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twitterMEMO FROM CARSON CITY:
Professor: Consider short-term borrowing
Bad ideas in a recession, he says, are raising taxes and cutting spending, services
Sunday, April 19, 2009 | 2 a.m.
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CARSON CITY — The Carson City budget dilemma is often phrased like this: Raise taxes or cut spending and services?
In the end it’s likely to be some combination. But economists say neither is good for a struggling economy.
Raise taxes too much, you hurt businesses. Reduce government spending, by laying off employees, cutting pay and health care coverage, and you’re taking money out of the economy and eliminating services when people need them the most.
What if there were another way?
Elliott Parker, a professor of economics at the University of Nevada, Reno, says the best thing to do is borrow money to avoid big spending cuts and pay it off later, when the economy rebounds.
Before some ignite another run on tea bags, the tea party reenactors who turned out in Carson City and Las Vegas Wednesday to decry federal deficit spending, should hear Parker out.
The professor agrees the federal situation is awful. “I’m a deficit hawk in general,” he said.
During good times, government should pay off its debt, which didn’t happen under President George W. Bush.
In bad times, though, government needs to spend to stimulate the economy.
For Nevada, that would mean borrowing. Parker says such debts should be paid back quickly with new taxes passed this session but implemented in a year or two, when the economy rebounds.
“It is a false choice to think that this reduction means we have to either gut our educational system and other public services, or raise taxes during a recession,” he wrote in an e-mail. “The only time borrowing is appropriate is to smooth out the provision of public services during a recession without raising taxes. Borrowing to keep taxes low and spending high in the long run is a terrible idea. Borrowing to prevent taxes from being raised or spending being cut in a short-run recession is a good idea.”
The spending solution is often advocated by economists. The federal government learned that lesson during the Great Depression, after President Herbert Hoover tried to balance the federal budget by raising taxes and cutting spending.
“Trying to cut expenditures and raise taxes during a severe economic downturn is a bad idea,” Parker said. “If you have to choose, it is better to raise taxes than to cut expenditures, but it is best to do neither.”
He points to economic analysis showing some government spending, on things such as food stamps and extended unemployment benefits, has a greater financial return to the economy than tax increases hurt the economy.
But Nevada has to balance its budget, right?
That isn’t the case.
Through the early part of the 20th century, Nevada regularly issued bonds to balance its budget, then-state archivist Guy Rocha told the Sun last year.
The state borrowed money in 1881, after a rash of bank closures and as the mining industry faltered. The Supreme Court weighed in after the debt was challenged and ruled that the Legislature has the power to issue debt “at any time.”
To pay back the loan, the state raised taxes on property and mining, Rocha said.
In December, the Legislature, with Gov. Jim Gibbons’ approval, passed legislation to allow lawmakers to borrow up to $120 million to reduce the budget gap.
Still, tax policy is set in a political process. With the bad reputation deficit spending has, legislative leaders say it’s unlikely the state will borrow to avoid budget cuts.
Controller Kim Wallin, the state’s chief fiscal officer, noted the example of California, which issues bonds even in flush years to cover operating costs.
“To borrow money is irresponsible,” she said. “It’s just going to put off the inevitable — we have to raise taxes.”
A Democratic legislative source made a sour face when asked about the possibility of borrowing to balance the budget. “We don’t borrow.”
Discussion: 12 comments so far…
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Our elected leaders need to consider the approach of living within our means. Less government is the best option, regardless of our brilliant University economist who are either promoting tax increases or now borrowing.
An economist is a business major that doesn't want to leave school and go to work. Great advice. The least educated amongst us know you don't fix a problem created by over spending and too much debt by borrowing and spending more.
I am sure this borrowing would make thing easier for the professor. Keep his salary climbing and his retirement plan intact. Borrow for the future apparently means we pay it back and he retires with our borrowings. What a evil joke. This guy is one expense that can be cut today.
For once, I agree with Newman. Ahnold balanced Cali's last budget with 15 year bonds, and now we know that it simply delayed the day of reckoning. Their new budget has taxes that are going through the roof. If you don't fix the problem today, it will multiply tomorrow. Like rabbits....
"The federal government learned that lesson during the Great Depression, after President Herbert Hoover tried to balance the federal budget by raising taxes and cutting spending."
The writer of the story is a complete history dummy.
Hoover actual ran higher and higher budget deficits because he was increasing spending to "stimulate" the economy.
The Emergency Relief and Construction Act (1932) was an attempt to increase money on public works projects. Hey, Schwartz, why do you think it is called Hoover Dam and FDR Dam?
In fact, FDR in his campaign against Hoover accused him of running up large deficits.
Hoover did other things that were quite similar to Obama. The Reconstruction Finance Corporation (1932) provided government funds to railroad and banks. The Glass-Steagall Act (1932) made getting credit easier and released funds for businesses to get loans.
The only taxes that were increase by Hoover where tariffs to help protect American products from cheap imports. This is also similar to Obama's embracing protectism by weakening trade pacts to protect American industries. Hoover attempt in protectism backfired and probably so will Obama's. However, it is not clear if Obama really believes in protectism because this could be just hot air to please the unions.
Your tea bag joke was not funny either which shows your very poor skills to write a "news" article objectively but I am not surprised by just nonsense by Sun "reporters" (super emphasis on the quotation marks).
You have achieved new lows in reporting. Is there a Peabody for that?
No wonder the Sun is just a lib rag insert into the LVRJ.
I you don't have the cash to pay for it then you can't afford to buy it. Cut the size of government down to the size of the revenue you collect. Those living off the government can move back to California for a few years. This idea that the government has to grow every year weather it can afford to or not is insane. Cut services, cut staff, cut the fat. We have all had to do just that at our jobs and with our lives. The new trend is downsize and I want to see the government take part in it.
