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