 years, DOT has borrowed itself into a hole that would laugh at the puny attempts of my thesaurus to describe it -- if it could laugh. Instead it just yawns wider and wider each year. And yet, the Governor and Assembly show no sign of wanting to begin to close this hole. They're doing their part to make it bigger still. DOT is planning to borrow another $45 million in general obligation bonds next year -- just about as much as we'll pay in interest on past borrowing. If this sounds like using one credit card to pay off another, it is.

And that's not all. We'll also borrow another $75 million in the "GARVEE" bonds, which are to be repaid with future federal highway funds. Sadly, the repayment depends crucially on the next round of transportation funding being as large as the last. Congress has its own deficit problems, even despite the President trying to keep the cost of the war out of the budget. If our allocation of federal transportation money declines -- which seems likely to me -- we're in for a world of woe. For the sake of your children's schools, the prospects for health care reform, and everything else your state government does, you should be worried that Governor Carcieri has bet a lot of our fiscal future on Congress

So this is the way it works. We have two programs financed by debt here. One is a department that has, through out-of-control borrowing, acquired a debt load so crushing that it can't afford to fix I-95 in Pawtucket, one of the most heavily traveled bridges in the state, and an even bigger disaster looms ahead. The other is a tiny part of DEM, and has been able to parlay a modest amount of borrowing into the preservation of thousands of acres of farmland -- and keeping them working.

But according to the Governor and what I hear about House Finance, DOT is going to get everything it wants, including permission to borrow $120 million next year and a bond referendum on this fall's ballot worth $83.5 million more. The Farm program, though, is slated to be scrapped. Asphalt, I guess, is valuable. Corn and milk, not so much.

If you like the way this sounds, go ahead and do whatever you were going to do today. If you don't, call someone on House Finance to complain. Rep. Steven Costantino's office (he's the committee chair) is 222-8028, and the House Speaker's office is 222-2466.

23:36 - 23 May 2008 [/y8/cols]

Thu, 22 May 2008

Economics and infrastructure

The Governor convened his economic thinkers to talk about the state's economy. Here's how he was quoted in the Projo:

The state is "making some real progress," he said, in making large investments in its infrastructure. He said that the relocation of Route 195, the rebuilding of the Washington Bridge, as well as other major projects amounts to a total investment of $5 billion to $6 billion over four to five years.

The problem? Not a single dime of that "$5 billion to $6 billion" will actually increase the state's transportation capacity. All of it is to preserve the capacity of existing transportation links (e.g. the train tracks already existed, but changes in train schedules and practices forced the upgrade), or prevent their collapse. The changes to 195 and 95 are in lieu of maintenance, but won't significantly improve the speed of transportation or capacity of the roads. The changes to the Washington bridge will create fewer jams there, but it won't change the capacity of other stretches of that highway, so will likely just move the bottle neck to another spot. The Sakonnet River bridge is just a replacement, so the net economic effect of that will only be to put a few businesses out of business.

So the question is: exactly how are these infrastructure improvements going to improve the state's economy?

Economists talk of infrastructure improvements as important because when they're done, you can do stuff you couldn't do before. But when these improvements are done, we'll only be able to do the stuff we could do before, and no more. Expecting these to have an economic impact is magical thinking. Of course there is the impact of spending that much money in the state's economy, but we could have had those road crews digging and filling in holes for that.

11:27 - 22 May 2008 [/y8/my]

Sat, 17 May 2008

Watching out for inflation, and for the CPI

Headlines the past couple of months have made it pretty clear that we're in for some interesting economic times ahead. But who needs headlines? Most of the important news is pretty clear on any trip to the grocery store. Food prices are up sharply, and since gas prices are mounted in foot-tall numbers on the side of the road, few of us have missed the portents there, either. Medical inflation is high, too.

Meanwhile, the Consumer Price Index (CPI) has been quite low for a number of years, and is only up to 4% now. It may not have much to do with the level of prices any more, though. The government modifies the index from time to time, but lately they've been making modifications that are convenient -- to them.

