Thursday, September 14, 2017

Two Futures for Wyoming: Part 2

In my nine years here in Wyoming I have not seen such a distinct dividing line between two futures as I see today. On the one hand we have the welfare-statist track, which includes $3-400 million in higher state taxes - and, if we are just a tad unlucky, a pile of local tax increases.

On the other hand, we have enormous, unexplored opportunities to reform our government. Done right, those reforms could unlock new economic growth that did not rely on the minerals industry, that could put thousands of dollars back in the pockets of Wyoming families and could create up to 20,000 new jobs around our state. 

Long term, this reform agenda could turn our state into a free-market driven incubator for new businesses, new entrepreneurial ambitions - and more prosperity for everyone willing to work hard and take on new challenges.

This reform agenda is spelled out in my essay A New Chapter for Wyoming. There, I propose long-term spending reforms that are both realistic and much needed. All it will take is some legislative backbone and a governor who is willing to lead from ahead, not follow from behind. 

I concentrate on two programs, Medicaid and K-12 education:

-A voucher system in Medicaid could cut the cost of that program by $65 million per year; 
-If the Republicans in Congress by some miracle actually.. wait for it... are you ready... repealed and replaced Obamacare, that number would rise to $116 million;
-Free-market reforms to our state's health care system could cut Medicaid costs by another 15 percent of the original amount, increasing that number to approximately $160 million;
-An educational freedom reform could cut an estimated $287 million out of the state's K-12 spending.

If we stick to the most optimistic reform outlook for health care and health insurance, the combined, permanent reductions in Medicaid and K-12 education would approximate $447 million. However, let us assume that Congressional Republicans will continue to do what they do best - obstruct President Trump's agenda - and that we are stuck with Obamacare. Removing the possible benefits from that reform, we still end up with estimated, permanent spending reductions of $392 million per year. 

Here, a crucial question arises: should we let those savings close the state's budget deficit, or should we cut taxes?

So long as Wyoming has money in the bank, the appropriate answer is to cut taxes. This will generate more growth, whereupon more jobs are created, more people become taxpayers and we see an increase in tax revenue through the back door. Yes, this is a supply-side argument, and supply-side economics has been rightfully criticized for contributing to the current federal debt problems. However, the only reason why supply-side reforms did not work as intended is that Congress could not exercise even a modicum of spending control under either Reagan or Bush Jr.; if they had refrained from annual spending increases in the 6-8 percent bracket, the surges in tax revenue after the Reagan and Bush tax cuts would easily have turned a budget deficit into a budget surplus. 

In other words, if we cut spending here in Wyoming, and simultaneously reduce taxes, we are in a good position to reap the benefits from lower taxes. 

In my aforementioned New Chapter essay I estimate the positive effects of comprehensive reforms to K-12 education. These reforms will, on the one hand, pressure school districts to slim down on administration and other overhead costs, and on the other hand open ample opportunities for teachers who currently work in public schools to start their own private alternatives. Together with other entrepreneurs in education, they can be part of a surge of jobs and growth generation in a sector that right now is being held back by a government monopoly. 

Private schools could add an estimated $447 million in total economic value to the Wyoming economy. Given that our private schools would operate - generally - along the same principles and practices as private schools do in Wisconsin, this new private sector could create as many as 11,000 new jobs, adding more than $400 million to private-sector payroll. 

This value is added to the $392 million in tax cuts. The tax cuts alone would put more than $2,600 per year back in the pockets of a four-person family. It is reasonable to expect that they would spend 75-80 percent of this increase in their bottom line. Taking the middle ground of that bracket, we end up with $2,000 more in consumer spending per four-person family, or $500 per every man, woman and child in Wyoming. 

This money is injected into the Wyoming economy as more spending in local stores and on local services - groceries, clothes, shoes, home repair, auto parts, restaurants, barber shops, car dealerships, even real estate agencies - and on more travels, benefiting gas stations, hotels, etc. Banks get more deposits, get loans paid back faster, sell more loans and make more money. 

And so on.

Together, Wyoming families would increase their spending by about 1.3 percent in current prices. This does not sound like much, but $293 million can make a substantial difference over time. If we apply the standard Keynesian consumption multiplier, current-price GDP could increase by as much as 3.8 percent over two years (the period it takes for a multiplier expansion to work its way through the economy). 

It is important to see what this expansion means. A 3.8-percent larger GDP, again at current prices, means a total of $1.4 billion in extra economic activity throughout our state.  More business sales in the local economy increases revenue in trucking, warehousing, construction and other industries. More economic activity inspires new businesses to start up; more money in the state economy attracts more investments from out of state. 

An estimate of personal income growth puts us back in the good old days before the Great Recession. In 2001-2010, per-capita personal income grew by 4.8 percent per year, on average, in current prices. My estimate puts us at 5.1 percent per year in 2020 and 2021 if we implement these reforms in 2018. (I do not do longer forecasts than four years; if an economist tells you he can do ten-year forecasts you should call the men in white coats, because that economist needs help.) With inflation remaining around two percent, a 5.1-percent annual rise in per-capita personal income - generated by rising wages and salaries - means real increases in the standard of living for Wyoming families. 

Another $1.4 billion in increased economic activity is equivalent to some 37,000 new jobs in the non-minerals private sector. However, that number is unrealistic (for technical reasons that I will not spend time on here but I will be happy to explain in case anyone wonders); a more realistic estimate is 20,000 new private-sector jobs. That, however, is enough to more than compensate for the job losse we have seen in the past couple of years. 

And - here is the cherry on the top of the cake for our lawmakers - $1.4 billion in new economic activity means more tax revenue for the state and for our local governments. 

Then there is the $400 million in new economic activity that originates in the K-12 education reform. Since that is partly going to be offset by reductions in public education spending - yes, partly - it is difficult to estimate the net effect that this reform will have on the state economy as a whole. It will be positive, but I would not count on it as being the main driver of growth; that banner will be carried by the tax cuts. 

What we can count on, though, is that school choice is an incubator for entrepreneurship: as I explain in the New Chapter article, students in school-choice systems are significantly more prone to start businesses than kids in public schools. In other words, by the time kids graduate from a K-12 system with educational freedom, the growth effects from lower taxes will have turned Wyoming into enough of an economic powerhouse to motivate entrepreneurially minded kids to stay here and start their own businesses. 

That, right there, solves the demographic problems that the ENDOW report talks about at length: we retain our young and we grow our workforce.

Now: there are three important conditions for this analysis. 

1. Our legislators hold firm on cutting taxes and implementing these spending reforms. No reversals after one, two or even five years. The spending reforms in this plan are to be permanent. 
2. Our local governments get onboard with these reforms and refrain from demanding more money; tomorrow's article will touch on that subject. 
3. The legislature and our governor agree on a strategic, limited drawdown of savings to bridge the budget gap while the spending and the tax reforms go to work. Once those reforms are carried out, the budget deficit will vanish and the legislature can successfully balance its budget. 

Given these three conditions, the New Chapter for Wyoming plan can turn our state into an economic powerhouse and an example for the rest of the country. 

Either we do that, or we let the welfare statists raise taxes on us by hundreds of millions of dollars in order to maintain status quo. Which, as we all know, is not working

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