Caution: Avoid ‘irrational exuberance’ over revenue forecast

Sen Doug Whitsett

by Sen. Doug Whitsett

Former Federal Reserve Chairman Alan Greenspan famously used the phrase “irrational exuberance” in 1996 to describe conditions in which the stock market becomes overvalued. His comments came a few years before the crash of the dot-com bubble that had inspired much of the undue confidence in the market throughout the late 1990s.

Oregon’s most recent revenue forecast was released on Thursday, May 14. “Irrational exuberance” could certainly be accurately used to describe the reaction of Democratic leaders to that estimate of future state income.

The forecast predicted significantly more revenue than had previously been expected. It was immediately hailed as Oregon’s “happy end” to the Great Recession that began, following the near collapse of the entire national economy, in 2008.

However, history has shown that the prediction for significantly more revenue is always to be expected in the May economic forecast issued in an odd-numbered year. That’s because the Legislature is in session, and extra revenue is always needed when budgets are being written and new programs are being proposed.

It is widely believed that political pressure is routinely applied to ensure that those revenue estimates are as rosy as possible in order to warrant increased spending. Democratic leaders consistently ignore the very low levels of statistical confidence in the forecast that makes additional spending ill-advised.

Despite the overwhelming optimism surrounding the forecast, the state economist was unable to maintain his enthusiasm when presenting the forecast to Legislators. He began by stating that “there is a lot of new money in it” and a “significant amount of more available resources” compared to last year and the March forecast.

He followed this opening by cautioning that his predictions were aggressive and optimistic, no less than three times, during his presentation. He said that “the trouble is, we don’t know if any of these additional resources are real yet.” The economist did make mention of “downside risk” and “uncertainty,” and warned Legislators that there are “no dollars in the door yet” and to keep any spending “feeding frenzy at bay.” He cautioned that carrying some of those projected dollars through to an ending balance of reserve funds would be “prudent.”

Perhaps even more concerning, he described signs of “fault lines” at the national level and other numbers “that are troubling.” They include a “softening” in manufacturing, retail sales and overall spending. The economist also cautioned that Oregon’s labor force participation rate remains lower than it should be in healthy economic conditions.

Nevertheless, Democratic leaders were quick to make plans to spend the newfound wealth on needful things. More than $100 million of the “new found” money was immediately dedicated to K-12 school funding.

I agree with our economist that prudence should be exercised by the legislative body. Experience has taught me that we should anticipate the next economic forecast, to be issued in September, will predict a sharp, and “unexpected downturn” in projected revenue.

There are other reasons why we should refrain from “irrational exuberance.”

Also released this month, but to much less fanfare, was the Secretary of State’s 2014 Financial Condition Report. Unfortunately, it tells a much different story regarding the state’s overall financial condition.

The Oregon Legislature’s engagement in heavy borrowing during the past decade has led to substantial debt payments that divert taxpayer dollars away from critical services. Transportation funding in the state has been augmented, since 2002, by borrowing money for highway construction projects. Payment of principle and interest due on that enormous debt will significantly compound the State’s inability to pay for highway maintenance and preservation.

Oregon’s health and human services spending has more than doubled since 2007. Its continued growth comes at the expense of education, public safety and other programs.

We were lucky enough to have created a Rainy Day fund to help carry state government through the worst times of the Great Recession. That reserve account helped to fund critical services during the period of reduced revenue. But the Legislature has yet to make any meaningful efforts to replenish that fund, leaving us even more vulnerable in the event of the next economic downturn.

One solution that has been offered involves suspending “kicker” rebates to Oregon taxpayers and redirecting those funds towards education and the Rainy Day Fund. Such a proposal will be adamantly opposed by myself and other Legislators. That is because we wish to uphold the wishes of voters who approved a measure to place the “kicker” in the Oregon Constitution as the state government’s only mechanism for a realistic spending limitation.

