Focus
Cutting state spending now will make dire situation worse
| • | Lawmakers aren't addressing crisis as boldly as they should |
By Lawrence W. Boyd Jr.
After a careful economic analysis of bills now being considered in special session, I am alarmed that the Legislature as a whole does not understand the gravity of our current crisis. Nor do lawmakers understand what can be done about it.
What is even more disturbing is the legislature's call for the governor to cut state spending by 5 percent.
Tax cuts on a state level will do nothing to stimulate the economy. Tax cuts are financed by cuts in government expenditures, which means that for every dollar distributed in a tax cut, a dollar is cut in government spending. The overall effect of this is slightly negative because some portion of the tax cuts leak out of a state's economy as savings.
The only thing that a state government can do that has a stimulus effect is go to the bond market and borrow money. In its broad outlines, the governor's proposed $1 billion spending bill was a reasonable response.
The experience with the Persian Gulf War demonstrates the effectiveness of bond-financed government expenditures. Then, and for two years afterward, visitor arrivals fell. Yet, except for the year of the Gulf War itself, the economy grew and unemployment remained within reasonable bounds.
This was because the John Waihe'e administration responded aggressively with capital spending, using both the surplus that was accumulated and bond-financed expenditures. The economy declined in 1994, 1995 and 1996 — a period in which visitor arrivals grew — partly because of an unreasonable decline in expenditures for public construction projects.
The arguments that these expenditures won't help laid-off hotel workers, or that it will come too late, ignores the spinoff effects of bond-financed construction. The governor's proposal would have issued a significant number of bonds this fiscal year. This could not have been done at the regular session — which puts off bond issues until the next fiscal year.
The difference in timing of the impact of when the money hits the economy is 12 to 18 months. By not doing anything meaningful during this session, the legislature has ensured that anything the state does will have no effect until June 2003.
The centerpiece of the legislature's proposal is tax credits. Rather than have the state issue bonds for construction, the assumption is that these tax credits will encourage the private sector to do so. Essentially, the Legislature is assuming the private sector, which faces even greater insecurities in terms of future revenues, will behave differently than it has in the past.
Further, lawmakers assume that unlike the legislature, individuals in the private sector will go out and borrow large sums of money to invest in Hawai'i.
In the form now being debated, homeowners will get a 4 percent income tax credit on renovations . On the other hand, hotels, apartment building owners, estates, trusts and corporations get a 10 percent credit through Dec. 1, 2004.
I know what you all are thinking: Now is a great time to go down to the bank and borrow several million dollars for that commercial building you've been thinking about constructing. A moment's thought will tell you that this will have no effect at all.
If lawmakers are concerned that future tax revenues will not allow them to borrow, what makes them think that a private individual will anticipate profit or even have a job — let alone then deduct the loan from future income taxes? After all, the wonderful thing about contemplating zero income is the opportunity not to pay taxes.
In limiting the bond issuance to $100 million, the legislature is missing a chance to do something meaningful. Furthermore, its expressed desire to have the governor limit current spending by 5 percent also can do great harm. There is enough money sitting in banks right now to maintain current spending through this fiscal year.
These surplus funds include the hurricane relief money. By cutting state government spending, rather than using surplus money, the state will magnify rather than soften the effects of the terrorist attack. The indirect effects of these cuts could well be another 1,000 or 2,000 unemployed.
The call to reduce spending is a faint echo of Andrew Mellon's now-infamous advice at the start of the Great Depression to "liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate ... purge the rottenness out of the system."
Let us hope that history does not repeat itself.
Lawrence W. Boyd Jr. is a labor economist with the Center for Labor Education and Research at the University of Hawai'i-West O'ahu.
