Thursday, May 10, 2018

Fiscal Conservatives - This One Is For You

Dear elected and aspiring fiscal conservatives: pay attention!

The economic expansion that began in mid-2009 and already ranks as the second-longest in American history most likely will end in 2020 as the Federal Reserve raises interest rates to cool off an overheating economy, according to forecasters surveyed by The Wall Street Journal. Some 59% of private-sector economists surveyed in recent days said the expansion was most likely to end in 2020. An additional 22% selected 2021, and smaller camps predicted the next recession would arrive next year, in 2022 or at some unspecified later date. “The current economic expansion is getting long in the tooth by historical standards, and more late-cycle signs are emerging,” said Scott Anderson, chief economist at Bank of the West, who was among those predicting a 2020 recession. 
This is a dire warning shot that we need to take very seriously here in the Cowboy State. Before I get to the specifics - and you will want to stay around for them - let me throw in the usual disclaimer: we saw some late-cycle signs two years ago, but nothing happened then. 

That said, the situation is different now, with oil possibly pushing toward $80 and a couple of more rate increases on the Federal Reserve agenda. In other words, unlike 2015, I would take these warning signs seriously. When the U.S. economy turns down again, it will most certainly pull the Wyoming economy with it. As I explained yesterday, our recent uptick in economic activity is almost exclusively driven by factors outside of our state, and largely by the minerals industry. When the Trump bump, caused by his tax cuts, comes to an end in late 2019, we are all on our own.

Dear legislators and candidates for governor: will you be prepared for that next recession?

Since the tax-and-spenders will ignore this question, the burden to answer it falls on the shoulders of you, the fiscal conservatives. 

Here are your problems:

1. We still have a regulatory blanket making it costly to do business here in Wyoming. Among the gubernatorial candidates, Harriet Hageman has been by far the strongest in vowing to deregulate our state.

2. Contrary to official mythology, we are not a low-tax state. To make matters worse, there is a dark Taxmageddon cloud hanging on the horizon. Of the people running for governor, Taylor Haynes has taken the lead on this issue, followed by Hageman. Both strongly oppose higher taxes. This is good, because I should not have to explain to our elected officials what will happen to our state's economy if we raise taxes by hundreds of millions of dollars in 2019 and 2020, and a recession hits us right as those tax hikes go into effect. 

3. Spending as usual. The trajectory in state spending remains unchanged, pointing straight to the skies. The only remedy provided so far are one-time trimmings to some programs, but temporary spending cuts do not solve permanent spending problems. 

4. Weak fiscal conservatism. 

Let me elaborate on this last point in a moment. First, here are the solutions to the first three problems:

1. Deregulation, of course. We need a "heat map" of regulations, showing what industries and what geographical areas of our state are hit the hardest by the combined pressure from federal, state and local regulations. I have always taken for granted that we, as a state, cannot do much about federal regulations. Harriet Hageman seems to be convinced that we can, and since she is the expert, I yield to her. This makes the case for deregulation even better: if we can have influence on all three regulatory levels, we can begin peeling away regulations soon after the election. We can do it where it hurts the economy the most and the gains therefore will be the biggest. 

Perhaps our fiscal conservatives could step in right now and provide whatever help a deregulation strategy would need from the legislative branch?

2. Taxes... Thanks again to Haynes and Hageman for pledging and promising, respectively, not to raise taxes. Where are the others on this issue? I heard whispers a while back that at least one more gubernatorial candidate was going to take my tax pledge; have not heard anything back since then. However, the need for unrelenting resistance to higher taxes is not limited to the executive branch. Some legislators have pledged - and consistently voted - against higher taxes; Senator Bouchard and Representative Salazar have set stellar examples, and there are others who bravely and consistently oppose tax hikes. Thank you for that! Unfortunately, the legislative defense line against tax hikes is thin; hopefully, an increasing number of representatives and senators will hold the line against higher taxes. 

3. When it comes to spending, the conversation has not even started. Let me, for the fiftileventh time, reiterate why this is so important: if we cannot present a coherent, consistent and economically solid alternative to tax hikes, the tax hikers will win by a war of legislative attrition. Put bluntly: saying no to higher taxes is a good start, but it is only that. We need school choice, school choice and school choice as the spearhead of structural, permanent and substantial reductions to government spending. Then we need to reform Medicaid and our health care industry; we will need a toll on the I-80 to make it pay for itself; and we need a functional reform of our entire government based on the default principle "private unless proven otherwise".

Now for the fiscal conservatives. I know some of you don't like it when I criticize you, because you feel that you bravely challenge the legislative leadership and don't get enough credit for it. Truth is, I took a step back during the legislative session so as to give you the room you asked for. 

Did you deliver?

No. I saw no proposals for spending reforms that could lay the foundation for an alternative to higher taxes. Fair enough - it was the session - but we are now in May and I have not seen anything from the fiscally conservative caucus about how you are going to permanently disarm the tax hikers. 

You are still playing defense. You need to take charge. Why not put together a school choice reform model? Why not present a Medicaid reform agenda to voters? Why not call for private-by-default reforms to all government programs?

Why not? Yes, I know the usual arguments. First, you cannot unite because you need a caucus that votes together on all issues. Let go of that principle. Agree to vote together on a small set of issues and forget about everything else.

Secondly, we the voters are always being told that if you go too boldly on fiscal conservatism, it is only going to anger the legislative leadership. You need the leadership to be nice to you, in order to get on the right committees and to get legislation passed. The only problem is that so long as you keep using those metrics; so long as you consider a bill passed better than a principle advanced; you are only perpetuating status quo.

We no longer have time for status quo. We are running out of time. If we have not even started on spending reforms when the 2019 session begins, our state is done for. 

Yes, it is that bad. Our deficit trajectory still points into the abyss. The latest CREG report has not changed that; we will see some minor course corrections, but the underlying, structural imbalance between spending and revenue is very much the same as before. Come 2020, the budget deficit will be $700 million or bigger - per fiscal year - and regardless of what Speaker Harshman says, there is still the threat of a $1 billion deficit in 2022. 

And this is without factoring in a recession in the U.S. economy. In other words, we are not even prepared to deal with our self-inflicted deficits; we are already sinking our state without needing the help of spendoholics in Congress, or just a regular recession. 

Sorry, fiscal conservatives in our state legislature, but the ball is in your court. You have to take the lead on this, step up to the plate and propose big reforms to government spending. Nobody else is going to do it. The tax-and-spenders will push their agenda regardless of whether you propose structural spending reforms or sit when told to. Your only chance to make a difference is to be bold, firm and brave.

Your uncompromising commitment to a better future for Wyoming will either break the resistance from the tax-and-spenders, or leave the tax-and-spenders exposed for caring more about their special interests than Wyoming families and businesses. It remains to be seen which will be the outcome. What we do know for certain is that the current tactics that you fiscal conservatives have applied, have not worked. 

Oh, we do know one more thing. If you go for the principles, you will have more support among the people of Wyoming than you realize. 

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