The State Fiscal Crisis–Responses Needed

A recent article by economist Rick Wolff highlights one of the many serious challenges facing the country–the growing fiscal crises that are hitting our states and municipalities.  He presents the following table from the work of the Center on Budget and Policy Priorities, which shows the gap between the fifty states’ tax revenues and expenditures during the last (2001) and current (2007-?) recessionary periods.

As the chart makes clear, while a recession generates a budgetary shortfall, the shortfall extends for years after the recession is over.   In particular, the expected shortfall over the next two years will be very large–some $360 billion.   This shortfall will have to be closed through some combination of revenue increases or expenditure cuts.

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The CBPP has studied state responses to current budget shortfalls and reports the following:

  • 27 states have reduced health benefits for low-income children and families
  • 25 states are cutting aid to K-12 schools and other educational programs
  • 34 states have cut assistance to state colleges and universities
  • 26 states have instituted hiring freezes
  • 13 states have announced layoffs
  • 22 states have reduced state workers’ wages

With fiscal problems set to grow we need bold action.   If we do nothing budget cuts will only further weaken our economy (by reducing demand)  and worsen living and working conditions for the great majority of citizens.

Oregon is no exception.  In fact, according to a story in the Oregonian, a Pew Center on the States report “names Oregon as one of 10 states at greatest peril of following California over a state budget cliff.  Even though the national economy has started to rebound, Oregon is likely to have a harder time coming up with enough money to pay for schools and other public services — or finding enough places it can cut back its spending — than it did when patching together a balanced budget for 2009-10 said Susan Urahn, managing director of the Pew Center.”

One part of any rational response to this situation has to be increasing revenue by raising taxes on the wealthy and our large corporations.  Oregon is trying to do just that with Measures 66 and 67.  These measures–passed by the legislature but put on the January ballot by opponents–deserve our support.

Obviously significant national action is also needed to address what is a major structural problem.  One obvious response: cut military spending (which continues to grow) and channel some of the savings to state and local governments.

More generally, we need a government-directed, integrated industrial and employment program.  For example, our government owns large holdings in major auto and finance enterprises.  Rather than remain passive owners, we should take control over the firms we own and redirect their activity.  We should start producing mass transit vehicles and require that the banks direct needed funds at reasonable rates to support that production.  And we should direct federal transportation spending to state and local governments so that the new vehicles can be purchased.

We should do the same for the production of needed technology and equipment to develop and expand alternative energy sources like wind and solar power.

At present, federal stimulus money is being used to encourage private firms to retrofit buildings to improve energy efficiency.  Instead, we should encourage the establishment of local publicly owned enterprises to carry out this work, with the profit earned from the work redirected back to local government budgets to support desired social programs.  And all publicly organized production should guarantee living wages and encourage democratic unionization.

Much more could be done—including the cancellation of so called free trade agreements which encourage capital flight and the pitting of workers in one country against another.

The point is that we need a dramatic rethinking and reorganization of how our economy works.  There are plenty of good ideas available—at issue is the political organization and will.

Tax Fairness in Oregon

Oregon faces a severe fiscal crisis.  In short, the state is just not taking in enough money to fund all the services needed by people.  In response the 2009 Legislature passed two measures (66 and 67) that will raise $733 million in new revenue in the 2009-11 biennium.  While not a solution to the crisis, this extra money will help reduce cuts in spending on education, health and public safety.  These measures also help produce a more equitable tax structure.

In brief, Measure 66 raises taxes on high income Oregonians—couples earning over $250,000 a year and individuals earning over $125,000 a year.  Measure 67 raises taxes on profitable corporations. (More details on both measures here).

Perhaps not surprisingly, there are those that oppose any tax changes, even ones as important, needed, and justifiable as these.  They succeeded in putting these measures on the January ballot, hoping to get voters to reject them.

