Basic Economics – The Conversation Continues

Last week there was a thread here at OregonCatalyst that sparked a debate about “basic economics” and Gov. Kulongski’s proposal for a rainy day fund. This debate continued over at NW Republican which I want to pick back up this week.

(NOTE: Please keep in mind that Kulongoski’s proposal is vastly different than a ballot measure floating around out there which predicates a Rainy Day fund created along side of a spending limit – Do not confuse the two. Kulongoski’s plan wishes to increase government spending with a so-called “Rainy Day Fund” as part of a whole spending package while the ballot measure seeks to limit government spending.)

It’s nothing new for politicians from all partisan perspectives to use this theme of “basic economics” as the basis for various tax increases, kicker deductions, ballot measure bullying and various budget gimmicks. This post is aimed at moving the debate forward asking the question of what is “basic economics” and how does it as a field of study play into the political sphere.

Economics in One Paragraph (Basic “Basic Economics”)
Economics is the study of resource allocation given the reality that we exist in a constant state of scarcity (not enough to go around for everyone’s wants and needs at any given moment). So in essence, how we spend the resources we have. Given our modern economy this study usually breaks down into tracking currency interaction and prices in dollars. Cold hard cash being the underlying medium of exchange for our economy and therefore the easiest way to determine relative values as it relates to how we allocate resources as an economy. Since there is only so much money to go around, economics recognizes the concept of opportunity cost (i.e. the reality that for every purchase made another opportunity is forgone as the money is spent and cannot therefore be used alternately in another investment/purchase).

So given this nutshell explanation there are two big points the Governor has to face when setting up any rainy day fund. First off there is only so much money to go around. Second that any additional revenue taken out of the economy cannot be put to use where it would normally go if left in the hands of tax payers.

Now this is the part of the debate in which liberals say – “So What?” “The rainy day fund pays dividend in stable government funding.”

But these dividends won’t really appear if government isn’t capable of improving its fundamental management and ability to prioritize its spending. Instead you will have money spent not when it rains but simply when clouds are forecasted to appear. This of course costs Oregon more in the long run as our resources are needlessly sapped. It only gets worse over time as government spending is not contained and this further expansion of the budget enlarges the problem beyond the ability of any rainy day fund to address.

Without a reform that requires Oregon to maintain a budget in line with inflation the Legislature and Governor have shown consistently that they will expand spending in a nonsustainable fashion. To put it simply, it isn’t that revenues are unstable its that the growth of spending is unsusatainable. It’s like a dot-com investor assuming the returns will stay great forever.

This is my big contention with the Rainy Day Fund as proposed by Gov. Kulongoski. Without real fundamental reforms to fix the fiscal crisis facing Oregon all his work and all our foregone take home pay will be for nothing. (Note: I do think there is a way to set up a rainy day fund that will work but it would require government to constrain its budget growth to mirror inflation but I will save that for a later day)

There is also another reason that I believe that the rainy day fund won’t deliver as promised. The catch is the fact that when you take large pools of resources out of the economy it has a direct impact on the economic growth of Oregon. How you ask??? The power of compound interest (another basic economic principle).

When economies grow there is a percentage you usually hear about called Gross Domestic Product (Oregon has its own share of our national GDP). This economic growth statistic is built upon hundreds of years of growth. So if you consider the gravity of it, the roughly 2% (I believe that’s the number) we grew this year as a state was probably the same inflation adjusted dollar figure for the entire Oregon economy say in 1920.

To take money out of this pool is to sacrifice a portion of the economic growth of the state. This growth now being taken away from the ongoing economic wealth of Oregon.

When you think in terms of opportunity cost this becomes a real threat. For Oregon to begin to tax an excess amount of money simply to take it out of the economy and to hold onto Oregon is canibilizing future revenu. The rainy day fund will cost us much more in economic growth over ten years than we will save in a fund. The state of Oregon is costing itself more money in the long-term as it is turning away larger revenues in the future in order to immediately realize a cash payment today.

Under the guise of a savings account the Governor is going to loot the future income of the state and slow Oregon’s economy. The issue in Oregon hasn’t been that state revenues decline. Its the fact that state spending has always grown faster than inflation. The first step isn’t socking away tax revenue but instead getting state spending under a reasonable growth curve. This in itself will reduce the cycles of boom in bust for the Oregon’s finances and will further bolster the growth of Oregon’s economy.

