Where Have We Been- Where Are We Going?

I can distinctly remember standing in front of an Econ 100 class a number of years ago and teaching the students about business cycles.  One of the charts I showed listed all the recessions going back to the Great Depression.  What was interesting was that in the last 30 years there had only been 2 small recessions, one lasting 9 months in the early 90s, and the other about 9 years ago that lasted a whole 6 months.  In effect, most people cannot remember the last time there were significant economic hard times. 

The net result of these economic good times was Washington state government revenue growth in the 4% to 5% range and, with one exception in 2004, plenty of money to spread around and start new programs.  Most elected officials in Olympia have not had to make 'hard' decisions because the economy was whirling along and so was the revenue. 

Businesses had also become complacent and suddenly risky decisions seemed less risky.  So what if loan applicants could not really afford the mortgage, home prices would rise and the bank would still be covered in the end.  Automakers were no longer as innovative and got caught with gas prices heading north of $4.00 a gallon--and nothing to show but gas guzzling SUV’s in the showroom.  Making money was easy, and after a while it seemed like nothing would change and the government had figured out a way to permanently end tough times.

Individuals also got caught up in the illusion.  Taking on more debt was not a big deal, and saving was put on the back burner.  People felt their jobs would last forever and the more they bought the better they felt.  Pretty soon we were in a consumer society where big houses and big mortgages became the norm.

For most of the last couple of decades we have been in a feed-back loop with people spending lots of money, business accommodating without appreciating the risk, and politicians riding high with increased revenue and plenty of new programs to help their constituencies.  The fundamental question now is whether things have actually changed or whether this recession is just another speed bump on the road to never ending economic growth.

Businesses and individuals seem to have made some big changes in how they view the future.  Individuals are saving a little more and getting into a little less debt.  Businesses are scaling back and planning on little to no growth for the next few years.  Bank credit is like it used to be, available to those with good credit, tough for anyone without the means to pay it back.  Government however still seems to believe good times are just around the corner and after a short rest, revenue growth will chug along again at 5% annual growth.

The siren call to solve budget issues through increased taxes hums from Olympia and Washington, D.C. The assumption being lack of revenue is only a short-term problem, not a long-term structural change. But what if this is not a short-term problem, and what if revenue does not return to 5% growth and instead flattens out to close to zero growth?  Tax increases work when there is a short-term revenue issue and tax increases are used to fill the hole until better times return.  Increased taxes also work when the people paying them are seeing their salaries go up more than the tax increases.  If your salary goes up 4% and the government increases taxes by 2%, at least you are still ahead and will likely not complain too much. 

What happens however, if this is not a short-term revenue problem?  You increase taxes this year, but what happens in the next biennium when you have another deficit that needs to be fixed?  If revenue stays flat for an extended period of time tax increases only prolong the hard decisions.  What happens if taxpayers' salaries stay flat?  Do you really think a taxpayer is going to pay higher taxes and decrease their consumption?  People may adjust their spending patterns, but in the end governments will not collect any additional revenue. 

We spend a lot of time talking about the importance of sustainability for both businesses and individuals.  The implication is businesses/individuals need to conserve resources today and leave some for future generations.  If we over consume today, we destroy opportunities for future generations.  By the same token, maybe it is now time to talk about sustainable government.  There are far more reasons to believe economic growth will slow down over the next decade than there are arguments it will keep going at 5%.  If our elected officials continue to make decisions that require 5% growth, what happens if revenue growth does not materialize?  What are the implications of individuals and businesses resetting to a new model of lower growth, but government does not?   Do we really think government can continue business as usual while we expect everyone else to be more sustainable?  Businesses and individuals are now paying the price for the consumerism of the last couple of decades, is it now time for government to adjust as well? 

Sustainable government means three things.  First, that growth is based on conservative forecasts, not the most optimistic.  If revenue comes in high, first use it to make one-time investments (like pay down the unfunded pension liability.)  If after a few years the long-term revenue forecast improves substantially, then talk about realistic new or expanded programs.  The second implication of sustainable government is that local governments are the primary problem solvers, not the federal and state government.  All issues are local and need to be solved locally.  The third implication of sustainable government is that government employees are empowered to do their jobs.  Unempowered employees are less effective and it shows in most interactions with government employees.  Frustrations will grow and  the same conversations will be repeated again and again until government becomes more sustainable, right along with the rest of us.