Deficit spending: Why shouldn’t Minnesota do as the feds do?

MinnPost photo illustration by Corey Anderson

With Minnesota facing a massive $5 billion deficit, Gov. Tim Pawlenty and lawmakers are focusing on deep, painful budget cuts as a necessity in balancing the state budget.

But some are asking, what good is a balanced budget if it means widespread slashing and burning to eliminate jobs and services, especially in tough economic times?

“The whole idea of a balanced budget rests upon an archaic and bankrupt economic theory that doesn’t work,” says David Schultz, a professor in Hamline University’s School of Business. “It comes from a neo-classical or pure free-market theory that says government expenditures hurt the economy, and that when the economy is not doing well, the best thing to do is for government to cut back on spending to maintain a balanced budget. But it doesn’t necessarily make sense to cut budgets when the economy is in a downturn.”

Is there a better approach? Prof thinks so
Rather than possibly worsening the state’s economy by cutting back, the state should do the opposite and spend, even if it means running up a deficit in the short run, Schultz says.

Such an idea would not be easy to implement in Minnesota without a constitutional amendment, and even raising the possibility quickly draws the ire of anti-tax groups and business representatives.

But here’s the case Schultz makes for rethinking state budget practices: Lawmakers, he says, could simply follow the federal government practice of deficit spending, a concept based on the theories of John Maynard Keynes, whose work influenced the country’s response to the Great Depression. (For more on Keynesian economics, here are a quick version and a lengthy dissertation on the theory.)

“It’s basically the rejection of supply-side economic theory,” says Schultz. “The Keynesian economics argument is that when demand slows down, one way revive the economy is for the government to fill in for that decreased consumption and act as a participant to stimulate the economy when consumers or businesses can’t do it.”

During the Great Depression, Keynesian economics fueled the New Deal and such initiatives as the Works Projects Administration (WPA) that put people back to work through government investment in public facilities and infrastructure.

Schultz says President-elect Barack Obama’s anticipated public works proposal is the latest example of how the government can be a positive force in a bad economy.

If the state chooses a few good projects to fund, establishes deficit spending for the short-term (say, over two to three years) with debt that’s manageable, then, “With all those in place we can do it fairly successfully,” he says.

Change the state Constitution?
But such an approach wouldn’t be easy.

For starters, changing Minnesota’s budget rules would require altering the state Constitution. Although the constitution doesn’t specifically spell out a balanced budget requirement, it strictly limits the purposes for which the state can borrow money. Back in 1857, there were only two allowable reasons to borrow — to repel an invasion or suppress an insurrection.

Later, other purposes were added, including developing agricultural resources (1922) and increasing forestation and abating forest fires, and maintaining and establishing highways (1924). It wasn’t until 1962 that the state passed a constitutional amendment to authorize money for bettering public lands and buildings, better known as the bonding bill.

Although the Constitution allows the state to borrow money for operating expenses within a biennium, that money must be paid back during that same two-year period from revenues available. No carry-over debt is allowed.

But since Minnesota doesn’t have the cash to fend off a $5 billion hit and has been averse in recent years to raising taxes, why not amend the Constitution to allow borrowing in the category of deficit spending? That way, the government would help people keep their jobs and legislators wouldn’t have to cut education, health care, and other services, right?

“No. It’s a horrible idea,” says Charlie Weaver, president of the Minnesota Business Partnership.

Weaver, a former legislator and former chief of staff to Gov. Tim Pawlenty, says it’s not a good thing when governments are “fat and happy.” He says government needs to be leaner, more efficient and smarter. He argues that kind of restructuring won’t happen without cutting spending and balancing the budget.

“This year, while painful and hard — nobody wants to go through it — institutions will be better for it,” says Weaver. “They will be forced to re-examine their business practices. They will operate better and more efficiently.”

Weaver says that the idea of deficit spending, even short-term, would never work.

Would legislators run amok?
“As a former legislator, I can tell you, there’s nothing temporary about what the Legislature does,” says Weaver. “Without the constitutional amendment (for a balanced budget), spending would run amok like in Washington, and our kids would end up paying for it.”

He’s got a point. The federal deficit is not exactly a model of fiscal responsibility.

It’s a ticking target, but the national debt now stands at more than $10.6 trillion, about $35,000 for every man, woman and child in the country. Yikes.

It’s for that reason Phil Krinkie of the Taxpayers League of Minnesota doesn’t know why on earth Minnesota would want to do what the Feds do with deficit spending.

“At the federal level, they have an almost callous disregard [of] what the federal debt is,” says Krinkie, also a former state legislator. “I don’t know anyone who’s even in the realm of proposing to do something about it. People just assume the debt will always be there.”

