Reliving our political mistakes

“Progress, far from consisting in change, depends on retentiveness. When change is absolute there remains no being to improve and no direction is set for possible improvement: and when experience is not retained, as among savages, infancy is perpetual. Those who cannot remember the past are condemned to repeat it.” George Santayana, The Life of Reason (1905-06)

The popular quotation contained in the last sentence above has greater meaning when put in its full context. And nowhere may that quote in its entirety be more appropriate than in the looming mistakes of Oregon’s Democrat dominated state government.

A recent article in BrainstormNW by noted Northwest economist William Conerly highlights the mistakes of Oregon state government prior to the recent 2001-03 recession and concludes by saying:

“The state of Oregon, however, is woefully ill prepared. The last recession hit the state government hard, but it appears that few lessons have been learned.”

The essence of Conerly’s article is that Oregon state government made two huge mistakes prior to the last recession. The first is the virtually unilateral reliance on a highly volatile state income tax to fund government and the second is the absolute failure to have either a plan or to react to the early notice of the economic downturn. Add to that a decade of unchecked spending in excess of real economic growth and the result was the predictable budget calamity that occurred in both the 2001 and 2003 legislative sessions.

Conerly’s article notes that as far back as 1998, state government was warned of the dangers of the first problem. A “blue-ribbon commission” was appointed by then Gov. Kitzhaber and headed by U.S. Bank’s chief economist, Dr. John Mitchell. In summary, the commission concluded:

“Oregon’s revenue system is more sensitive to changes in the economy than it was in 1980.
–“General Fund revenue growth has varied widely from biennium to biennium.
–“General Fund revenue has had a high degree of unpredictability on a biennial basis.”

In the ten years since that warning, and in the face of the budgetary calamity that befell the last recession, nothing has been done to change that dynamic. There are those that will argue that creation of the “rainy day fund” has created a safety net but the return to unchecked spending in excess of real economic growth has already overwhelmed the nascent fund.

Conerly’s second admonition concerning the state’s failure to plan or act in light of the early notice of the economic downturn particularly hits home with me. Having recently retired, I had accepted an offer from a friend of mine to become the chief of staff for the Senate Majority after the regular session and in the middle of the marathon special sessions. I had a ringside seat to watch the legislature repeatedly fail to act and Gov. Kitzhaber make a bad situation even worse – either by inept management or deliberate scuttling of the ship of state.

Prior to the conclusion of the regular session, the governor and the legislature were already aware that the pending budget was unsustainable. But they passed it anyway and went home. Instead of reducing spending early, the governor, in spite of the demonstrable shortfall, insisted on spending at the authorized levels, leaving the entirety of the budget shortfall to be absorbed in the final quarters of the biennium. (A $500 million reduction spread over 24 months is manageable – a $500 million reduction spread over six months is catastrophic.) There was, at the time, speculation that the governor did this deliberately to make the pain more acute in hopes of convincing the legislature to raise taxes.

Through a regular session and five special sessions, neither the governor nor the legislature would step up to the hard choices of managing down a bloated state government. In the end, they fell to the easy solution – raise taxes. They tried it twice and failed.

We are embarked on that path again. Neither the governor nor the legislature is willing to address the perpetual problem of an unreliable revenue stream, choosing instead to continuously raise taxes. No plan has been prepared or adopted to deal with the next downturn. This governor, by experience and training, is even more unprepared to act rationally when it happens.

James Stack, a noted market analyst who has remarkably predicted the last several downturns, notes that this is the second longest market expansion in history and now flies the warning flags of a looming downturn.

“. . . when experience is not retained, as among savages, infancy is perpetual.”