One of their arguments is that the tax increases are unfair.  But really what is unfair is the unbalanced nature of our existing tax system (see table below).  For example, as the Oregon Center for Public Policy explains:

Today, low-income Oregonians pay a larger share of their income in state and local taxes than wealthy Oregonians. In fact, the highest-income Oregonians pay the lowest share of their income in state and local taxes. . . . After accounting for the deduction of state income taxes on federal tax returns, the lowest-income Oregonians currently pay 8.7 percent of their income in taxes, the highest share among all income groups. Middle-income Oregonians pay 7.9 percent. The wealthiest 1 percent — households with income in excess of $410,000 and averaging over $1 million — pay only 6.1 percent of their income toward state and local taxes.

The passage of Measure 66 will help move things in a more equitable direction:

The lowest-income Oregonians will still pay the same 8.7 percent of their income in state and local taxes, but the share will increase for those at the highest levels of the income scale. For the wealthiest 1 percent, for example, state and local taxes will increase from 6.1 to 6.6 percent of their income. For the next highest 4 percent of taxpayers, taxes will increase from 7.0 to 7.1 percent of income. These slight changes for those at the top 5 percent of the income scale constitute a small but important step toward making our tax system better based on ability to pay.

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Other opponents are calling these measures “job-killer tax increases,” especially Measure 67.  The recently established Oregonians Against Job-Killing Taxes (OAJKT) argues that “Oregon government doesn’t even need the new taxes. They already have the money sitting in bank accounts.”  Their website says that if the measures are defeated “no services have to suffer.”

In a recent Oregonian column, Steve Duin examines those behind the OAJKT effort to overturn Measures 66 and 67.  He concludes as follows:

As Chuck Sheketoff at the Oregon Center for Public Policy noted, these riffs are necessary because only 3 percent of Oregonians will pay higher taxes if Measures 66 and 67 pass. . . .

Tis the season. I’ll end with this. The OAJKT website insists that “the most damaging” tax increase for business would require that a C-corporation with $25 million-$50 million in Oregon sales will now pay a gross sales tax of $30,000.

That’s all? Less than one-tenth of 1 percent? For many companies that, for years, have paid the $10 minimum? Who in the world considers that unreasonable?

A number of economists teaching and working in Oregon have recently published a statement in defense of Measures 66 and 67.   You can read it here.

The Oregon Economic Experience

It is often hard to know how our fellow Oregonians are doing — for a good look check out “Survey shows how recession has hit Oregon households” by Richard Read in The Oregonian, September 17, 2009.

The articles makes clear that there is a lot of suffering going on in Oregon, even more than in the nation as a whole.  Some highlights:

  • “Almost a third of Oregonians polled recently say they or a family member in their household have been laid off or lost a job in the past year.”
  • “Forty-one percent say they or a family member at home have had work hours cut during the recession. Nearly a third have housed a family member or friend because of money.”
  • “In other responses, 40 percent of Oregonians interviewed say they worry all or most of the time that their total family income will not be enough to meet expenses. That’s 6 percentage points higher than nationally and 9 points higher than last year, when the question was asked in Oregon during a similar survey.”
  • “More than a quarter of Oregonians say they or a household member have had problems paying for necessities such as mortgage, rent, heating or food during the past 12 months. Fifty-six percent say that if they were suddenly unable to pay for necessities, they wouldn’t know where to go for help from the government or a charity.”

Why The Status Quo Is Unacceptable

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The table above comes from the Oregon Center for Public Policy report by Joy Margheim entitled Labor Day Woes and Wishes.

Consider the table carefully—among other things it shows that over the period 2000-2007, the bottom 60% of state income earners actually lost money (in real terms).  Only the top 20% gained, and most of that gain went to the top 1%.  This outcome represents a sharp challenge to our media and elected officials who talk about overcoming the Great Recession and returning to “normalcy.”  Is a return to a political economy in which the majority actually suffers an income loss really our goal?

Clearly, we need to transform the way our economy works and our economic policies should be judged accordingly.  At the same time, a look at the enormous gains enjoyed by those at the very top of the income distribution speaks volumes about the source of resistance to the needed changes.

