State Budget and the Economy

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Economists discuss the potential impact of the state budget on Arizona’s economy. Guests include ASU economist Dennis Hoffman and Alan Maguire, president and principal economist for The Maguire Company.

Ted Simons: How do budget cuts to K-12 education, universities and Medicaid impact Arizona's economy? Here to share their views are Alan Maguire, president and principal economist for the Maguire company. And ASU economist Dennis Hoffman, who directs the seedman research institute for the W.P. Carey School of Business. Good to see you back here again.

Alan Maguire: Good to see you.

Dennis Hoffman: Good to be here Ted.

Ted Simons: Al, we'll start with you, overall impact of the budget with its cuts on the economy?

Alan Maguire: Well, budget cutting is always hard but I think what we have to weigh in balance here, what were the alternatives? We either have this increase taxes or cut spending. And I think with the temporary tax having been passed a couple of years ago, we really had to look for spending cuts. Yes, they will hurt the economy but they probably won't hurt the economy as much as substantial tax increases would have hurt the economy.

Ted Simons: What do you make of it, Dennis?

Dennis Hoffman: well it's job losses. You have to decide what the priority is right now, Ted. If the problem is jobs in Arizona and that's what many think. We rank 49th in '09 and rocketed up to 48th in 2010. This budget will give us a jobs haircut of about 50,000 jobs with the 30,000 in the private sector.

Ted Simons: Let's get specific here. Healthcare cut, the impact there. I've seen everything from 10,000 to 14,000 job cut if the $510 million Medicaid is erased. Make sense to you? Sounds like a lot of jobs.

Dennis Hoffman: That would make sense to me and the rippled effects through the private sector gets me up to the 30,000 number.

Ted Simons: Are these jobs replaced by similar jobs and if so, when?

Alan Maguire: It depends on the job, quite frankly. In the case of the healthcare jobs they may get relocated. Some may not. But we're starting to see the economy recover a little bit and start to see job growth in different sectors and eventually recover from whatever job losses we have as a result the spending cuts but again you have to balance those against the impact of tax increases on job losses and one thing that's really important, I think, is that imperfect as the budget may be, it sends a positive signal to the world that Arizona is going to begin to deal with its fiscal problems. We have been in a total fiscal mess for three or four years now and we're actually trying to address it. Not perfectly but trying to address it.

Ted Simons: We hear the message of stability and certainty with Arizona, how do you see that?

Dennis Hoffman: I've been ranting, frankly, about the instabilities and the negative signal, because we've not gotten our fiscal house in order. The arithmetic suggests we're taking a step to getting our fiscal house in order. There's other ways one could have done this. I just want to make a quick comment with respect to Alan, he's exactly right. The economy is improving. There will be jobs created over the next year because of the improvement of the economy, so when I talk about 50,000, 30,000 jobs lost, that would be against the -- you know, the growth of jobs elsewhere.

Ted Simons: But we mentioned 10,000 to 14,000 healthcare jobs and I guess if child care subsidies go the way you talk about then another 1,000, 2,000 jobs there. If these jobs do come back because of the stable environment, because of the certainty, because you didn't raise taxes, are these the same kinds of jobs or different? Are different sectors affected? What's going on here?

Dennis Hoffman: I just don't find very much at all in terms of the jobs impact in terms of raising taxes. So for example, I said you could do this differently let's suppose you raised consumption taxes by the amount that they made cuts this time. You'd lose approximately one-five. 15,000 jobs by raising taxes. You'd lose 50,000 jobs by making the cuts.

Alan Maguire: Well that would not be what the international monetary fund says. The international monetary fund analysis which was based on regressions of actual fiscal changes in a number of countries around the world shows that the impact of spending reductions is one quarter of the negative impact of tax increases. That's not my data. That's the IMF and it's based on a whole bunch of analysis from a bunch of economies and maybe it's wrong for a little bit. But there's was four-to-one with the differential there. That's pretty powerful there to me.

Dennis Hoffman: Depends clearly there and I would concur with IMF analysis. Really depends on the nature of the tax hike. Certain business tax hikes really strangle economies. I'm talking about a consumption tax increase on products that are largely made outside the state. So there are negative implications, a few less TVs purchased, ok? They're made in China.

Alan Maguire: I'm sorry --

Ted Simons: Please go ahead.

Alan Maguire: I don't disagree. If you're going to have to raise taxes, the best way is to make it temporary because that doesn't change behaviors badly and secondly, a consumption tax. And that's why, personally, I like the sales tax because it's a consumption tax it's the most economically neutral tax. The last thing you want to do is punish capital or workers.

David Hoffman: Completely agree.

