APPEL: What Happens When The Business Cycle Catches Up To Louisiana?

All economies, national, state, and local, are subject to the whims of business cycles. Business cycles are defined as periods of economic expansion and contraction. The two most current downturn cycles hit Louisiana hard, first in the 1980s as the oil industry collapsed and again during the Great Recession starting in 2008.

Our current historically strong national economy has provided 3% GDP national growth but Louisiana’s weak business climate has only generated 1.1% growth. But the foibles of the business climate will sooner or later dictate that we will see a national downturn. As a matter of fact most business leaders believe that had it not been for President Trump’s economic policies we probably would have been cast into national recession already. Our state’s weak economic structure leaves our economy exposed to grave danger from such a national contraction.

During the current Legislative session I have several times pressed the Administration for a state economic impact model that reflects the consequences of recession on our state’s fiscal well being. In Louisiana so much of our budget consists of growing, mandated obligations; Federal program matches such as Medicaid expansion, contracts, statutory dedications, the MFP, the pension systems, and other obligated expenses. This structure makes our budget particularly vulnerable to recessionary impacts.

A recession causes revenues to decline even as fixed expenses do not, so the state runs short on funds. Exasperating the problem, recession also increases demand for state services causing associated expenses to rise dramatically. Recessions devastate state resources.

During hard times there are only a few options available to the state; default on obligations or change the law creating those obligations, implement major cuts to non-protected state programs, or substantially raise taxes. Default or changing the law is not really an option and increasing taxes only assures an ever deeper state recession. So that leaves only cuts to potentially vital but unprotected state priorities. Recessions devastate people.

Good management practice dictates that the state’s Administration must have an impact model in order to have an understanding of the shock of national downturns and other recessionary events. Based on that information, the Administration must identify a level of savings to be accumulated during good times in order to minimize the results of the inevitable downturn. To be a good steward, it is up to the Administration to identify potential risks to the body politic and to make recommendations that the Legislature should enact to protect the people.

What I determined was that the Administration had no such model nor any strategy to prepare the state for downturn. That’s too bad, but I recognize that governors don’t like to save, spending is what governors love, and legislators are worse. The reality is that through our history no governor or legislature has taken unavoidable economic decline seriously, that is until it is too late. Then the finger pointing begins.

But such an economic impact model does exist. Here is a link to a 2018 “Stress Test” by Moody’s Analytics.

This Stress Test analyzes the effects of recession on the fiscal structures of all states and is the tool that our state should have always had. Perhaps the Administration’s reticence to answer my inquiries is because they knew the answers or perhaps not but as usual Louisiana ranks last in its preparedness for an economic downturn. In order to survive a moderate recession Louisiana would have to set aside about $2 billion and a severe recession will require about $3.2 billion. Nothing like that exists nor have the people been told of the danger.

Since the governor entered office our state spending has increased by over a billion dollars and, showing indifference to the future, our savings have increased only slightly. The looming disaster could be moderated by estimating the amount needed and putting away enough into our Rainy Day Fund to prepare the state. Instead the governor actually successfully fought against the only bill that sought to create saving in order to put some away. The Administration simply has no interest in reducing spending or in saving.

This is an election year. During the last gubernatorial election our current governor, who as a legislator led budget discussions for eight years, stated absolutely that he would not raise taxes. That disingenuous promise didn’t last six months. As long as politicians can tell untruths the people will suffer. But one thing is certain, recession is coming probably sooner than later. The leaders and potential leaders of this state must get honest about conservative fiscal management or as Moody’s makes very clear, the next recession will be truly devastating.

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