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.
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.