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Posted by at 07:05 | Posted in Measure 37 | 8 Comments |Email This Post Email This Post |Print This Post Print This Post
  • PanchoPdx

    The rainy day fund created by the McIntire spending limit (aka the Rainy Day Amendment), would create the fund out of surpluses created under a spending limit.

    The funds could not be spent unless:

    1) tax revenues fall below the spending limit in a biennium, or

    2) the legislature sends them back to the taxpayers, or

    3) the legislature refers and the voters approve spending the funds.

    This measure does not affect the kicker or require any new taxes. In fact, it is much more likely to help lower taxes in the future.

  • Pancho

    This post popped up prematurely. When you commented it was still being drafted.

  • Jason Williams

    McIntire’s Rainyday Amendment Spending Limit is a vehicle to reduce runaway spending growth whereas Kulongoski’s and other plans (Sen. Morse, OBA) mis-use a rainyday fund idea as a way to increase government spending (by raising taxes, riading the kicker).

    The more Kulongoski talks the more he makes my case for citizens to pass a spending limit because his spending rhetoric alone needs a limit.

    Sincerely, Jason Williams proud petitioner

  • Anon

    There is really no point in talking about Sleepy’s jaw flapping. His spinners immediately pulled back from anything he said.

    The only Rainy Day Amendment to talk about is the spending limit that is actually moving forward as people sign initiative petitions to get it on the Nov. ballot.

    Overspending is rampant in state government. Even within the growth limits of population + inflation there will still be waste and inefficiency.

    Until Oregon gets in line with other states re. PERS and health care costs for public employees … and re. bidding / contracting / outsourcing … basic gov’t services will be dysfunctional = too expensive and ill-fitting.

    But at least we could have some limit on the mess.

  • James West

    Anything Kulongoski proposes is a bad idea, reason? Because Kulongoski proposed it!

  • Marvin McConoughey

    Recessions function in a very crude way to motivate government to create efficiencies, curtail bloated programs, and refrain from adventurism in new programs. Sometimes the motivation is effective and often not.

    Still, our state government has not created a better approach to cost control. Until it does, the rainy day fund seems apt to operate as a ratchet. In good times spending will expand rapidly and in bad times will not be allowed to retreat. Over time under a rainy day fund system, I believe that Oregon legislatures will lack the moral fiber to control spending and the state economy will suffer.

  • Anonymous

    i love how so many in oregon think that public employees should be paid crap and have no benefits. yeah, want the employees of mcdonalds working for state and local governments? is that the quality of workforce you want looking into your slope stability, electrical connections, trades licensing etc? i doubt it.

    people always want less government spending, and yet bitch and moan about how long it takes to process permits, applications, review professional licenses, prosecute crimes etc. if you want services, you have to pay for them. they don’t magically appear.

    • Many government empoyees aren’t paid crap but in fact well above market wages. Many government workers are paid less than they deserve. I know many government employees that are dedicated, hard working and deserve every penny they receive. Regardless it doesn’t justify letting our state services bankrupt the entire state.

      In particular, its the benefits that bug me. How is it that every employer in the world can provide health care regardless of prexisting benefits for below $600 but our state government the largest buyer of healthcare in Oregon can’t manage to do it for less than $800. These are the sources of our criticism of state management.

      If you as a state employee find that your caught in the middle it’s because you are. They are squandering your state resources and job security to blow money needlessly. Same with PERS. PERS would have bankrupted the state of Oregon (and still might). Democratic politicians ran from reform and therefore threatened not only statewide services but you government employees actually receiving the retirement check they were promised.

      I agree we have to pay for services. I agree that there are many services that government is uniquely positioned to offer for me. It still does not excuse Portland giving millions to condo developers and expecting the rest of Oregon to pick up the difference from schools. It doesn’t excuse Oregon’s PERS board from playing games with state employee’s retirement funds and still expecting the tax payers of Oregon to pay for losses. Reform is needed, state employees in particular need to stop falling behind the union noise machine and recognize that these reforms are in your favor.

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