Oregonian Edition: MLS, Credit and Taxes

David Sarasohn has an Op-Ed in today's Oregonian (not on web site) in which he suggests the MLS team and the Beavers could share PGE park and in which he makes the erroneous claim that "several" MLS teams share stadia with baseball teams.  This is demonstrably false and very easy to check - only Kansas City shares at the moment in a temporary two year arrangement while they develop a soccer-specific stadium.  It also ignores the fact that on most days, the Beavers fill less than 10% of the seats of PGE park making for a fairly dismal fan experience.  I think it needs to be recognized by members of the press that MLS is the only current viable plan for PGE Park, full stop.  MLS will not work in PGE park sharing with the Beavers because of space constraints (permanent stands will need to be constructed long the 18th Ave side) and the difficulty providing a top quality natural grass field with a baseball infield.   MLS has made it clear to all teams that the sharing will not work and most MLS teams are either playing in, or in the process of, developing soccer-specific stadiums.  What to do with the Portland Beavers is a tricky problem, and the abandonment of the Rose Quarter so quickly thanks to a tiny, but vocal group who want to preserve Memorial Coliseum for ... what exactly? ... makes their continued presence in the city questionable.  And maybe having them depart for the 'burbs is the right answer.  Saltzman's Leonard's insistence that his support for the MLS plan is contingent on keeping the Beavers is myopic and may end up costly when, in a few years, PGE Park is vacant.  

Also in Sunday's paper, Ryan Frank has a great story on Tom Moyer and his stalled tower.

And finally A very nice editorial by Susan Nielsen asking the same questions I have: why hasn't there been any real effort on the part of Democrats to go after wholesale reform of the states fiscal system.  This dovetails nicely with a good article on the state tax system in general - mirroring some efforts I have made to try and make sense of it.  Dems' insistence on piecemeal hole plugging is pretty troubling and their justifications pretty weak in my opinion.

Oregon's Fiscal Policy: Fred Thompson, Guest Blogger

Finals are around the corner and I have been busy so I have been lax in my bloggitorial duties, fortunately Fred Thompson is here to rescue me:

According to the Pew Center on the States, a part of the Pew Research Center at Harvard’s Kennedy School of Government, only eight states fared worse than Oregon in a study of government money management practices. They are about half right and pretty much all wrong. They are right that we haven’t faced up to one very big, long standing problem: the extreme volatility of state government’s revenue structure. They are wrong when they confuse policy advocacy with problem diagnosis.

What don’t they like about us? We don’t have a sales tax; our ‘rainy-day’ fund is insufficient; and we have the kicker. All true; but adopting a sales tax and eliminating the kicker would still leave us with a revenue volatility problem, which is the main concern driving the Pew Center’s assessment, and it is too late to build a big enough‘rainy-day’ fund to make a significant difference the next time revenues go south(probably, next fiscal year), even if that were a good idea, which it is not. Moreover, as my previous column noted, we can deal with the revenue volatility problem directly.The great things about Oregon’s revenue structure are that it is fair and adequate.

The Pew Center damns Oregon’s professional money managers with faint praise, saying thestate “employs an impressive number of talented individuals. Unfortunately for them, allthe good intentions in the world can't overcome the state's thoroughly unwieldy fiscalstructure.” Frankly, their accomplishments deserve better than that. Oregon’s Treasury functions (investment management, debt management, and cash management) are among the best in the nation (as judged by their treasury officers in other states and financial analysts in the private sector). Oregon’s budgeters and revenue forecasters are equally respected. The state’s accountants and internal auditors consistently produce the top-rated general-purpose financial statements and a squeaky-clean, government largely free of financial scandal. Much the same thing can be said of many of Oregon’s state agencies and departments, including the often-maligned Department of Human Services,which has recently made dramatic improvements in its money management practices.

Oregon’s fiscal structure is a lot of things, but unwieldy it’s not.

Fiscal Stimulus

I participated in a discussion on the Oregon economy and the government's fiscal stimulus plan this morning on OPB's "Think Out Loud" program so I thought a post that summarizes my thoughts would be appropriate.

