Ill-advised budget cuts can be devastating to rebounding from recession

Politicians make it sound so simple. Families are tightening their belts in hard times, they say, so government should be doing the same.

The big problem with this bromide is that the demand for essential government services rises during hard times. Even the unfairly vilified Herbert Hoover understood this, embarking on what was, up to that point, the largest peacetime expansion of the federal government in American history to combat the Great Depression.

Hoover was a budget balancer by temperament, but today's governors and legislatures must do the same by law. So with a $5 billion shortfall facing Washington state, it's going to get ugly, far uglier than expected from lawmakers who thought they were battle-hardened by previous budget cuts.

As Hoover learned, there's no correlation between this government belt-tightening and economic health. At least in the short term, cuts hurt demand and public-sector layoffs add to the ranks of the unemployed at a time when private-sector hiring remains slow. Budget reductions also hurt companies that are vendors for state government. And cutting education and programs for the poor and disabled harm development of human capital and individual economic upward mobility.

In the long run, ill-advised budget reductions can be devastating.

Like many states, Washington expanded spending during the boom years. Washingtonians like government services, even if majorities have shown an unwillingness to raise taxes and the tax-limitation measures of conservative activist Tim Eyman have often proven popular.

The full force of the recession arrived later here than in most states. Washington also has a tax structure that left it vulnerable to a recession that smashed sales taxes and fees from construction. From the second-quarter 2007 peak to the first-quarter 2010 trough, state revenues from construction fell 48 percent. The decline was still about 38 percent in last year's third quarter, the most recent data available.

"I don't expect a very rapid recovery in revenues from this sector, because the construction sector is lagging the recovery this time," said Arun Raha, the state's chief economist. Atop this, states are losing the federal backstop that came from the Obama stimulus package.

Thus the bad options vs. worse options drama in Olympia.

"The trick here is managing the immediate fiscal challenges while remembering that the fastest way to manage a deficit is to grow out of it," said Mark Muro, a senior fellow at the Brookings Institution. "That means that it's essential to avoid the mistake of shortchanging essential investments in growth — education, innovation efforts, infrastructure, other investments — when the largest budget problems are in entitlements like Medicaid."

While business hardly speaks with one voice, this advice isn't lost on some of Washington's most powerful business groups. For example, the Washington Roundtable, which represents major private-sector employers, supports strong funding for universities — which have suffered severe cuts — and transportation infrastructure even in the tight environment.

Considering business has already won a restructuring of the unemployment-insurance system, this backing for programs critical for future economic growth is important.

Many businesses are also supporting passage of tax-increment financing, a tool that has been used nationally to successfully revive downtowns and other areas, as well as finance specific projects. The Legislature has long rejected it. Maybe not this time.

It's also a good time to revisit the value of billions in tax breaks, as advocated by the Washington State Budget and Policy Center. Some work; others may not.

One business leader I spoke with, who asked that his name not be used because of the sensitivity of budget negotiations, gives Gov. Chris Gregoire high marks for her leadership. But the crunch will come, he said, if Olympia understands the old revenue and spending model won't come back. Washington needs a sustainable budget.

For example, the Roundtable advocates a Priorities of Government process that focuses on funding core programs. It asks if the activity is essential; whether the state must provide it or if others could do it more effectively; whether it can be eliminated in a recession. It also seeks more cost-effective ways to achieve budget goals, and subject them to performance contracts and incentives. This was an approach undertaken in the mid-2000s by then Gov. Gary Locke and then state Sen. Dino Rossi.

It didn't take. But in the "new normal," elected leaders may have little choice.

Said Muro: "The state should not assume the business cycle will reassert itself and bail it out. There's a ton of evidence that things are going to be, and already are, different ... Meanwhile, production matters more, and that should be an opportunity for the state. But all bets are off, as it's a time in which all places need to scramble to identify new niches in a new world system."

That said, the tough changes necessary, which must include many sacred cows, will hurt real people. And cutting too much will damage the state economy far beyond one budget cycle.

It might be a saving grace that so many other states are worse off, or entered the recession with more limited economies. But that's not really where Washington's toughest competition is located in the 21st century.

You may reach Jon Talton at jtalton@seattletimes.com