Ted Simons: Let's get specific again here regarding the cuts to education. Big cuts there. Impact on the economy with jobs lost and let's look at some other factors too, with the quality of the workforce.

Alan Maguire: Right, you know, I think -- I think the argument gets a little lost sometimes and we talk about jobs, but jobs is just shorthand for building an economy. Arizona needs to strengthen its base economy. We have to begin to build industries that bring money into the state. People that produce something here and sell it somewhere else. Intel is a good example. But we also do that for services. The university of Phoenix does online education across the country and generates income in the state of Arizona. That the kind of thing you want to focus on. How do you do that? You need to do two things: First, you have to have the right high-skilled labor force. So I worry about anything that reduces the quality of our labor force and that's what made Arizona grow in the 50's, 60's, 70's, and 80's was a quality labor force. The second thing you have to do is make sure your tax and regulatory environment is hospitable to those kind of companies so we really have two pieces to do here and our budget may be struggling with how to do that the best way.

Dennis Hoffman: We've done the second thing well. I worry about the first thing. And I think Alan laid it out very, very clearly. We need to start competing not only on taxes and regulatory burdens but we need to be competing for the best programs to produce highly-educated, skilled workers. Look at what the state of Washington did to retain the Boeing jobs up there.

Ted Simons: I know it's not a zero-sum game. When we talk about education cuts and you say that obviously raising taxes, not good for the economy, not good for business. And yet, not having the funds for a quality education and results in a quality workforce also affects -- I mean, how do you balance here? What's the formula, what's the equation?

Alan Maguire: I think the third piece you have to throw into that is what else are we spending government funds on? And what's really happened over the last 20 years is we've set up I think a very foolish competition in Arizona, because of scarce resources between education and end gent healthcare. Low-income healthcare for Arizona resident dollars consuming a larger and larger share of the budget. Tom Betlach was on last night talking about that. There's no place in the state budget for that pressure to go but into education and it has systematically reduced the share of the general fund going to particularly higher education.

Dennis Hoffman: Exactly. He's exactly right. We've engaged in the competition and the universities lost that competition.

Ted Simons: But is that not the nature of the beast with so much of the budget protected, the only things you can go after are things like healthcare and education?

Dennis Hoffman: You need to change the revenue base in this state.

Ted Simons: Explain.

Dennis Hoffman: I think we need to be honest with the citizens of this state, look every one of them in the eye, not look for pockets of rich people or corporations or loopholes over there, there's something mysterious. You look at everybody and ask them, each one of them, to contribute according to their means toward providing a greater base of revenue to pay some of these bills.

Ted Simons: That sounds like a tax hike.

Dennis Hoffman: You're absolutely right it's a tax hike. We could go to a fair flat tax, 3% or 3.5%. We could go to a broadened sales tax base. We could stop subsidizing residential property taxes through the homeowners rebate. We can do any number of these things.

Ted Simons: what do you think about those ideas?

Alan Maguire: Well before I went to a tax increase, particularly in this climate in this state, I would try and figure out how to get my balance back in my budget. What we have done over time is starve higher education and community colleges and universities, we've starved infrastructure. In the best years of the mid 2000s when we had so much cash coming in, we didn't almost know what to do with it, we were still taking money out of the state highway fund to fund general fund spending.

Dennis Hoffman: Absolutely right.

Alan Maguire: So how does that help your economy? Let's have a serious conversation about what are the essential things to build an economy and once you make that decision, then you maybe can talk about how to pay for it.

Dennis Hoffman: And we will have to talk about how we're going to pay for it. You know, there's one more piece to the puzzle Ted. Tax increases are something that I've advocated not because I want to tax the world, it's just that it's so clear to me, the arithmetic is so clear that this state is short. But this particular budget being passed in March, first time they've passed a budget in March in my memory. Why? What in the world was the hurry? Revenues are coming in. We hit double digits in retail. We've got income taxes coming in the end of April. We're going to see this revenue. It's like what were they thinking? Did they have a bowl game to attend or what?

Ted Simons: Watch it there, fella. We've got about 30 seconds left. Bottom line, is this a good budget for Arizona?

Alan Maguire: Well you know one of my favorite quotes is from Abraham Lincoln which was, "whatever you are, be the best you can be," and I think that the most important thing about this budget is turning the direction toward fiscal stability. Imperfect as it may be, it's heading in the right direction.

Ted Simons: We've got to stop it right there. Gentleman, good stuff thank you very much.
Alan Maguire: Very good Ted.

Dennis Hoffman: Thank you Ted.

Dennis Hoffman:ASU economist;Alan Maguire:President and Principal Economist, The Maguire Company;

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