Sunday, June 7, 2009 | 2 a.m.
Recently the state budget was finally passed over Gov. Jim Gibbons’ veto. We should all breathe a sigh of relief. The governor said that increasing taxes is a bad idea, but cutting state expenditures to the extent he proposed, especially in higher education, was an even worse choice.
It is indisputable that Nevada’s general fund has long been the smallest in the nation, relative to the size of our economy, and only half the national average. This share has been on a downward trend for decades.
Because our tax base is heavily dependent on merchandise sales and casino revenue, two sectors that have been disproportionately affected by this recession, our state’s general fund revenue has fallen from about 3 percent of state GDP to about 2 percent. Our revenues thus declined by a third, the most of any state. But as a share of our GDP this was only a drop of 1 percent, and other states have bigger relative budget gaps. It is also important to understand that our state revenues declined much, much more that our economy as a whole.
Should we have increased taxes? Most taxes are inefficient, economists argue, because they have incentive effects that discourage people from potentially productive activities. However, this is more than offset when the government is able to provide socially valuable goods that the private sector can’t provide in sufficient amounts. Public education is one of those goods.
Taxes are also less inefficient if they are broadly applied and rates are not too high. Although the taxes our Legislature imposed are only second-best solutions, they are not likely to be very burdensome to the economy given our already-low overall rate of taxation.
A tax increase reduces disposable income, and thus reduces private spending. The governor is right that this is a bad idea in a recession. But cutting government spending is an even worse idea in a recession, unless you believe the state provides absolutely nothing of value.
You lose the same amount of private spending as with a tax increase, plus you lose what government bought or provided in the first place. Consider that public employees and private contractors are Nevadans, too, and they are working for you.
Most people don’t realize that state and local governments, in aggregate, spend more on consumption and investment than the federal government, and this was even more true during the Great Depression. At a time when the federal government is trying to stimulate the economy, the states are unintentionally making it worse because they are generally constrained to balance their budgets. Economist and New York Times columnist Paul Krugman has called this problem “50 Herbert Hoovers.”
Unemployment in Nevada, which usually hovers at or below the national average, has risen dramatically in the past two years to 10.6 percent of the labor force in April, compared to a national rate of 8.9 percent that same month (now 9.4 percent for May, which is not as bad as many expected).
Personal income in Nevada, which grew by 5.5 percent in 2007 and 3.1 percent in 2008, was projected by the Economic Forum in December to rise by 1 percent in 2009. That was probably too optimistic, but I have seen no sane economist project average income declines of more than 5 percent in 2009, and incomes should improve in 2010.
Of course, this is only the average, and although many are doing OK (other than watching their 401(k)s wither away and their homes go underwater), others are disproportionately hurt. Much of the construction sector, for example, has seen its business completely dry up.
Are state budgets, and state employees, sharing this pain? The governor asked state workers to take a 6 percent pay cut, which the Legislature reduced to 4 percent with an unpaid furlough of one day per month for most workers. The Governor’s budget called for a cut of a third in the total higher education operating budget, which the Legislature reduced to about 11 percent. Certainly we are not hurting as much as the construction or tourist sectors, but cuts to higher education are certainly more than the “average” Nevadan is expected to bear.
Some think higher education spending is out of control. In Nevada it has only kept pace with the rest of the economy. Not coincidentally, our state’s proportion of the population with a college education has remained stagnant, while in other states it has increased significantly.
The total operating budget for the Nevada System of Higher Education, including the state’s general fund contribution and the tuition and fees paid by students, was about 0.6 percent of our GDP in 1985, the year I entered graduate school. After having peaked at about 0.7 percent in 2003, it was back down to the same 0.6 percent ratio this past fiscal year. It will be lower next year as a result of these cuts.
Are the cuts real? Thankfully, our universities and community colleges have been preparing for this for a year, and we are working to make our institutions more efficient. Over the past year these institutions have closed centers, increased teaching loads, encouraged early retirements, eliminated many valuable student services, and terminated hundreds of productive people.
Those who have left are not being replaced. Meanwhile, most institutions have more students to teach than before, not fewer, which is very different from the experience of the private sector in a downturn.
We are now making more cuts. But it could have been so much worse had the executive budget been approved. We would be closing whole colleges, not just programs, and turning away students by the hundreds.
But it is not so much about cuts, or how many jobs have been saved, as it is about Nevada’s future. Many of us have chosen this profession over usually more lucrative private sector jobs because we believe in the value of a public education, and at UNR and UNLV we are trying as hard as we can to create universities that Nevada can be proud of, universities that will attract our best students and keep them in our state after they graduate.
This matters because education is very important to our economy. One study cited recently in The Wall Street Journal noted that our country lags behind a number of other countries in education, and estimated that our country’s educational gap costs us as much as $2.3 trillion per year, about 16 percent of our GDP. Nevada has the biggest educational gap in the country, and it makes it hard for us to attract and keep new business in the state.
Many — though certainly not all — of those who argue that we should have cut spending more than 11 percent do so because they oppose public education and public services on principle, and think this was a good opportunity to make our government even smaller. For the rest of us, we should be grateful the Legislature was able to override the governor’s veto.
Elliott Parker is chairman of the Faculty Senate and professor of economics at the University of Nevada, Reno.