Friday, July 21, 2017

Sorry, Governor Mead, But You Are Wrong

According to the U.S. News and the Associated Press, Governor Mead believes that the state budget situation is not as bad as expected. The state's General Fund, Mead said, "is running above projections by about $70 million." He added that "other revenue" is also exceeding expectations.

I understand the governor. He gets his picture of the Wyoming economy from, among others, state senior economist Jim Robinson. Unfortunately, Robinson's latest analysis of the state economy was nothing short of dishonest. I am sorry to be so blunt and use such a strong word, but I have to call them as I see them. 

As I explained in my June 29 article on Robinson's analysis, our economy is badly trailing the rest of the country. For example, as is evident in the Bureau of Labor Statistics jobs data, our economy is flattening out. That's all. It is not ripe for a recovery.

The truth, Governor Mead, is that Wyoming is closer to a fiscal-panic situation than almost every other state. We are not in as bad a situation as Illinois, not by a long shot, but our credit was downgraded in May and all our legislators have mustered since then is to further increase the already serious threat of growth-killing tax hikes. In fact, with the Revenue Committee's agenda for its August meeting, the possibility is opening up that we will be looking at a taxmageddon after the next legislative session.

The purpose of this relentless pursuit of higher taxes is to save state spending at all cost. Those who advocate tax hikes have their priorities completely mixed up: their job is not to adjust the private sector to the needs of government; their job is to adjust government to what the private sector can afford. Unfortunately, so long as they do not get their responsibilities straight, they will continue to protect a very costly K-12 public education monopoly, an inefficient Department of Transportation, a juvenile justice system that many people suggest is in bad need of reform, and an onerous regulatory environment. 

Not to mention a disturbing trend of health care socialization here in the purportedly conservative state of Wyoming.

While our elected officials strive to make us earn the Government First state nickname, the cold, hard truth about our state's economy is that: 

a) it is stabilizing; 
b) its future is uncertain; and
c) by constantly talking about tax hikes, our legislators are exacerbating that uncertainty.

Perhaps it is time to give our welfare statists, including Governor Mead, a crash course in macroeconomics. The prevailing wisdom among economists and the general public is that our economy moves between ups and downs known as the business cycle. When the economy is strong, it is in a growth period; when it is weak, we call it a recession:

This theory of the business cycle was developed by macroeconomists during the 1950s. It was based on a number of elements that were pulled together by, among others Paul Samuelson (whose textbooks from the 1950s were still being sold in large quantities when I was a lowly undergrad in economics in the 1980s). Back then, the economy behaved much as this theory suggests, with comparatively smooth shifts between a couple of years of growth, and 12-18 months of recession. Transitions between the two phases were relatively mild and predictable.

Macroeconomic tranquility ended with the 1960s. There is a massive literature trying to explain why; after 30 years of working with economics in theory (you can still find my doctoral thesis on Amazon) and practice (a total of almost 20 years in public policy) I have come to the conclusion that the literature for the most part draws the wrong conclusions. Original contributions by such brilliant minds as Frank Knight, John Maynard Keynes and Friedrich von Hayek still stand tall; here is what they tell us.

While the economy swings between ups and downs, there is no genuinely predictable pattern to those swings. Growth periods can last for six to eight years, as the 1980s, 1990s and 2000s showed us. Recessions also differ dramatically, from mild ones (as we had in the early 1990s) to very serious ones (the Great Recession of 2008-2009). Rather than treating all these phases as part of a bigger pattern, we should inquire into each phase as a more or less independent segment. 

If we do that, the downturn in the economy, shifting us from growth period to recession, becomes important in itself. Furthermore, once we carve out the downturn as a phase of its own, we also sever the tie between the growth period and the recession that makes people believe that the economy is automatically going to recover again. Therefore, instead of talking about a temporary recession, we should be looking at the phase after the downturn as independent of the previous growth period. If we do that, we get an entirely new, and empirically much more accurate, picture of the economy:

The "Stabilization and stagnation" phase is simply a "new normal" where the economy lands after the downturn has ended. Its most important characteristic is that it will last until economic decision makers have an explicit reason to believe in a better future. 

In a free-market economy, those reasons come along with entrepreneurial ingenuity, consumer confidence and investors searching for new profitable opportunities. In an economy such as ours (not to mention the welfare states in Europe) the room for the free market is confined to what government permits, and as a direct result, the future of the economy in the stabilized stagnation phase depends increasingly on what government decides to do.

Reforms that remove government from the picture, or at least scale back its incursions into the free market, allow for more free-market activity and free-market mindset to define the economy's future. 

By contrast, an expansion of government after a downturn, just when the economy is stabilizing, is about the worst that can happen:

In theory, there is no limit to how an economy can tailspin, once the red arrow defines its direction. Greece is a prime example of how repeated expansions of government intrusions has decimated an economy. According to some researchers, Greece is now de facto a non-industrialized economy.

Can that happen in Wyoming? It remains to be seen. It all hinges on how far our welfare statists are willing to pursue their Government First agenda. It will all be decided by how much they are willing to raise taxes to protect government from long-term, structural spending reforms.

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