The fiscal stimulus plan being proposed by the federal government is based on good old Keynesian theory that in a temporary down turn in the economy, fiscal policy can have a role in stimulating the economy and lessening the blow. Keynesian theory underwent a withering attack from the rational expectations revolution in macroeconomics which suggested that fiscal policy is ineffective as agents in the economy understand that any fiscal spending today has to be paid back in the future so behaviors will adjust immediately. However, assuming this is true, economies do not adjust immediately to behavioral changes - there is wage and price 'stickiness' - which means that, in the short-run, fiscal policy can still be effective. The key with fiscal policy as opposed to monetary policy is that if it appears that consumer confidence is low and present and future consumer spending is and will be low then firms react my lowering investment and employment and wages suffer - further enhancing the low consumer confidence and spending. This leads to the downward spiral that can enhance and lengthen recessions. Cash transfers to those that are likely to spend it will cause a temporary shock in this cycle which, it is hoped will lead to new investment and job recovery - further stimulating consumption - and lessen the extent of the economic downturn.

So two pertinent questions are: does the current situation look like the one I have described, and what is the catch to such a policy?

First, it is not entirely clear that we are in such a cycle and that this is the appropriate policy response and the main reason I say this is that it is not clear we are seeing the big effect on investment and jobs probably due to the very strong export market thanks to the weak dollar. But it is hard to know exactly as data lag the present. I am weakly in favor of the plan broadly conceived (but I think we could do a lot better targeting benefits to those most likely to spend them) - largely because the risk of a severe downturn is real and recessions hurt the most vulnerable hardest, so I generally err on the side of caution.

Second, the catch is that short term stimulus increases the debt which will be a drag on the economy when it returns to sustained positive growth. So, once again, there is no free lunch.

What does this all mean to Oregon? Well, there are two competing facts: one, Oregon has traditionally be a high unemployment state and was hit particularly hard by the last recession, and two, Oregon's housing market is is good shape (so far) relative to other parts of the country. Local conditions matter only partly for the economy so any national recession will be shared by Oregon, but I do think we will not be exceptional like last time. Exports are strong (10% of Oregon GDP), house values have not crashed and there is a chance that tourism (generally down when incomes fall) will remain healthy in Oregon as people substitute Oregon vacations for overseas ones due to the dollar. So I remain cautiously optimistic. The wood products industry and construction industry are already being hit hard by the slump in construction, however, and demand for Oregon's manufactured goods within the US is falling. So, only time will tell.

Here Comes Your Kicker - Thank the Dismal Scientist

The kicker is a strange piece of public policy in a number of ways, but I want to talk about one way in particular: counting on people like me (economists) to determine future economic conditions in the state and thus the amount of the kicker. Can this possibly be a good idea? I don't think so. Economic forecasts are educated guesses that are generally pretty good in the short-run but are pretty unreliable in the long-run. Why? Well in the short-run, risk is low, much is known and economic conditions are slow to change. But trying to predict the state of the Oregon economy two years out is a fool's errand. Consider the US economy and the subprime mess. The US economy is intensely studied, but until recently there were not many economists who thought 'softness' in the housing sector was that big a deal, now suddenly there is a crisis that could lead to recession soon (yet, again, no one is quite sure). Markets in general are not that wise either, had they been so smart, the price of citigroup stock, for example, would have fallen long ago. So the point is, relying on long range economic forecasts is simply silly.

But I have another concern, one that my be a bit far fetched (but I am not so sure how far fetched). In relying on forecasts instead of outcomes we are relying on something that can itself change economic conditions. What we would call an endogenous process. Here is what I mean: suppose the economic forecast is very pessimistic, this means a lower likely tax burden through a kicker return. This should spur investment in the Oregon economy as people act on expectations of the future and thus this should create even better economic performance and even bigger kicker refunds. Now consider an optimistic economic forecast, this will depress investment and may cause poor economic performance of the Oregon economy. Perhaps this counter-cyclical effect of the kicker is desirable, but I don't think it is understood and I don't think it is a first-best policy. If you want to restrain state spending, why not just limit state spending using some index based on economic outcomes? Or, if you want the state to act counter-cyclically, why not save part of the money collected in good years for lean years and then have the government spend these reserves in bad times as a counter-cyclical influence? (OK, I am speaking like a Keynesian here, but in the short-run, guess what? The Keynes model works incredibly well)

If you don't think my endogeneity story is very plausible then you must believe that people and businesses don't form opinions about the relative pessimism of the forecast. That means we are basically introducing uncertainty into the eventual tax burden of Oregon taxpayers. Uncertainty is not a good thing. Most people and many businesses are risk averse, which means that adding uncertainty will depress investment. If the goal of the kicker is to spur investment in Oregon, than this is counter productive.