Minnesota has one of those problems many states would like to have. It is trying to figure out what do to with a growing budget surplus. According to the Bureau of Labor Statistics, the January seasonally adjusted unemployment rate in Minnesota was the ninth best rate in the United States at 4.7% and the economy is growing. Short-term projections for the state are that there will be 42,000 more jobs by the fourth quarter of 2014 than there were in the fourth quarter of 2013.
Indiana’s seasonally adjusted unemployment rate for January was 6.4%. This placed Indiana tied with Alaska, Pennsylvania, South Carolina, and Washington for the 27th best unemployment rate. There is no doubt that Hoosiers would prefer to be ranked higher, but we can take solace in the fact that our rate is better than the states contiguous to us (Illinois, 8.7%; Kentucky, 7.7%; Michigan 7.8%; Ohio, 6.9%).
When economic indicators are heading in the wrong direction, or not improving fast enough, our elected officials are likely to propose actions designed to change directions or speed a recovery. In very simple terms, these actions fall into three categories. The first category is to reduce the cost of operating the government. This shows fiscal responsibility. The second is to change the tax code so people and organizations are incentivized to invest or spend money. The third is to spend government funds on things that are supposed to promote economic activity such as building or repairing highways.
In the last five months we have seen all of this in Indiana. In December of 2013, when state tax revenue was falling short of the projections that were used to write the budget, Governor Mike Pence called for state departments and agencies (including IPFW) to cut spending. The goal was to offset the shortfall in revenue. It also was supposed to show that the government was fiscally responsible.
Approximately one week after calling for the spending cuts, Governor Pence laid out his 2014 Roadmap which included calls for changes to the tax code and additional spending. The General Assembly did some of both.
- Senate Bill 1 reduces the corporate income tax in Indiana to 4.9% over six years and gives counties the ability to exempt some items from the business personal property tax.
- House Bill 1002 spends up to $200 million on transportation projects in 2014 and there could be an additional $200 million spent next year.
Some of the actions taken by elected officials can be seen and felt almost immediately. Others will not materialize for many months. This complicates determining which actions had the biggest positive effect, if there was a positive effect. The most recent revenue report is through the end of February 2014. Sadly, there still is bad news on the revenue front. Revenue was short of projections in six of the eight most recent months. The total shortfall for this fiscal year is over $89 million.
In a perfect world, when elected officials are trying to stimulate the economy, they would do one thing at a time and wait to see what the result of the action was. Unfortunately, we do not live in a perfect world.
Trying one thing at a time is not practical. It comes with a methodological challenge as well. Just because we limit government activity to one change does not mean that we have controlled all other variables that might affect the economy. The economy is a complicated thing to understand and the human beings who engage in economic activities are even more complicated.
Influencing the economy is paradoxical and we do not know the right answer to the question of what is the best way to do so. For example, there are people who think that changing the tax code is more effective than government spending and vice versa. Some people think that the government has not done enough to stimulate the economy and others think that the government has done too much.
The result is, and probably always will be, some sort of compromise where we see a little of this and a little of that and there will be too little data to ever know which action or inaction was the thing that brought the best change. No one ever said it would be easy.
(The truth is that most elected officials never stop looking for ways to reduce costs and influence the economy positively.  In December, the revenue projections for this fiscal year were revised down by $339.7 million.)
Andrew Downs is Director of the Mike Downs Center for Indiana Politics at IPFW.
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