Krinkie worries that if Minnesota went to a deficit-spending model, lawmakers would become as complacent as those in Congress who do nothing about it.

“(Deficit spending) is a tremendous aphrodisiac,” says Krinkie. “We think we can help the people who are homeless or don’t have health care, but … from my perspective, it’s the absolute wrong direction.”

For his part, Keynesian economics fan Schultz says deficit spending on the state level does not automatically lead to crippling debt. He says the problem on the national level is that the federal government has had an inconsistent economic philosophy.

“We seem to be shifting priorities constantly,” says Schultz. “First with defense spending, then taxes. We haven’t had a consistent approach to managing the economy for the past two generations.”

Despite the gains that Schultz believes could be made by adopting deficit spending, it appears so far, only a few states are considering it (all 50 states, except Vermont, have some kind of budget balancing requirement). And in Minnesota, it’s not gaining much traction either.

A non-starter?
Weaver doubts a deficit-spending proposal would get far with lawmakers and says it has never been seriously considered by the Legislature.

“I’ve never heard it talked about even in the toughest times,” says Weaver. “It’s just such a bad idea. And so un-Minnesotan. Minnesotans like being responsible and take pride in living within our means, not spending more than you have.”

There don’t appear to be any lawmakers championing deficit spending. Speaker of the House Margaret Anderson Kelliher, DFL-Minneapolis, declined to comment on the issue, but Senate Majority Leader Larry Pogemiller, DFL-Minneapolis, states clearly that he doesn’t think Minnesota should emulate the federal government’s deficit spending ways.

“The federal government and state government are different,” says Pogemiller. “The federal government is the largest economy in the world. It can print money and, through the Federal Reserve, can affect the economic situation. We’re a smaller level of government and should have balanced budgets. As painful as that can be sometimes, it’s a wiser course over the long term.”

House Minority Leader Marty Seifert, R-Marshall, agrees. “I am absolutely against deficit spending being allowed,” he says bluntly. “I’m refreshed that we must make tough decisions and am disgusted by the federal government’s lack of ability to make difficult choices on priorities in the budget.”

Schultz is aware of the lack of enthusiasm states have for deficit spending and admits, “This is real heretical proposing something like this.”

But, he says, as the economy worsens and state budgets suffer more and more, states should seriously consider going Keynesian.

Marisa Helms writes about politics, east metro issues and other topics. She can be reached at mhelms [at] minnpost [dot] com.

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Comments (10)

  1. Submitted by Ron Gotzman on 12/18/2008 - 10:23 am.

    The easiest thing for a liberal to do is to spend other people’s money. Mr. Schultz loves to do easy things.

  2. Submitted by Leslie Davis on 12/18/2008 - 11:45 am.

    Mr. Schultz suggests we borrow money at interest to solve our problem. The worst idea. Time and interest makes the debt grow, but it does not increase the money supply. Borrowing at interest will only make our financial predicament more severe. One cannot pay debt with debt and get rid of debt.

    Leslie Davis for Governor 2010

  3. Anonymous Submitted by Anonymous on 12/18/2008 - 11:45 am.

    Aside for the question of deficit spending, the state does have a responsibility to make sure its budget-balancing solution does not worsen the economic downturn.
    While both spending cuts and tax increases remove demand from the economy, Nobel Prize-winning economist Joseph Stiglitz and Congressional Budget Office director Peter Orszag wrote during the last recession that state spending cuts can actually hurt the economy more during an economic downturn than tax increases. When state spending is cut, that means less spent on employee wages and the purchase of goods and services in Minnesota’s economy.

    In contrast, a focused tax increase on high-income earners is likely to have less of a drag on the state’s economy, because those individuals are likely to maintain their levels of consumption, but compensate for the tax increase by saving less. We need a balanced response to closing the deficit, which includes both spending cuts and raising revenues.

  4. Submitted by Tom Poe on 12/18/2008 - 11:59 am.

    Pawlenty is right. Lean government is the answer. Balanced budget is more important than jobs. Especially now that we’ve established just how ridiculous the notion of free market economics is. Let’s face the facts, and throw them away, since they only interfere with the Republican trickle down theory of jobs and growth. What we need, now, more than ever are fewer filthy rich people, and more homeless and poor people in Minnesota. That’s how real economies should behave. Go get ’em Brownie. You’re doin’ a heck-of-job, Pawlenty. We’ll all be cheering for your presidential run on your track record in 2012.

  5. Submitted by Gail O'Hare on 12/18/2008 - 12:51 pm.

    Thanks to Mr. Schulz, Ms. Blauvelt and Mr. Poe. I am so tired of hearing what is un-Minnesotan, as if we were a monolith of Scandinavian farmers, circa 1885.