Unemployed Councils: Lessons For Today

Economic conditions are bad; what should we do?  In many ways the problem is not a lack of ideas—if we had power we could strengthen labor laws making it easier for workers to defend their rights; implement a single payer health system; nationalize the banks and re-direct funds to priority areas like mass transit and green technology; raise taxes on corporations and the wealthy to fund vital social services and programs; change trade laws to undercut corporate power.  The list goes on.

No, the problem is more a lack of political power and will.  People feel isolated and discouraged.  How do we overcome that problem?  History offers some important examples that deserve serious study.  One is the experience of the 1930s Unemployed Councils.

By the end of 1931, Unemployed Councils in Portland had more than 3000 registered members.  When individual efforts to work within the system failed, the Councils often took direction action in defense of their member’s interests. For example, after some 400 unemployed stormed City Hall, the city agreed to provide housing and shelter for over 1000 unemployed working people.  [The picture below illustrates the work of the unemployed councils in Portland “reversing” an eviction]

If unemployed workers could come together in the midst of the depression and form a powerful national organization to fight for meaningful social changes for themselves and others,  why can’t we help today’s hungry, homeless, and unemployed (modern day victims of social forces beyond their control) organize and work with other movements to demand change?

Here are some places to learn more about the Unemployed Councils:

The Pacific Northwest Labor History Project

KBOO’s Labor Radio

“Organize among Yourselves”: Mary Gale on Unemployed Organizing in the Great Depression

“I’m Going to Fight Like Hell”: Anna Taffler and the Unemployed Councils of the 1930s

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Labor Radio Interview

On Monday (August 10), Labor Radio–a weekly program that airs on KBOO radio (90.7 FM)–played an interview of me by hosts Deborah Schwartz and Al Bradbury.  We discussed a variety of topics, including the effectiveness of the stimulus, the outlook for the economy, the alleged social security crisis, and the need for structural change in our economy.

You can hear the interview (followed by another that was done by the hosts with Henry Huerta, Campaign Director of the CLEAN Car Wash Campaign, about the unionization efforts of more than ten thousand Los Angeles car washers) at:  http://kboo.fm/node/15826

You can hear an extended (and unaired) version of my interview at: http://kboo.fm/node/15788

Unemployment hits 23.5% in Oregon–

How bad is the unemployment problem in Oregon (and the rest of the US)?

The New York Times offers a graphic that allows you to see the value of the two main unemployment indicators (U-3 and U-6) for every state in the country.  U-3 is the official rate; it is 9.5% nationally and 12.2% in Oregon.  U-6 is the adjusted rate (which means it takes into account involuntary part-time employment and discouraged workers).  It is a crushing 16.5% nationally and an even higher 23.5% in Oregon.

That’s right—23.5% in Oregon.

According to the Times, the U-6 rate “was 21.5 percent in both Michigan and Rhode Island and 20.3 percent in California. In Tennessee, Nevada and several other states that have relied heavily on manufacturing or housing, the rate was just under 20 percent this spring and may have since surpassed it.”

I think we are moving beyond the “Great Recession” to the “Great Depression 2.”

Those arguing about whether we need a bigger or smaller stimulus are missing the point–we need a new economy.

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Inauguration special

As we all know, President Obama is planning a major stimulus spending program—and there are all sorts of debates concerning what kind of program is best, in terms of size and composition.  Key here is a correct understanding of the nature of our current difficulties—short term recession or longer term crisis or an overlay of one on top of the other.  My answer—the latter.

We often talk as if the goal of the stimulus is to restore our economy to its previous health.  But how should we evaluate economic conditions in the pre-crisis period.  As a Washington Post story of January 12, 2009 notes:

President Bush has presided over the weakest eight-year span for the U.S. economy in decades, according to an analysis of key data, and economists across the ideological spectrum increasingly view his two terms as a time of little progress on the nation’s thorniest fiscal challenges.

The number of jobs in the nation increased by about 2 percent during Bush’s tenure, the most tepid growth over any eight-year span since data collection began seven decades ago. Gross domestic product, a broad measure of economic output, grew at the slowest pace for a period of that length since the Truman administration. And Americans’ incomes grew more slowly than in any presidency since the 1960s, other than that of Bush’s father.