The value of the CPI is based on a basket of goods, and it's supposed to be comparable from one year to another. The problem is that the goods people buy change. When the CPI was established, cell phones and computers didn't exist, but many now consider them essential. But that's not all. There are lots of other adjustments that are made. For example, because a cheap computer can do more than a cheap one from ten years ago, the CPI economists say the "effective" price has gone down, even if the actual price has not. (And just try to buy one of those ten-year-old models.)

Housing prices are funny, too. The CPI uses "imputed rent" as its measure of housing costs. For homeowners, this is the rent you might get if you rented out your house. But if you don't rent your house, and pay considerably more than market rent for it, as many people do, the CPI doesn't match your experience.

In other words, in adjusting the CPI from one year to the next, there are a hundred little decisions to make. In a world where a President's political success is closely tied to the health of the economy, I'm sure it will come as a great shock to you to learn that in virtually every one of those decisions over the past 20 years, the choice was made that would minimize the apparent level of inflation. This leaves the CPI as a good statement of the official line on inflation, but maybe not so much more.

The result is that measures that are tied to inflation -- cost of living adjustments in labor contracts and pension systems, as well as budget decisions by incurious legislators and town councilors -- fall behind the real level of prices.

Those of us who can recall the 1970's wonder if that kind of inflation is in store. Well, no one really knows, but it's hard to see how it could happen like that now. That is, serious, systemic inflation is caused by rising prices putting pressure on wages which in turn increase prices, and there's a problem with that.

It's pretty clear that rising prices are putting pressure on people, but you can't have a "wage-price spiral" without the wages part. Real wages have stagnated for years, and the truth is that workers in America are in as weak a position as they've been since the 1920's. Between the rise of global trade that has made so many of us competitors with our Asian counterparts, and the loss of union power, where is the upward pressure on wages to come from? (Not to mention that we have become a nation of workers who reflexively side with management in labor disputes, something that will drive future historians nuts as they try to make sense of our society.)

In other words, we're all going to get squeezed by what's coming, and that's particularly bad news for Rhode Island. It is a curious fact of our economy that, while white-collar jobs here pay only a bit less than their counterparts in Massachusetts and Connecticut, blue-collar jobs tend to pay quite a bit less. (You can read more about this at at whatcheer.net, or check it out yourself at careerjournal.com.) Housing and food costs aren't appreciably lower, so people on the lower end of the scale are going to get squeezed even more here than in our neighboring states. We're not necessarily talking about poor people here, just people at the low end of the middle and below.

Those people obviously don't have a lot of money to spend, but two facts make up for that and give them an outsize effect on our economy. One is that -- on average -- they save almost nothing and spend virtually everything they get, and the other is that there are a lot of them.

So this is what's going to happen: people at the lower end of the income scale are going to get squeezed more here than in our neighboring states simply because they are poorer here. Our state government, so dominated by budget-cutters, will do nothing to help them, and the loss of that spending will help keep our economy in the doldrums longer than our neighbors.

And our Governor and Assembly leaders will wonder, a couple of years hence, why their tax cuts didn't do the trick. But they'll find someone to blame.

21:43 - 17 May 2008 [/y8/cols]

Tue, 13 May 2008

Carbon for thought

An article here points out that a properly done cap-and-trade carbon policy would have a progressive (in the technical sense of tax policy) effect. It also points out that doing things John McCain's way might be as effective in the environmental sense, but have a regressive effect, and provide a windfall to electric producers and oil companies. More later.

10:37 - 13 May 2008 [/y8/my]

Sat, 10 May 2008

Business subsidies

I was reviewing some statistics about state tax revenues last week, and looked at business taxes. Along with the income tax and sales tax, business taxes were once the third important leg of funding state operations, but no longer. Between 1996 and 2006, income tax collections rose by 76%, sales tax collections by 97% and business taxes by -- wait for it -- 14%, far less than inflation over that decade.

Why have business tax revenue declined so much? The economy has suffered recently, but not for all of that decade. The biggest reason for the decline is a nearly endless stream of special tax breaks. We offer businesses several different investment tax credits, an R&D credit, a credit for wages paid in an Enterprise Zone, a jobs development credit, a job training credit, a biotechnology tax credit, an "innovation and growth" tax credit, and much more. Some of these are worth millions of dollars. For others, we simply don't know what the effect is on the state budget. But the result is that 94% of the businesses in our state pay the minimum corporate tax of $500.

