Wednesday, May 06, 2009

‘Kicker’ falsely assumes economy is predictable

The Great Recession is the label that some commentators use to refer to the current global economic slump, and it seems appropriate. Even as we struggle against the downturn, I am relieved that the legislative process has been set in motion to address the “kicker law.”

The kicker law mandates refunds to taxpayers if the tax receipts exceed forecasted biennial revenue by more than 2 percent. One lesson of the Great Recession, which has immense implications for the kicker, is a simple one: Predicting the economic future is nearly impossible, and even more difficult is the task of estimating revenues within a 2 percent margin.

Very few experts foresaw the nasty recession when we were still riding high two years ago. Even the chairman of the Federal Reserve, Ben Bernanke, did not see this coming. In fact, during the early years of the bull market, Bernanke publicly worried that the problem in the world was from a savings glut. He was also among many leading economists who were confident that we had tamed the boom-bust cycles, and that we were in for smooth cruising. If only that were the case!

A clear minority of experts predicted a recession, and even fewer, such as Nouriel Roubini, worried that it would be a nasty global economic pandemic.

Plainly, economic forecasting is not as easy, nor scientific, as we might imagine it to be. Yet, the kicker is predicated upon such economic forecasts. Take, for instance, the state economist’s revenue forecast from March 2008. The report notes that, “The forecast projects a slowing Oregon economy in 2008 with mild growth returning in 2009.” It has been anything but.

However, it does not mean that the state economist was way off. The same report states, correctly, that “Uncertainty surrounds the financial system. … Broadly, we place ‘uncertainty’ under ‘risks,’ and note that the Oregon economy is at a precarious juncture of the business cycle.” A year later, that “uncertainty” has revealed itself in a number of unpleasant ways, including the 12.1 percent unemployment, which could worsen.

The bottom line is that the kicker law is built on “forecasting” that cannot ever be precise and is, therefore, set up to fail. No wonder, then, that rebates have been frequent, rather than rare exceptions.

Looking at it another way, this kicker law, which was approved in 1980, was an Oregon innovation similar to other notables such as the bottle bill or the gas tax. However, unlike the bottle bill, the kicker law was not adopted by any other state in the union. Could it be for a simple reason that the kicker was not considered an idea brilliant enough to be copied?

I fully recognize and support the reason behind the kicker law — as a check against uncontrolled expansion of government, which could otherwise suck away money from private economic activities. However, there is no guarantee that such controls on revenue alone will constrain government expenditures.

All we need for an example is immediately to the south of us. Californians passed the famous Proposition 13 back in 1978, before our own kicker law, to limit property taxes and future tax increases. Three decades later, the libertarian Reason magazine recently noted that even Gov. Arnold Schwarzenegger, who swept into office promising to limit government, has ended up expanding it at rates slightly more than what his predecessor did: “Under Schwarzenegger, spending has increased 6.8 percent annually, compared to a population/inflation rate of just under 5 percent.”

It is therefore up to us voters to be on the alert for necessary and unnecessary government expenditures, and to use existing processes to express our preferences. A constitutional revenue choke-off, which is what the kicker amounts to, cannot by itself limit government, and can only worsen budget crises whenever we enter into a recession.

Furthermore, let us not forget that there will be a recession after we recover from this one — that is the nature of the economic system. This means we ought to prepare ourselves for the economic ups and downs that are not easy to forecast, which is why I fully support the proposals to strengthen the rainy day fund by diverting a portion of the monies that would otherwise become kicker refunds.

The old saying is “once bitten, twice shy” — and Oregonians have been bitten more than once by economic downturns. Let us work on avoiding nasty bites in the future.

Posted to Web: Wednesday, May 6, 2009 05:29PM
Appeared in print: Thursday, May 7, 2009, page A9

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