Looking at a longer time period, and focusing just on Oregon, over the period 1979-2004, the bottom 20 percent of earners suffered, on average, a 15.1 percent decline in real income; those in the next highest quintile lost 3.4 percent, those in the middle quintile lost 4.4 percent, those in the next highest quintile gained only 0.3 percent.  Only those in the top 20 percent enjoyed real income gains over this period, an average increase of 37.1 percent.

In reality, however, the majority of the gains for this top group went to the top 1 percent.  Households in the top 1 percent saw their real adjusted gross incomes beat inflation by 135 percent.  The rest of the top 20 percent saw gains of only 19 percent.  In fact, the gains were really more concentrated then that.  It was the top 1/10 of a percent that was the big winner.  Those households saw their real adjusted gross income rise by almost four times, from $733,000 to $2.6 million.  The rest of the top 1 percent, by contrast, saw their incomes only double, from $238,000 to $500,000 on average.  In short, although the economy has grown over the last several decades, conditions for the vast majority of Americans have deteriorated (and here I include the declining percentage that have access to health care, etc.).  In short, I don’t think our goal should be to recreate “the good old days.”

Actually, the choice we face is quite different.  Even if we wanted to recreate those days, there is no obvious way to do it.  The fact is that growth over the last fifteen years or so was driven by a series of bubbles, first a stock market and then a housing bubble.  Those bubbles are over and there are no new ones on the horizon.

As earnings stagnated over the last few decades, people drew upon their appreciating stock and housing wealth to borrow.  In other words, our recent growth was largely based on debt, which was tied to appreciating stock and housing prices.  In particular, people used their homes almost like ATM machines.  Between 2001 and 2007, homeowners withdrew almost $5 trillion in cash from their homes; as prices of their homes would rise, people would take out a new mortgage, borrowing ever greater amounts of money in the process.  About a third of the total growth in consumption over this six year period was financed by so-called mortgage equity withdrawal.  At the peak of the bubble in 2006, consumers were cashing out some $780 billion a year from (then rapidly rising) home equity.  But the resulting rise in debt levels was clearly unsustainable—household debt (mortgage and credit card debt) as a percent of disposable personal income rose from 59% in 1982 to 77.5% in 1990 and 91.1% in 2000 to 128.8% in 2007.

The bubbles have now popped, with prices of houses and stocks falling sharply.  The shaky financial sector then collapsed along with consumption, triggering the current ever deepening recession.  What then is to replace these bubbles as drivers of economic growth after the effects of the stimulus spending dissipate?  Consumers are deep in debt and consumer spending is unlikely to magically be renewed as the country’s main economic driver.  Business spending on plant and equipment has been weak and unlikely to grow substantially under current conditions.  The entire world economy is in recession, so forget exports.  All we have left is government spending.  And we now come back to the stimulus program: if we conceive of the government only as supplier of short term spending to end the recession we are in big trouble.

Yes, government spending is necessary to shorten the recession, but if that is all that is being planned then we face a period of long term economic stagnation, with the great majority of us suffering further declines in the quality of our lives.  It is against this future that we have to plan and judge any new program of government activity.  Unfortunately it is not clear that the President or his advisors yet grasp the extent of the real problems we face.  Let’s hope they do so quickly.

Economic update

The economic mess is getting worse:

The state of Oregon is predicting a major revenue shortage—perhaps as much as a billion dollars—and thinking about cuts.  The Oregon Center for Public Policy says it is a revenue problem not a spending problem and suggests targeted ways to boost revenue–like deal with the ever shrinking corporate contribution to our taxes.

Unemployment is rising sharply, but we have a broken system.  For example, “just 37 percent of unemployed Americans are receiving jobless benefits today, down from 42 percent during the 1981-82 recession and 50 percent during the 1974-75 downturn. Americans today receive a maximum of 39 weeks of unemployment benefits, down from 65 weeks in the 1970s. The average weekly benefit is $293.”

And then there is deflation—imagine if prices and salaries all fall while debts remain unchanged.