    First, please distinguish between deficit and debt. Even those iconic farmers must run their businesses on deficits, sometimes for more than 2 years, till better times can restore equilibrium. Keynes was right.

  6. Submitted by John Diers on 12/18/2008 - 02:51 pm.

    Just as borrowing is available to private sector businesses, deficit spending should be a tool available to state policymakers to assure continuity in government services and programs during the ups and downs of the business cycle–that and a sales tax on securities trades to raise revenues from those who can afford it most.

  7. Submitted by Ginny Martin on 12/18/2008 - 07:47 pm.

    We are in the current financial mess exactly because of the theory of low taxes and cutting government spending. We need to borrow money to finance replacing and building the infrastructure, financing education, from Headstart (which gives back at least $3 for each $1 spent–you can look it up) all the way up to the university and college level. Good education promotes and creates jobs in our state. We need to put money in the places where it will go immediately to work, give people jobs who will then pay taxes and spend–buy cars, say–which then goes back into the economy.
    There is nothing theoretical about this. It’s been proven over time and over geography. Take a look at Minnesota a number of years back when we were on the cover of Time as the Minnesota miracle for a “state that works.” Taxes were much higher then; we funded education and we did all the other things a good government does. Or take a look at Mississippi or Alabama. Low taxes with resulting abysmal education, infrastructure, you name it.
    This current financial mess proves, once and for all, that “trickle down” economics is just what the first George Bush said: “voodoo economics.” (He changed his mind and bought into it with his “no new taxes read my lips” and then reversed himself again, being a pragmatist, and raised taxes.
    When money is INVESTED in these sorts of things, we all get paid back with more jobs, more companies coming to Minnesota to start businesses because we have well-educated citizens (that used to be a big draw for companies), people spending more because they have money, and paying taxes that pay for all this.
    The very last thing we should do is cut government spending, lower taxes (should be raised on the wealthy who can afford it and should be willing to pay their fair share–they pay less than middle-class people now–for a civilized society.
    Which is one thing we seem to be lacking. Along with an educated citizenry which understands that the economic thought cannot be reduced to a wrongheaded slogan like “No new taxes.” That is the exact recipe for disaster that has brought our state and our nation to its economic (and threadbare) knees.

  8. Submitted by Thomas Swift on 12/19/2008 - 11:49 am.

    “Just as borrowing is available to private sector businesses, deficit spending should be a tool available to state policymakers”

    Huh.

    How many times have I heard the collective screech “Government is not run like a business!” from the left when the idea of maintaining a budget like private industry is advanced?

    Are we re-thinking that?

    Heartfelt, if factually bereft lefty commentary not withstanding, Charley Weaver has summed up the situation just right…allow me to post it again:

    “As a former legislator, I can tell you, there’s nothing temporary about what the Legislature does. Without the constitutional amendment (for a balanced budget), spending would run amok like in Washington, and our kids would end up paying for it.”

    Rather than waste time revisiting all of the economics experts and real life debacles that have thoroughly shredded Mr. Keynes, allow me to come from a more urgent direction.

    If you choose not to consider the wisdom that Mr. Weaver shares, please enlighten this poor fiscal conservative….where, do you suppose we will borrow all of this cash?

    Before answering, please remember that the federal government has just flooded the bond market with a virtual tsunami of paper, and is proposing another.

    At some point, all of that paper has the effect of eroding the value the currency that backs it; and in fact that is the case already.

    Has anyone considered the effect of putting the value of the dollar into a self-perpetuating tail spin in the midst of a recession?

    I’m guessing Mr. Weaver has.

  9. Submitted by Thomas Swift on 12/19/2008 - 12:13 pm.

    Oh, and by the way Ms. Martin.

    If there were a positive correlation between funding and academic achievement, our schools would be graduating armies of Rhodes Scholars.

    As it stands, the public system struggles to graduate kids to remedial college courses, despite the fact that we spend 42% of the entire state budget on k-12 education.

    I could make an argument, using the public school system as a prime example, connecting government spending and wasted resources, but I will save that for another time.

  10. Submitted by Mike Fratto on 12/20/2008 - 08:04 am.

    If Charlie Weaver and Phil Krinkie are correct then the Minnesota budget should have a surplus component.

    However, both of these men were in office when we had budget surpluses. What did they and their colleagues, including Tim Pawlenty do? They supposedly gave it back to the taxpayers.

    Unfortunately, we have had years and years of government cuts so Pawlenty didn’t have to raise taxes and he could cut the taxes of the rich. Now we have to pay the piper.

    I don’t want to see taxes raised at this time, but we have to do something to offset the deficit and we can’t cut more programs for the poor.

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