Oregon Jobs Long-Term Forecast

For what its worth...from The Oregonian:

The Verdict: $3.6 Billion

The state economist's official revenue forecast is in: $3.6 billion shortfall over the next two years. This is grim but not as grim as I expected. So I suppose that is some solace.

Oregon's Economic Forecast: Grim

The latest numbers as reported by The Oregonian:

SALEM -- The revenue forecast released this morning shows that Oregon will be short at least $855 million for schools, social services and other state programs this year.

Legislative leaders and Gov. Ted Kulongoski have suggested cuts to schools and furloughs for state workers and school teachers in order to make up the gap with four months remaining in the budget period. The 2007-09 budget was set at $15 billion.

The shortfall for the 2009-11 budget period will be even larger, at least $2.5 billion short of maintaining current services.

The governor may be right that we should not dip into reserve funds, but that decision should be made based on a determination of the effectiveness of spending.  Just saying that the budget is going to be worse in the future is not good enough.  Perhaps fewer school days are appropriate but I doubt it.  I would at least like to see a comparison of student performance based on marginal differences in instruction days and class size. 

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.