It has become painfully obvious that many of my peers in the Louisiana legislature and elsewhere in state government have no concept that economic forces, controlled by simple laws of economics, guide our lives. In fact at the state level those forces have more to do with outcomes than anything that we could possibly believe. Every action we take has a result that is driven by those laws.
Case in point is the relationship between state revenues and the economic results of all the businesses in the state.
This is how it works: the state needs financial resources to operate. The amount needed is determined by the programs and policies of state government. There are complicating factors such as inflation but for the sake of simplicity let’s just assume the financial needs of the state are as defined by constitutional and statutory policies promulgated by the legislature and in some cases voted on by the people. Note that the governor doesn’t have a direct say in this, though all governors really do drive these policies by their efforts to control legislative actions.
Now here is where those nasty laws of economics come in. Spending as defined by the legislature is constant (remember we are ignoring inflation but many programs such as Medicaid expansion are automatically growing) but unless the legislature acts, revenues fluctuate widely. Assuming a baseline of state implemented tax and fee structures at any given time, revenue is a function of how well the economy performs. If the economy is strong there are surpluses; if, has been the case for a decade or more, the economy is weak then there are shortfalls.
The current “fiscal cliff’ is truly a contraction of revenue due to economic malaise coupled with a sharp upturn in spending in the last two years.
If we return to spending levels from Jindal’s last year, no fiscal cliff.
If the economy had picked up since 2008 resulting in more revenue from our fixed tax structure, no fiscal cliff.
So far so good, right?
Well here is the pitfall. The laws of economics create a circular link. Government revenues are created by economic output, but with a big-government model like the one Louisiana has been joined to for decades, the amount of economic output is dependent upon the level of government revenues!
As I have stated numerous times business has but one goal; to make money and to keep as much of it as it can for its shareholders. Business at its most fundamental level doesn’t care a hoot about government policies or how they affect the people. Of course business expects some simple things from government – public safety, education, infrastructure, and so on. But fundamentally all governments everywhere are expected to provide those services at a certain level, What business cares about is what it costs it to enjoy those services. So if business can select from a wide number of places that have approximately equal levels of service then business will move or grow in those areas in which government costs the least.
It gets worse. As stated above, due to tax and other government policies (including to a great extent civil justice policies), as business volumes shrink or as business leaves for better places so do taxes, fees, and other government revenue decline. Now since we assumed that government associated costs are fixed, as revenues fall government usually reacts not by reducing policy and program expenses, but by raising taxes and other sources of revenue ever higher on the remaining citizens and businesses.
Now for the inevitable finale! As those government demands for revenues continues to grow, business output declines even more. Citizens and businesses mobile enough to move do so and/or demand for business services continues to shrink. The spiral has begun – fixed spending patterns in a declining revenue environment starts it, less contributors to pay or declining revenues bring on ever more demand for higher taxes! Down, down, down goes the economy, even as the cry for ever more taxes increasingly falls on those that remain.
This is the economic tsunami that we are threatened by. Driven I suspect by a lack of understanding of economics or cynically worse, by ignoring the facts, our state continues to grow expenses unabated in the face of a declining economy. There is a high price to pay when we ignore those pesky laws of economics and we are already suffering for that folly.
We are technically last in all categories of state success. The New York Times just called us a failed state, though the column landing that fairly accurate label on us got virtually all the reasons why wrong. And yet we continue on doing the same things because there is only one solution and that beckons in the form of taking bitter medicine in order over time to create a viable economy. What governor or legislator would want to face up to that inevitable truth! Far better to sweep it under the rug in the hope that time will make it someone else’s problem!
Like spoiled children we never want to give up our toys; but it is those toys, those high cost state policies and programs, that are dragging us down into the vortex of long term failure. Bragging about minor economic wins will not cure our fundamental problems. Ignoring basic economics will not make things better.
Only a strong dose of courage followed by a substantial overhaul of state government has any chance of success. Beyond that the laws of economics will accelerate its pull as they draw us ever deeper into the vortex.