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ECONOMIC ANALYSIS: Strong economy draws out plethora of spending plans

September 4, 2006

If you ever want to satisfy your curiosity about recessions and business cycles, travel over to the Web site of the National Bureau of Economic Research. It has recorded and documented every downturn and uptick in the U.S. economy since 1857. And over that century and a half, the bureau has noticed certain regularities to the boom and bust of the economy around us.

In the first stages of recovery from a recession, for example, it is quite common for the economy to experience above-average growth, as confidence returns and businesses and consumers begin to open their wallets and buy the things they've done without during the tougher times.

There's a regularity in public-sector finances as well, but it's a little different. Recessions hit governments at all levels with a fiscal double whammy. Just as tax revenues dip because of the slumping economy, expenses shoot upward to pay for the heavier load on the social safety net taxes help pay for. The deficits that result are a little like a hangover after a wild party-lingering long after the noise has stopped and the recession is over.

The Indiana state treasury has only recently managed to close the books on a painful recession that officially ended in 2001, but whose fiscal impacts lasted much longer. The state budget is balanced, the state's credit rating is up, and projections for the upcoming fiscal year show a modest surplus. But those projections don't take into account another regularity of how business cycles affect the public sector. That's the bounce back in demand for public spending on projects and initiatives of all kinds.

Many of those spending proposals have been on hold several years running, as budget realities in state government kept them tucked inside lobbyists' pockets and out of the light of public view. But with the first news of rising revenue, that's changing in a hurry. And as recently summarized in a briefing by Mark Brown of the Indiana Fiscal Policy Institute, the list of projects and needs in search of new state dollars is a daunting one.

It's hard to say no to many of these. Making good on skipped payments to schools and universities, unfreezing wages and hiring, or even restoring some of the legally dubious cuts made in Medicaid spending would be in that category, at least to my thinking. Other proposals, such as instituting universal full-day kindergarten in public schools, have been supported in principle by our leaders for so long that overlooking them now would put their credibility at risk.

But after lying low for so long, the ambitions of many for public spending go a lot further than that. Just one plan, from one public university-Indiana University-calls for $80 million in new money in 2007 to support a life sciences initiative that would ultimately hire almost 500 new researchers.

A vision of state-mandated universal health insurance, as adopted in Massachusetts and under consideration in California, could easily cost several hundred million. And every proposal out there to limit the growth in the bite of the property tax adds to state spending on property tax relief to localities, now the secondlargest category for state spending from the general fund.

These plans give our elected leaders a chance to do what they love to do-reach out to the electorate and pick winners. Will homeowners get property tax relief? Or will poor families get more generous Medicaid coverage? Or will we finally give judges and other state officials a decent pay increase? It's a happy legislator who can march home to his or her district with presents to give out.

But there's one more regularity in business cycles and public sector finances we should all keep in mind. That is the inevitability of the next downturn. No matter how many hungry mouths cry for money and attention, setting enough aside today to meet that challenge has to be a higher priority.



Barkey is an economist and director of economic and policy study at the College of Business, Ball State University. His column appears weekly. He can be reached by e-mail at pbarkey@ibj.com.
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