Nance, whether or not we agree, I think we agree on the importance of historical accuracy.
The Glass-Steagall Act passed in 1933. It followed the inauguration of Franklin Roosevelt. It was the work of a newly elected Democratic Congress. And by the way, many of its rules were repealed by a Republican Congress in 1999 and signed by a Democratic president, and any Democrat who went along with that should have been ashamed--but I digress.
The planning of Hoover Dam construction began long before construction actually started, long before the Great Depression. It is named for Hoover, yes, but most of his work on the project was when he was secretary of commerce for eight years before becoming president. Its name was changed in 1933 to Boulder Dam, and back to Hoover in 1947. It was never the FDR Dam, and while it served the purpose of being a jobs bonanza during the Depression, that was not the intent--they were totally separate.
In addition, the ERCA created the RFC. Most reputable economists and historians feel the problem with the RFC is that it did too little. FDR changed that.
Professor Green, it is important to be accruate.
You, being a history professor, should know that there are two US laws that are both refered to as the Glass-Steagall Act.
One was signed into law by Hoover in 1932 and the other was signed into law by FDR in 1933.
At least you will agree that Hoover ran deficits (biggest in history at that point in time) of which FDR used against him in the campaign.
Hopefully, you will agree that Hoover's The Emergency Relief and Construction Act (1932) was an attempt to "stimulate" the economy via public works project.
Professor Parker replies:
For readers interested in a somewhat more careful discussion of the issue, I wrote up a better explanation, "The Economic Principles of State Budget Cuts", a few months ago. It is on my website, at http://www.business.unr.edu/faculty/park....
The Governor's argument that this problem was caused by overspending, which Mr. Neiman repeats, does not hold up, unless you believe that ANY government spending is too much. This is caused primarily by a decline in revenue, and the data is on my website, with graphs. If you can't find it there, send me an e-mail and I will send you the links. Look around Las Vegas at the casinos on the verge of bankruptcy, and then tell us you think these are normal times for the economy.
Mr. Neiman spoke of what the "least educated amongst us know," but surely you know that you don't sell your car if you lose your job, for you will need it if you hope to find a new job. You may temporarily have the income of a street person, but you don't want to become one by adjusting permanently to a temporary decline in income.
Yes, I certainly agree that you do not spend beyond your income, not in the long-run, and that is what got us into this mess. Households stopped saving, on average, people bought houses they could not afford on the belief that prices would keep rising, and financial institutions lent to them on the hubris that diversification through the derivatives market eliminated any real risk. Another way to become a street person is to keep spending more than your income even when you have a job.
Which brings us to President Hoover. Yes, tax revenues fell and spending increased, but this is to be expected when a quarter of the workforce is unemployed and has no safety net. Yes, there was an effort by the Hoover administration to increase public works spending, and make other relief available. But in 1932 the administration also supported a Revenue Act that increased taxes to reduce the deficit, and tax revenues rose significantly as a share of GDP. Poor President Hoover was even criticized by FDR for deficit spending, in spite of his efforts to raise taxes.
The problem is the mindset of the time, which some readers of this paper may still not have gotten beyond. What is a solid principle in good times is a terrible idea in bad times.
There is a legitimate concern -- which I share -- that once state governments realize they can borrow to get over bad times, they can borrow even in good times. The Bush Administration cut taxes and raised spending when they thought the economy was going into recession -- a mild one from our current vantage point -- and then did the same thing when the economy was growing. Ditto California, which basically tried to solve long-run problems through short-term fixes. I am not advocating that.
Continued...
Finally, for the reader who made the ad-hominem attack, it is true that I don't want to leave the university. I love it, I love my job, and I love teaching. But I could leave if I wanted to, and I would have probably done much better financially if I had.
Like many of my colleagues in the business college, I have worked in the private sector. Many of us were quite successful there. It is a curiousity that the salary I was offered to stay in the private sector, when I left for graduate school, was higher than the salary I was offered at UNR seven years later, when I finished my Ph.D., and I am not even adjusting for inflation.
But I am not complaining, for I have never looked back. If I were rich I would do this job for free. Given the state of my retirement, I will probably have to do it until I die, so it is a good thing I like it so much.
Professor BP......yes Hoover did signed the Revenue Act of 1932.
Again, just like other Hoover actions it this too is very similar to Obama's economic plan.
"Among other things, the Revenue Act increased the top income tax rate to 63% from 25%, doubled the estate tax, increased corporate tax rates nearly 15%, and added new and increased excise taxes on goods such as tires, lubricating oil, refrigerators, chewing gum, soft drinks, electricity, and many other items."
Let's review:
Raise taxes on the rich.....Yes...Obama...Yes Hoover
Raise taxes on corporations...Yes...Obama...Yes...Hoover
Raise excise taxes....Yes...Obama...Yes...Hoover.
Hoover did a small public works program to "stimulate" the economy. So is Obama.
Hoover ran the biggest budget deficits of his time. So is Obama.
Hoover provided government funds to banks and corporations and tried to increase credit levels. So is Obama.
Obama = Hoover
Anyone who doesn't want to raise taxes should be required to remove the numbers 9 and 1 from their telephones, no police or fire services for their address, and if they have children, be forced to home school them.
This is of the same logic that if you give a heroin addict more heroin they'll get better"
EP seems to think you can "borrow to get out of bad times". Try telling that to the American's underwater in their homes.
Why don't you visit -> http://www.kwaves.com/kond_overview.htm The Kondratieff Theory.
Ups and down are part of life. Fighting the downs will only make it worse.