Good Government

Patrick B. McGuigan | October 5, 2009

Government 'Cannot Stay the Same'

Patrick B. McGuigan

Two weeks before his powerful essay about government spending appeared in The Wall Street Journal ("The Coming Reset in State Government," September 3), Indiana Governor Mitch Daniels previewed his provocative thoughts in an exchange with reporters from across America.

Daniels, speaking in late August at the 2009 "Capitol Beat" conference I attended in Indianapolis, submitted to mostly liberal reporters a pragmatic conservatism that has garnered him lots of good coverage, and what is now a 70 percent statewide approval rating.

As Oklahoma faces a government spending crunch and a seemingly certain special session that might "spend down" the Rainy Day Fund, Daniels' words on government behavioral patterns may be instructive to policymakers here.

The Hoosier State, he said, is "still solvent, and we had a modest increase in spending" for government last year. The state is one of the few in the nation with a surplus, but a $1.3 billion cushion eroded to about $1 billion in the most recent budget cycle.

Where Daniels stirred the pot was in predicting that regardless of economic recovery, "Indiana will have fewer dollars to work with in 2011 than in 2007." As is the case with journalism business models, government "cannot stay the same," he said.

When a reporter asked him to share Indiana's "secret" to fiscal solvency in a time of recession, Daniels told the audience, "Prepare to be dazzled." He then spoke very slowly: "We. Spent. Less. Than. We. Took. In."

Everyone laughed-but seriously, now: Indiana on his watch has eliminated an estimated $700 million to $800 million in "structural deficit" and "more or less" frozen spending as a whole. A tax amnesty his first year was "spectacularly successful" in getting one-time money to pay down government debt-and not for new spending.

Daniels is also looking to save money via school choice. In the waning hours of a special legislative session June 30, Indiana lawmakers approved a $2.5 million scholarship tax credit program for K-12 education, a measure the governor had kept alive by including it in his budget proposal during the special session. A Friedman Foundation fiscal-impact study two months earlier had found that such a tax credit would save the state money.

Challenges remain: "How can we deliver services at lower cost?" Sacrosanct areas of spending must be examined, he said. "Entitlements eat the budget," a situation that can no longer be ignored. On broader economics, Daniels is concerned that stimulus spending has "taken care of longstanding wish lists," rather than pump-priming.

Still ahead in his final term, Daniels predicted, is a tough look at the effectiveness of government economic incentive packages. In the end, "the business environment is crucial." What Daniels described as "the sand box"-the prevailing culture a state offers business-is more important than up-front incentives and direct subsidies for operations or relocations.

In the Journal essay, Daniels went nationwide: "Fewer than 10 states ended the last fiscal year with significant reserves, and three-fourths have deficits exceeding 10 percent of their budgets." Building on predictions made to reporters that Indiana revenues would be lower two years from now than they were two years ago, he said states today are facing "a near permanent reduction" in tax revenues that will require reduction in "the size and scope of our state governments. And the time to prepare for this new reality is already at hand."

In sum, after a decade which saw state government spending increase by an average of 6 percent a year-peaking at an 8 percent rise in 2007-08-I guess you can say the orgy's over. Daniels argues, "Much of the government institutions built up in those years will now have to be dismantled."

It's not clear other state chief executives are getting the message, as more than half the states have raised taxes during the current recession. Many states are growing government, Daniels observed, while Indiana has "reduced the number of state employees by some 5,000 from the 2004 level."

In a luncheon keynote at that Indy conference, Steve Cochrane, a senior managing director at Moody's, outlined what he called "the shape of the coming recovery," including an eventual starring role for Oklahoma in growth. Cochrane, who oversees Moody's reports for all 50 states, the territories, and the District of Columbia, seemed pessimistic in the near term and hopeful in the mid-to-long term.

On the hopeful side, Cochrane told me the central tier of American states will lead an ultimate national economic recovery. While Texas might experience slight employment increases in the coming months, Oklahoma will face continued jobs erosion in the short term, he said, but strong job growth in 2011 and thereafter.

As for the biggest states, Cochrane predicted that California, while trailing states like ours in economic growth, will fairly soon be on the road to improvement, with Florida and northeast states, including New York, lagging behind.

On a less hopeful note, Cochrane found it "pretty remarkable" that so many states have so far avoided major spending and government employment cuts. Those states will ultimately have "no choices" but to bring significant fiscal restraint to bear in order to weather the aftermath of the recession, he believes.

In recent press accounts, some Oklahoma economists, including OU's Robert Dauffenbach, seem more pessimistic than Cochrane about state prospects.

Widespread is the assumption that Oklahoma's looming special session will result in a "Rainy Day" raid of perhaps $300 million. Marie Price of The Journal Record (September 13) echoed the "best guess" of most observers that officials will "come back to the Capitol before next year's regular session, tap a state savings account and spend more federal stimulus money."

Price also reported that Matt Guillory of the Oklahoma Policy Institute, the liberal counterpart to OCPA's market-oriented conservatism, wants to make it easier to tap Rainy Day money during a slow-motion recovery. More cautiously, House Speaker Chris Benge seemed to echo Daniels when he said the turnaround might not be as robust as hoped.

Well now. Even though many assume our Legislature and Gov. Brad Henry will snag about half of the constitutional "Rainy Day Fund" during a special session, there is an alternative future, if not an alternate universe, one more in keeping with the American vision of limited government and ordered liberty.

As OCPA recently documented, Sooner State government jobs are up by 8,600 during an 18-month time frame when the private sector has lost more than 36,000 jobs.

In an "advertorial," Marlin Oil Corporation, operated by OCPA trustee Ralph Harvey, observed in The City Sentinel last month (September 9): "It is the private sector that funds government through taxes, not the other way around. It is time, or past time, to subject Oklahoma government-state and local-to the kind of spending cuts and job losses that businesses and individuals have already endured because they had no choice."

As a helpful reminder, an editorial in the state's largest newspaper (The Oklahoman, September 13) catalogued government and public/private scandals touching several agencies. Quick calculation of just the worst scandals from recent months reveals spending rip-offs at four agencies alone totaling nearly $3 million. How much more waste and graft is scattered around government? Why not devote attention to all that before pulling down the emergency reserve to stave off, yet again, Oklahoma's day of reckoning for government spending?

To cite that Wall Street Journal essay one more time, Gov. Daniels was spot on in describing the government response to the worst recession since World War II as crucial for America, indeed "a test of our adulthood as a democracy."

I like Mitch Daniels (disclosure: we were allies during the Reagan presidency), but Indiana is not the only place where wisdom resides.

There's no reason Oklahoma can't lead the way in providing an alternative to bigger and more expensive government.

Patrick B. McGuigan is managing editor of The City Sentinel, a weekly newspaper in Oklahoma City, and capitol editor for Tulsa Today, an online news service. He is a member of the National Press Club, the Tulsa Press Club, the Oklahoma City Gridiron Club, the Society of Professional Journalists, and the Association of Capitol Reporters and Editors.

Patrick B. McGuigan

Independent Journalist

A member of the Oklahoma Journalism Hall of Fame, Patrick B. McGuigan is founder of CapitolBeatOK, an online news service, and editor of The City Sentinel, an independent newspaper. He is the author of three books and editor of seven, and has written extensively on education and other public policy issues.

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