Most of these cuts were made in the name of economic stimulus. But for most of them, we don't really know how much the tax credit costs us, or what we've gotten in return. As usual, the state has been making decisions over millions of dollars in foregone revenue in the dark.

Sen. Stephen Alves, the chair of the Senate Finance committee, has proposed raising the minimum corporate tax to deal with this issue, but the last thing we need is a head tax, on people or businesses. An income tax can't put a business out of business, since no income equals no tax, and that's the fairer way to raise revenue than with a hefty annual fixed payment that doesn't change with a business's income. The minimum tax is already too high. The problem should be fixed by determining which of the tax breaks aren't doing what was promised.

Rep. Peter Lewiss of Westerly has proposed an admirable approach to the problem in the "Development Subsidy Job Goals Accountability Act" (H-7953). The idea behind the legislation is to begin to make public exactly what we are getting for the many tax cuts we give businesses. It also proposes a public economic development budget for the state, to provide a unified picture of what, exactly, the state does in the name of economic stimulus, via the many different departments that do it. The bill was heard in House Finance last week, but it's not clear if it has the votes to clear the committee. If you care about accountability, let Rep. Steve Costantino, the chair of House Finance know, along with all the committee members.

16:40 - 10 May 2008 [/y8/cols]

Highlights from the Supplemental Budget Follies

As expected, the supplemental budget passed the Senate last week, though it nearly ran off the rails in the Senate Finance Committee where a majority of the committee voted against it.

What's that? It lost in committee? Then how did it pass? Let's call it some extraordinary parliamentary maneuvering.

In an official sense, the Senate President and the Majority and Minority leaders sit on all the committees of the Senate, though they almost never attend or vote on committee matters. But last week, six of the ten Finance Committee members decided to vote against the budget, which forced all three of the ex officio members to interrupt whatever else they were doing, and show up at the Finance committee to cast their votes for the budget, in order to get the bill out of committee, 7-6.

The joke hiding here is not just that it took this much work to provide for a budget that slashes RIte Care, including for some legal immigrants, accelerates a few thousand retirement decisions among state employees, cuts money from all the cities and towns in the state for the current fiscal year, imposes a tax on bottled water, and cuts income taxes for the wealthiest taxpayers. The joke is also that it took two extra Democrats and one extra Republican to do it. The Republican was voting for his Governor's budget. What were the Democrats doing?

For the record, these were Minority Leader Dennis Algiere of Westerly and Senate President Joseph Montalbano of Pawtucket, N. Providence and Lincoln and Majority leader Teresa Paiva-Weed of Newport. Montalbano and Paiva-Weed apparently felt that passing this was more important than honoring the will of the committee members they appointed.

So the new '08 budget passed, and now your city or town has to figure out how to cut its budget for the current year, something you might have thought was settled last June. Now we can move on to the disaster of next year's budget, right? Well yes, but not so fast. I'm sorry to report that there is another land mine lurking among the May flowers brought by last week's rain.

Twice a year, the "Revenue Estimating Conference" -- made up of representatives from the House, the Senate and the Governor's office -- gets together to talk about the state's economy, state service committments, and state revenue collections and predictions. The point is to agree on what everyone should expect and base budget numbers on those. They meet early in November and then again early in May, this week. If their agreement doesn't define the shape of the budget, it does define the shape of the debate.

The revenue estimators met all last week, and again this week. They'll come to some agreement late this week, and there are very few people who expect them to say the revenue picture has gotten better since the last Conference, this past November. It's quite likely that the budget will be cut some more before the year is over. This could be the year of the supplemental supplemental budget.

n.b. Their meeting finished yesterday where they decided that the changing revenue picture made this year look worse, but not so much worse that they need to have a supplemental supplemental. Meanwhile, next year's budget hole increased by $55 million. There will be a report out this coming week to add detail.

