Yesterday, Governor Pawlenty gave his State of the State speech (available as text, podcast, streaming audio or video at his web site.)
The state is facing a big budget deficit because we are in a really tough economy. So let’s take a look at how some of the initiatives mentioned in the Governor’s State of the State would impact the economy…and contrast that with what Mark Zandi, chief economist at Moody’s economy.com, finds will most effectively stimulate the economy (note that Zandi was an advisor to John McCain during the campaign).
- Pawlenty. The Governor says job creation is one of his top priorities. He did not name any direct investments in job creation, but rather a set of business tax cuts including cutting the corporate income tax in half, tax credits and a capital gains exemption for investments in small business, a refundable tax credit for small business owners, faster depreciation, and more. These tax cuts would have to be paid for through greater spending cuts elsewhere.
- Zandi. But the research shows tax cuts are the least successful means of stimulating the economy. Accelerated depreciation would deliver $0.27 in economic activity for each $1 in government revenues forgone, and a corporate tax cut would generate $0.30 in economic activity. In contrast, infrastructure spending, in which the government more directly invests in jobs and purchases of goods and services, shows a return of $1.59.
- Pawlenty. The Governor noted the growth in the health and human services budget (remember – the increased cost of health care is occurring in both public and private systems, it is not anything unique to state programs). He’ll propose significant cuts in this area, only protecting “current health care eligibility for children.”
- Zandi. Those policies that help low- and moderate-income people sustain their incomes during tough times have the greatest bang for the buck, delivering more than $1 of economic activity for each $1 of government money spent on them. (My editorial comment: cutting adults off of health care is not a great way to help Minnesota workers to make ends meet.)
- Pawlenty. A wage freeze for state employees for two years, and requiring a wage freeze for any Minnesota government entity that accepts state money.
- Zandi. Cuts in state and local government spending are a real concern, and can be a substantial drag on the economy. Zandi found that federal aid to the states to help them maintain their payrolls and continue to fund programs would result in $1.36 in economic activity for each $1 spent.
But you don’t need to be an economist to understand the problem. Pawlenty hopes to create jobs through tax cuts for businesses. In the meantime, he would plan to slash spending on local government and health and human services which we know will lead to the loss of already existing jobs. Common sense, as well as econometrics, suggests the most effective way to help our economy is to spend money wisely rather than cut taxes rashly.