Reset state spending to new normal

More than morbid curiosity drew the crowd to the crash site in Olympia last week. Most of the gathered throng had a direct stake in the disaster unfolding before them. Dr. Arun Raha systematically delivered the bad news, in the matter-of-fact manner of air traffic controllers and critical care physicians.

Raha is neither. As the head of the state Economic and Revenue Forecast Council, it’s his job to diagnose the economy and estimate how much money the state will collect in taxes. The crash site is the state capitol, where Raha explained the wreck that is our economy.

Taking us through the charts, he notes that the vital signs all point down. The stock market, household net worth, commercial lending, consumer confidence, car sales, housing starts, exports, you name it: the trend lines drop abruptly to the bottom of the page.

Just a few months ago, he reminds us, he reduced his forecast by $1.9 billion.

“We were not pessimistic enough,” he says as he cuts another $2.3 billion from forecast revenues for the next 30 months.

And the Legislature, which has shown little capacity or appetite for dealing with a $6 billion shortfall, must now address an $8 billion problem.

On cue, entering from stage left, the liberal Budget and Policy Center delivers a letter from economists urging the governor and legislative leaders to raise taxes. Of the 28 signers, 24 are identified with tax-supported institutions: community colleges, state universities, and county government. It’s OK for liberal economists to press their advice, even their self-interest, on lawmakers. Everyone else does.

But there is something altogether too condescending about statements like this: “Drawing upon economic theory, we believe reducing government spending will have a more deleterious effect on Washington State’s economy than would increasing revenues.”

Eighteen months of economic confusion, persistent recession, the collapse of the financial markets, and controversial stimulus packages ought to have inured us to “trust us, we know more than you do” pronouncements from such folks. Besides, other economists disagree. If they didn’t, cable news programs couldn’t survive.

A half-century ago, President Truman, weary of conflicting and waffling economic advice — on the one hand, on the other hand — vainly searched for a “one-handed economist.” The Budget and Policy Center apparently found a couple dozen of them.

Adding to the tax burden of families and businesses at this time to prop up government spending would be a mistake. As Microsoft CEO Steve Ballmer said last month, “The economy is resetting to a lower level of business and consumer spending.”

Raha doesn’t expect a return to growth until mid-2010 and concedes, “My magic crystal ball is still cloudy.”

State spending soared in recent years, outpacing revenues even during the housing and construction boom. The recession deepened, but did not cause, the deficit. Government must now reset to a lower, sustainable spending plateau — the new normal.

This is not the typical cyclical recession we’ve experienced before. We’re likely to be in the trough for several years. If lawmakers don’t make the right moves, hard times will last longer.

They should begin by subjecting state spending to a rigorous, ruthless review.

When they talk about the “tough decisions” they must make, lawmakers generally refer to services that might be cut: public schools, health care, public safety or social services. That’s easier than talking about program costs, efficiency or effectiveness. But it’s past time to take a good look at the growth of middle management, program and agency consolidation, state duplication of federal regulation, outsourcing services to business and nonprofits, and getting government out of some activities altogether.

Fiscal crisis provides an opportunity to rethink public employee compensation. State workers continue to enjoy generous taxpayer-subsidized pension and health care benefits, far richer than those of their private sector counterparts. The governor rightly scrapped the contracts negotiated with state unions, calling them unaffordable. The unions sued and the governor won the first round in Thurston County Superior Court. Ultimately, we’d be better off scrapping collective bargaining for public employees.

Lawmakers should clean up the budget wreck, resist tax hikes, reset spending, and concentrate on retaining private sector jobs and investment with competitive tax and regulatory policies.

Richard S. Davis writes on public policy, economics and politics. His e-mail address is richardsdavis@gmail.com.