An Interconnected Economy
There is a lot of very concerning talk about the US going over a fiscal cliff; about reductions in state revenues; and the Eurozone in crisis. All of this is connected and all of this will affect Attleboro and surrounding communities.
Now that the Eurozone has slipped into a double-dip recession, our markets will continue to take hits. When investors don’t invest, revenues from capital gains decrease and so does our economy. Also consider that one Eurozone nation, Greece, is often in the US news. The Greek economy is nothing like the US economy. However, there are some lessons that can be learned.
One lesson is that austerity (drastically cutting government spending) in a recession is a very bad idea because it increases unemployment. At the right time, cutting government spending can be good, however, in a recession it causes the economy to further contract.
Back here in the US, our economy would contract with sequestration and the looming fiscal cliff. Estimates show that the fiscal cliff would cut 3-5% from the US GDP. Considering that the US economy is only growing between 2-3%, this means the US will be in a recession again.
When an economy contracts, one option is that the Fed can reduce interest rates to stimulate borrowing and ultimately growth in the private sector, but right now, interest rates are practically at zero and we can’t stimulate growth through lowering interest rates. This is a liquidity trap.
At present, cutting taxes to grow our economy won't really work anymore than lowering interest rates. Moreover, this option 1) will result in critical services being cut, which will also 2) result in people (including private sector contracted) with less money in their pockets to spend in the economy ultimately shrinking the economy even more.
With decreased revenues at the state and federal levels, so as to contionue to provide services, there are going to be calls to raise revenues as a way to navigate this storm. To “raise revenues”, in case you didn’t know, usually means raising taxes.
What does all this mean for Massachusetts and our local community?
Attleboro’s unemployment rate is stubbornly over 8%. Right now, raising taxes on Attleboro would be regressive falling on a community that can least afford it, taking more money out of the consumer economy, which could amplify a domestic double-dip recession, locally.
Additionally, raising taxes on Massachusetts would have several consequences: 1) it would encourage needed businesses that were thinking about relocating here to reconsider; 2) a tax hike would give a pass to existing wasted taxes; and 3) we would have a hard time bringing the tax rate back to baseline after the economic recovery.
We are running out of easy options, but we can be creative.
Here is what Massachusetts can and perhaps should do.
- As a former director in a state agency who has worked with other public agencies, I know exactly where waste occurs. The specific examples I am thinking of happen all the time in divisions and agencies all over Massachusetts. If we need additional revenues, we have good places to start.
- We have virtually no empirical data on what programs do and don’t work. If a program doesn't work we should not reflexively cut that program, but we need to reform that program so it works and so that we get a return on our investment, which is a cost savings way of doing things.
- The governor can make cuts faster than the legislature - 9C cuts are another option. We can either plan for optional cuts now, or be faced with unplanned forced cuts later. But cuts, as I have noted, may have second-order consequences. (Cuts to waste and unreformable programs are a different story.)
- The legislature should look for ways to cap and eliminate some tax deductions as one way to raise revenues without raising taxes.
- Massachusetts has a very high credit rating. That paired with low interest rates suggests that to weather this storm now and invest in our future by borrowing and/or selling bonds. If generations benefit from it, generations should pay for it. Investments in infrastructure, research and development and education will keep Massachusetts competitive with thriving economies in the Middle East and East Asia. We need to attract businesses here, now and in the future.
- Since China has a growing middle class and the cost of transporting goods is increasing, the cost of goods imported from China will increase. We need to ask what can be brought back to the US for production. Bring it to Massachusetts.
Just because the Eurozone has gone into a double-dip recession, and the US may go into a double-dip recession, it doesn't mean that Massachusetts has to as well, and it doesn’t mean that our local community can’t do well.
I am violating one of the major rules of being a politician – don’t talk about future hypothetical situations. So let me qualify my comments: If conditions don’t unfold as expected or if new information arises, our options may or may not be different.
I don’t purport to have all the answers but if ever there were a time for our State Reps, the stewards of our tax dollars, to think outside of the box, now is that time.