Problems with Kulongoski’s budget

Gov. Kulongoski has made good on his first two campaign promises. First he has increased spending. Second he has increased taxes. I realize that the beginning of the legislative session is still a month away and that “legally” these are only the governor’s proposals. However, with the Democrats now in control of both houses of the legislature, we can safely assume that the governor’s proposals are simply the floor from which the adopted budget will grow significantly. After all there are dozens of special interest groups that need to be fed at the public trough.

No, nobody should be surprised that the governor is going to increase spending but the amount by which he proposes to increase it should, but won’t, set off alarms in every taxpayer’s purse and pocketbook. The reason that it won’t set off any alarms is because the state is currently awash in tax revenue – nearly two billion dollars more than the previous biennium. The governor’s proposed budget can be adopted without a general tax increase and, therefore, will be invisible to most. (There is a general income tax increase on business in the form of refusing to refund the “kicker” to business.)

But the size of the proposed spending increase is a signal that Oregon government has returned to business as usual and has learned nothing from the recent past. During the exhilarating years of the 90’s when Oregon’s high tech industry grew at phenomenal rates and produced a plethora of jobs and, therefore, tax revenue, Oregon’s total personal income grew at slightly over six percent per annum. (Total personal income represents all income from all sources – passive and active – for all Oregonians, and, therefore reflects not only the growth in individual income but also the growth in population.) But government spending grew at even a faster rate, slightly over ten percent per annum – just about what the governor is proposing with his new budget and slightly less than what the Democrats will ultimately adopt after feeding their special interests. The average growth in total personal income over the last twenty years has been slightly over five percent.

And therein lies the problem. It is mathematically impossible to sustain ten percent per annum growth in government spending when the source of the revenue (taxpayers’ total personal income) is only growing at between five and six percent. That is, it is impossible without a tax increase. That mathematical certainty becomes more apparent in a recession – just like the recession Oregon experienced in 2001-04. The exorbitant growth in spending in the decade proceeding that recession assured that state government would encounter a fiscal crisis. Government never responds to fiscal crises like a business. Its first choice is never “belt tightening.” Rather, it is always to increase revenue through higher taxes. Thus we saw the government try to impose two tax increases in the midst of the most recent recession – the first for $800M and the second for $1.2B – both of which were turned back by the voters in successive elections.

Because of the unsustainable spending increases in the previous decade, when the voters rejected those tax increases the impact on the budget was that much more severe. No, we didn’t sustain massive layoffs of public employees. No, we didn’t see the elderly dying in the streets. No, we didn’t see the doors to the prisons open and the dregs of society pour out to endanger the citizenry. All of those catastrophes were predicted by the big spenders – the liberals, public employees unions, and career politicians. The only part of their scare tactics that came to pass were isolated early closures of school terms – and those were not caused by the failure to adopt the tax increases, but rather because then-Gov. Kitzhaber and other public officials refused to reduce spending when signs of the recession were first confirmed and thus imposed the whole of the shortfall on the final quarter of spending.

And now we are hard at uncontrolled spending again. Spending at unsustainable levels. Spending without regard to the fact that recessions follow expansions as night follows day.

Serious economists, stock market analysts and portfolio managers have already raised cautionary flags with regard to the current economic growth. The housing market downturn hasn’t and won’t have its full effect until foreclosures begin on those who borrowed to purchase and resell (flipping), those with adjustable rate mortgages exhaust their initial low rate, and those with the introductory custom loans (interest only, etc.) realize that their loan amount exceeds the now reduced value of their equity. The severe cuts by Ford and General Motors will have long range effects that may not be felt for several months because of the buy out packages and the phased job elimination. And finally, the continuing growth in the defined benefit pension programs for both business and government (PERS) continue to adversely impact future investment and program spending. When the next recession hits, Oregon will suffer the same fate as it did in the last recession. Without a willingness to control spending within the parameters of sustainable economic growth, Oregon is destined for these continuing severe boom/bust cycles forever.

All of this appears to escape Gov. Kulongoski and will escape the Democrats in control of the legislature. For them it is never a problem. After all you can simply raise taxes.