16:33 - 10 May 2008 [/y8/cols]

Sun, 04 May 2008

Why do they put up with it?

The House of Representatives last week approved the Governor's supplemental budget for this current year. They approved of the plan to take back $12.5 million from all the cities and towns before the end of June, throwing 39 municipal budgets into chaos. This plan also cuts 2700 immigrant children from RIte Care -- including more than a thousand who are here legally -- and forces state employees to take six furlough days. There are some minor deviations from the Governor's original proposal, but they are nothing compared to the agreement.

My favorite: cutting $26 million from Rhode Island Housing. This agency gets its money from federal housing grants and from borrowing. Using their money to balance the budget means we are using either borrowed money or federal housing grants. I report, you decide which is worse.

The sad truth is that the Governor and the leadership of both houses of the Assembly are reading from the same script. The Assembly leadership team call themselves Democrats, but so what? They are for slashing pensions and health care for state and municipal workers and ending important (and cost-saving) social programs. All the while, they are cutting taxes for rich people, while the upward pressure on local property taxes remains as bad as ever. In what meaningful way is this a Democratic agenda? Maybe they mean that the program cuts cause them more pain than they cause Republicans.

Here's an interesting detail from the supplemental budget. The Governor proposed to add a tax on cases of bottled water for the next fiscal year. (I know he promised not to add any taxes, but the only people who believed him are bad at arithmetic.) It's a tiny tax, only four cents per case of water, but it's a tax nonetheless, and it was the Governor's suggestion. It is projected to earn about $600,000 next year. The Assembly decided that he was right, and this should be taxed, but they voted to start it in May instead of July, so we'll get some of the proceeds this fiscal year. So remember, from now on, each time you buy a bottle of Poland Spring you're helping pay for tax cuts to the wealthy people. Thirsty?

But honestly, the people to pity are the rank and file Democratic legislators. For the most part, these people did not run for office in order to disassemble the state government and to upset the budgets of the cities and towns that sent them to the state house. They did not run to suddenly end health benefits for state retirees, causing thousands of state workers to retire prematurely -- a decision that will cost us valuable expertise in the work force, drive up pension costs, and ultimately save us only a few dimes, if that. How many of them think they ran for office in order to ratify tax cuts in a time of fiscal crisis? Their special tragedy is that they signed on to support a leadership team that has spent the last several years cooperating with the Governor to lead our state into a fiscal hole in the ground, and now that we're here, all the choices are bad. One can only wonder why they put up with it.

To their credit, about two dozen legislators voted against the worst parts of this travesty of a budget last Friday, but it wasn't enough to stop it. But this isn't so far from enough votes to select another leadership team, a fact presumably not lost on the people in charge, though there is no obvious candidate.

Truthfully, the Assembly leadership is worth some compassion, too. After all, they have largely turned on contituencies that originally put them in office, but few of them are going to be embraced by their new allies. The Governor is still going to blame his deficits on Assembly Democrats, for example, and it's positively funny how many people think that the Handy/Moura tax reform legislation has the backing of the Assembly leadership. (It emphatically does not.)

These people have little to fear from voters. Most have plenty of campaign money on hand, and few opponents in sight. A Democratic opponent to Speaker Murphy, for example, would be opposed by the state party, while a Republican would find it difficult to draw a distinction with him: a winning strategy. Murphy and his team will continue to hold power and influence until the legislators who made him Speaker decide that the state needs an opposition party that, well, opposes. Until then, look for more cuts, more delayed maintenance, more shuttered programs and less effective government. Meanwhile, because the real causes of rising costs haven't been identified, taxes will still rise.

The problems are two: an unwillingness to acknowledge the expensive spending decisions we've made -- unnecessary bridges, crazy borrowing nonexistent maintenance schedules, to name three -- and an inability to see that all taxes are not the same. Some taxes fall on one group and other taxes fall on another. Some taxes discourage one kind of activity and others discourage something different. When you hear someone say they don't care which tax gets cut, that's someone who doesn't care what your government can do, and who richly deserves the still-expensive, less-effective government we are all going to get.

02:37 - 04 May 2008 [/y8/cols]

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