Why the collapse of the old ideology could make our new year bright

Governor Patterson

Before Governor David Paterson published his first budget last week, more than 100 economists signed a letter urging him to erase his budget deficit by raising revenue from a broad-based income tax.

“The reasoning is straightforward,” the economists wrote. “In a recession, you want to raise (or not decrease) the level of total spending—by households, businesses and government—in the economy. That keeps people employed and buying things, and makes it more likely that businesses will want to invest to serve that consumer demand.”

Soon after, Paterson put forward a budget that demonstrates that he is ignoring that advice.

Instead, Paterson’s budget includes a wide array of taxes on consumption.

Besides recommending that any new taxes be income-based taxes rather than consumption-based taxes, the economists said that “almost every dollar of state and local government spending on transfer payments to the needy and for the salaries of public servants providing vital services to our communities enters the local economy right away, generating a greater economic impact.”

Paterson partially accepted and partially rejected that notion. Paterson’s budget still spends more next year than this year. And despite the protests about cuts in spending, Paterson mainly reduced the growth-rate in some state spending that has seen tremendous increases in recent years, especially in education and in healthcare. But in a curious nod to the observations of the Gang of 100, and one they should celebrate, the governor of New York rather courageously increased the basic grant to welfare recipients, which has remained static for the past 18 years.

There’s one true fact about low-income folks: They consumer every last dollar of their income. If your income is so low that you don’t pay income tax, it’s a sure bet that you’re going to spend what you have. Nobody but the most dogged anti-government ideologue can disagree with that observation.

But here’s the problem we’re facing today: Not enough people are spending enough money in our consumption-driven economy. And because consumer spending is such an important driver of every other kind of economic activity, a big contraction in retail sales is going to restrict the ability of the state to keep funding the stuff that works.

Why this is a “reform moment”

Here’s what happens when retail sales suffer: Stores close. Store clerks lose their jobs. Store tenants default on their leases because it’s cheaper to pay the landlord the penalty than it is to keep the lights on. If the landlord receives less rent, then real-estate taxes that the landlord pays to local governments shrink, and the income taxes paid by store-owners and real-estate owners shrink, too.

It’s enough to make one want to write back to the governor and ask him to please quickly take out an eraser on all those pages of his budget that include taxes on consumers, even that special “obesity penalty” of additional tax on sugary soft drinks.

I hope that the New York State Legislature rejects lots of the consumer-burdening tax and fee increases that Paterson includes in his budget. I hope that the legislature instead does the sane thing, and increases the top rate of the state income tax, or puts a surcharge on top incomes.

The big problem for New York State is that neither our governor nor our legislature is taking on the big structural problems that will hit next year and the year after and for the next 20 years, namely:

■ The large and growing share of the population (especially upstate) who are elderly and who will be demanding long-term care that is paid for by taxpayers;

■ The shrinking share of the population (especially upstate) who will need to go to suburban schools;

■ The need to stop sprawl (especially upstate) in areas where there is no population growth; and

■ The urgent need to consolidate local government.

Right now, the messaging from Albany is as follows: The middle class will be paying more little annoying fees and taxes—including higher tuition for their college-age kid in state schools—so that Wall Street can enjoy bailouts and welfare recipients can enjoy higher cash grants.

With only a little bit more bravery, the message could be this: The middle class will get better government and less sprawl, the needy will be treated with dignity, and high-income earners will have to make do with mere BMWs rather than Ferraris.

Happy thoughts for the New Year

The good news is that New York State is in much, much better fiscal shape than California and many other states. While Paterson’s budget does not contain a bold, sweeping plan to change the relationship between state and local governments, it does reflect some recognition that government consolidation at the local level is a worthwhile goal—even if all Paterson is doing is maintaining a small grant program to help those who are already willing to change, rather than investing the power of the office of governor to face a historic challenge.

Here’s what else to be happy about in our fair state: America’s current secretary of the treasury has decided to play Santa Claus to many banks, including M&T Bank, which is headquartered in Buffalo and employs several thousand workers here.

Others may be outraged that the Troubled Asset Recovery Program (TARP) that the United States Congress created last month is being administered by Secretary Paulson such that many Wall Street operations are getting billions of dollars of public money, and spending some of those billions (at least $1.7 billion so far) on executive bonuses.

Not I.

In this season, I want to see retail stores in Manhattan and Westchester County continue to sell expensive watches, jewelry, clothing, handbags, and other luxury items to deserving traders, brokers, deal-makers, lawyers, and to the people they love. I wish that more of the taxpayer-funded boodle would go to American watchmakers and jewelers, but at least some of the money will circulate locally before being exported to Switzerland. And as that money circulates downstate, it will continue to be pumped upstate.

And I understand why Buffalo-headquartered M&T Bank asked for, and received, $600 million in TARP funds. They were, essentially, invited to do so—because it is outgoing Treasury Secretary Paulson’s theory that helping sound, non-crisis-ridden banks to do more deals is a way to keep the economy going.

I applaud the cautious local bankers, who sensibly avoided the junk that took so many big banks down. But I don’t quite understand why it is in the public interest for M&T Bank to receive TARP money in the same week that it is closing its purchase of a Baltimore-area bank. I mean, I understand that that transaction is probably a good one for M&T shareholders, even if a whole bunch of folks who work for the target bank in the Baltimore area will probably lose their jobs because of the takeover. I don’t know why my tax dollars should pay for this; having a bank-eats-bank fund is a lot harder to understand as critical to our country’s national interest than is having a domestic automobile industry.

But I am cheerful in this thought: that everything we have been told about the “rules” of the free market since the days of Ronald Reagan is now proved wrong. We are awakening from our three decades of sleepy trust in the beneficence of the Unseen Hand. Lurching unsteadily forward, nowadays it seems that nobody in power is talking about slashing public spending—even if we are not quite there yet in hearing public figures endorse the progressive taxation of income. And even in Albany, even if tepidly, from our anything-but-radical governor, we are hearing some tentative endorsement of the notion that restructuring, smart-growth, and sprawl-control are worth funding even in a budget crisis.

I will be delighted to read, as I’m sure I will, the annual report of M&T Bank Corporation this coming year, in which the chairman will reverse himself on all the harsh supply-side, free market fundamentalist notions contained in his earlier reports, in which he has ever condemned the high cost of government, now that M&T has received its $600 million of taxpayer funds.

Change, folks. It’s coming. What a gift! Merry Christmas, Happy Hanukkah, and Happy New Year to us all!

Bruce Fisher is visiting professor of economics and finance at Buffalo State College, where he directs the Center for Economic and Policy Studies.