How too little state spending will hurt recovery Upstate

The lower your income in New York State, the more of it you pay in state and local income, sales, property, and excise taxes. The more you make, the less of it you pay in state and local taxes here. That’s the finding of a 2009 Institute on Taxation and Economic Policy study of the tax systems of all 50 states called “Who Pays?”

Yet the dominant political rhetoric about taxes—especially as repeated uncritically by the news media—has been so effective that you’ll be hard-pressed to find any New York State elected officials or candidates this year advocating a tax increase, even on heirs, heiresses, bonus-packing Wall Street traders, or hedge-fund managers. The marginal state tax rate on the highest-income individuals (who are usually speculators in financial instruments) has dropped from 15 percent 20 years ago to less than eight percent, which is what the average prosperous lawyer or accountant or doctor pays.

So instead of advocating a tax system that would treat Wall Street casino zillionaires differently from hard-striving folks who bill by the procedure or by the hour, elected officials of both parties are completely addicted to the anti-tax theme, even though many economists are warning that states that cut their budgets this year will delay or even undermine the economic recovery that federal “stimulus” spending has helped.

It’s another case of economic reality being trumped by political rhetoric. Even in recent news stories that have trumpeted the relative resilience of Buffalo, Oklahoma City, Indianapolis, Nashville, and a few other medium-sized cities that have strong government sectors, the media are hard put to make the connection for readers and viewers—which is that these cities haven’t suffered cataclysmic job losses in the recent recession because local, state, and federal government spending is a stabilizing force.

Here in Western New York, that fact is on display. In the past two years, the recession has been quite real, as evidenced by the fact that over 13,000 more households, to an all-time high of over 57,000 of Erie County’s 300,000-odd households, are now receiving Food Stamps. Since December 2007, the Buffalo metro area lost 2.6 percent of its workforce—over 12,000 jobs. That hurts badly, but it’s not cataclysmic. Compared to parts of Michigan, Ohio, Florida, California, and other spots where there is much higher unemployment, widespread housing foreclosures and repo men working overtime for the few banks that haven’t gone bust, we look okay here.

One reason we’re not so badly off: government spending. About one out of six workers in the Buffalo-Niagara region is a teacher, cop, fireman, nurse, social worker, college professor, bus driver, or Air Force Base employee. Government contracts pay a lot of salaries at Moog Industries and other defense contractors, and construction contracts for schools, roads, bridges, and the new Kaleida cardiovascular center (indeed, for all of UB 2020’s planned buildings) come from taxpayers.

Take away the taxpayer money? That would be economic homicide for the Buffalo area. But that’s just what Albany politicians are talking about.

How the real economy works

At a forum at Buffalo State College last week, economist William Ganley pointed out some things we all know: The Buffalo area didn’t expand like other American regions did in the early 21st century, but neither did we see our housing bubble pop. (There was no bubble here.) “We’re a slow-growth region,” said Ganley. “Population losses, deindustrialization, global competition, and an aging infrastructure are all reasons why the local economy grows slowly during good times and recedes slowly during poor economic times.”

National Bureau of Economic Analysis data indicate that the $46 billion Buffalo regional economy has been expanding at a good clip recently, at about a 4.6 percent annual rate. Were this happy trend to continue, the regional economy could grow to $50 billion in 2011.

But Ganley warned that the recovery is in danger—from New York State.

“The reality is that with the loss of state funding the regional economy will probably grow at less than three percent a year,” said Ganley. “The lag in the regional economy will continue until the state fiscal situation stabilizes.”

And stabilizing the state fiscal situation means getting going on economic recovery in metro New York. Over the past two years, New York City lost 3.1 percent of its jobs—a staggering 329,000 jobs. As I write today, over 850,000 New Yorkers statewide remain unemployed. Most of that pain is where most of the workers and the population are, in the New York metro area.

New York City is still struggling to rebuild after the devastation of the Wall Street collapse of 2008. Without a substantial recovery in employment in the most populous area of our state, New York State government is going to be spending more and more of its scarce resources on entitlements, leaving state government with little ability to pay anything more than the basic bills so long as state officials refuse to seek any new revenue.

Now is the time for New York State to do what the United States is doing—namely, to do what economists call “counter-cyclical” spending to stimulate the economy. But because states aren’t allowed to run deficits, the crunch is on.

Tea Party messages

As many nine-year-olds know, it was the nutty Mad Hatter who ran the tea party in the Lewis Carroll’s colorful political farce Alice’s Adventures in Wonderland. The tea party rhetoric about government being the problem with our economy has all the nuttiness of Alice’s trip, but none of its charm.

We’ll see a local example of this garbled rhetoric if former New York State taxpayer Tom Golisano funds more candidacies against incumbents like Assemblymember Sam Hoyt. Hoyt may face the Golisano-funded rerun candidacy of North District Councilman Joe Golombek, but I doubt that Golombek will talk about the great tax cuts that rich stock speculators have enjoyed as the enduring legacy of George Pataki. Hoyt won’t either: Democrats here say “me too” on cutting state spending.

Meanwhile, Erie County government, like other county governments led by Republicans, is sitting on tens of millions of dollars in “stimulus” money. Washington sent New York billions of dollars to help pay bills, especially for Medicaid, so that there would be continuity in public services. Erie County, which has one of the lowest property-tax rates of any of New York’s 62 counties, got $74 million so far, and will get another $20 million by the end of 2011—even though the Medicaid bill at the county level never went up anywhere near that much. Thank Washington, not the Rath Building, for Erie County’s $40 million surplus, which is stimulating nothing as it sits in a bank account.

One wishes that the federal government would directly stimulate our manufacturing economy, which used to be a New York State mainstay, by negotiating for fairer international trade. One wishes that the federal government would change the Wall Street rules to keep it stable and sane, and to help it rebound, by re-imposing some of the banking rules that M & T Bank Chairman Bob Wilmers recommended in his recent article in the Wall Street Journal. Many Great Lakes cities need sewer and streetcar investments to ready us for population growth that could eventuate here if we get cleaner, greener, and wiser about sustainable infrastructure.

But don’t expect New York State government to act in our long-term economic interest. Expect cuts to local projects. Expect more avoidance of the issue of tax progressivity. Maybe we’ll get Lieutenant Governor Ravitch’s plan enacted, the short-term borrowing plan that comes with a budget reform package. That would help our economic recovery. But it, too, may fall victim to the rhetoric that makes life shiny for people who screw around with stocks and bonds, and rather dull for the rest of us, precisely because our politics is so dull that we can’t distinguish between us and them.

Bruce Fisher is a former deputy executive for Erie County and currently visiting professor of economics and finance at Buffalo State College, where he directs the Center for Economic and Policy Studies.