The audit report goes on to state that Oregon has experienced virtually no growth in new businesses since the 2008 onset of the Great Recession. Our unemployment rate has exceeded the national average, every year, since 1996. Oregonians’ per capita income is 11 percent below the national average, and continues to decline.

There are other troubling signs for the state’s economy as it relates to other states and the nation as a whole.

The state’s property crime rate is 12th highest in the nation and climbing. We also rank third-highest in the rate of identity theft.

The number of Oregonians on varying forms of government dependence further serves to erode any sense of “irrational exuberance” and proclamations of an impressive economic recovery. Nearly one million Oregonians are on Medicaid, 800,000 are on food stamps, and our rate of people living in poverty has increased 30 percent during the past dozen years.

It’s true that there has been growth in some economic sectors. But most of the growth in employment has been in the education and health care sectors, and have largely resulted from the hiring of more government employees.

The cure to Oregon’s budget problems is based on spending restraint and increased revenue from private sector job creation. We must return to our natural resources based free-market economy if Oregon is to once again be a prosperous place to live and raise a family.

Regardless of the overly optimistic predictions from our state economist, our Secretary of State’s audit makes clear that “happy days” are not quite here again. It is important that our policymakers set aside the feel-good “irrational exuberance” that could lead to very bad policy and spending decisions.

We should instead exercise the kind of prudence in spending that has been sorely lacking in Oregon government for so long. And we must stop throttling our State’s free market economy with myriad restrictions and regulations.

Perhaps most importantly, we should never stop reminding Oregon’s political leaders that healthy Oregon budgets are entirely dependent upon a healthy private sector economy.

Senator Doug Whitsett is the Republican state senator representing Senate District 28 – Klamath Falls

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Posted by at 05:00 | Posted in Government Spending, OR 78th Legislative Session, Oregon Government, State Budget | 3 Comments |Email This Post Email This Post |Print This Post Print This Post
  • Bob Clark

    The state also gets some of its revenues from capital gains, and the stock market as measured by the S&P 500 index is said to have had positive returns in each of the last six years; and what is also is being said is the U.S stock market has never been positive seven years in a row. In other words, there’s reason to expect state revenue growth could slow significantly after recovering from the Great Recession.

    So, state leaders should look for private projects, unleashed through targeted deregulation, to provide some counter to negative risks to the economy. Examples I am thinking here of are state leaders possibly looking to encourage a privately financed west side bypass toll road. Also, greater expansion of the Portland Metro Urban Growth Boundary (which is not being any where nears the flexibility it originally was based).

  • Myke

    Pixies will come down from the cascades and grant wishes to the needy, flowers will bloom across the Willamette valley, and a Republican will hold an office of influence within the boundaries of Oregon. Yeah, we’re in deep do. Personally, I’m still rooting for state bankruptcy. Its good to be first.

  • fred291

    Sen. Whitsett, you are absolutely correct in your conclusion that the state should restrict spending growth to a sustainable rate (less than the current short-term forecast) and sock the rest away in the rainy day account. Anything else would be recklessly imprudent. I only wish more of your colleagues understood the need to bring the rate of spending growth into line with long-term growth.

    As for the kicker, I’d like to see it diverted to debt reduction or, perhaps, even better to a sinking fund, offsetting the state’s recent debt growth.

    Some of your claims about the performance of Oregon’s economy seem excessively pessimistic, however. I don’t know where the auditors got their numbers, they are probably right, but according to Census Quick-Facts, Oregon’s mean per-capita income increased from 89 percent of the US average in 2010 to 95 percent in 2014 and median household income from 89 percent to 94 percent. Since 2010 almost all of Oregon’s net job growth has been in health care (not public employees, but largely driven by public spending), manufacturing, professional and business services, and leisure and hospitality services. Indeed, over the past 15 years Oregon has been the number-one state in private-sector job growth. Also, last I looked (Mar 2015), the US unemployment rate was 5.5 percent; Oregon’s 5.4 percent.

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