1 Economic Overview: Is the Worst Behind Us? Dave Colander C.A.J. Dist. Prof. of Economics Middlebury College

Two Questions When is the US economy coming out of this recession? What will make a state treasurers or auditors life easier? 2

When is the economy going to get out of this recession? Not in the foreseeable future. The reason: We are not in a recession. We are in a suppressed depression. 3

What is the difference between a suppressed depression and a recession? A Recession is what an in-shape athlete experiences. A suppressed depression is what a 60 year old 450 pound 5 ft 10 inch man who parties all night, and who thinks he is still 18 experiences. 4

The Talk Stop pulling punches and sugar coating the problem. Let me put it bluntly. The US economy is best thought of as the economic equivalent to an old, overweight, out of shape 65 year old who has had a serious heart attack. No politician on either side has wanted to tell the US public that, and until we do, we will not be dealing with our problem. 5

The Suppressed Depression Federal Budget Overhang Not an additional 1.5 trillion Not an additional 4 trillion An additional 10 (and possibly 12) trillion dollars that we need to cut 6

How to Deal with these Problems? Reassure A United Voice 7

Impossible Expectations and Jobs The US can produce plenty of jobsbut it cannot produce the type jobs we want at the pay we want. Thats what unemployment is telling us. Unemployment serves a purposeit reduces expectations. The problem is that it does so unequallysome people face the harsh reality while others of us simply watch. Here is the reality: In today's global economy, the US economy is not going to produce the jobs we wantnot the private sector, not the government nobody. The jobs we can produce involve harder work and lower pay than people want to accept. As long as there are 100s of millions of non-US citizens who can be as productive and are willing to work for less, global job creation will go elsewhere. Somehow our desires and the capabilities of our economy have to converge. And unless we can figure out another way to lower expectations we need high unemployment to do it. 8

9 What makes policy so hard is that there are three Americas, not one Group 1.those who have faced global competition. Group 2those who have not yet faced global competition. Group 3 –those who gained from global competition. Group 1basic manufacturers, unskilled, some skilled manufacturers Group 2lawyers, government workers, teachers, professors, specialized manufacturers, upper middle class Americans. Group 3financiers and high level corporate executives who are outsourcing.

10 Here is what is in store for us. Exercise more Eat Less

What advice do I have for state auditors and treasurers? Realistically, probably none, but I do have some cheerleading for you. Your job is central to the future success of the nation. You are the people society has entrusted with the financial health of society. You are the ones who can bring about the talk by not letting any unrealistic rosy projection through. 11

Three Suggestions Suggestion 1 Multi-year moving average budgets Push for a multi-year moving average budget, which automatically builds up a rainy day fund when revenues rise, without showing it as a surplus on the budget, so politicians spend it. Actually, you need not only a large rainy day fund. You need a raining season fund, and a moving average budget builds it into the accounting procedures. 12

Suggestion 2 Change to rhetoric about government expenditures and taxes. The discussion about taxes and expenditures has gotten off track. It has separated the discussion of taxes from the discussion of government services. That connection needs to be returned. Taxes are really fees. They are the price we pay for the government services we receive. Without government the economy cant function, so they are fees worth paying. The narrative has to change to emphasize the benefit principle of taxation, which sees taxes as fees for payment for government services, not the ability to pay principle. That does not mean the rich should not pay more than they currently do. But if they should the argument is not because they have the ability to pay, but because they receive more benefitsa stable, functioning economy is necessary for wealth preservation and the government provides that. The standard economic rule in fee setting is the inverse elasticity rule, and at the federal level the rich have much more inelastic demands so following standard business practice, they would pay significantly more than others based on the benefit principle and standard economic analysis. On the state level, it is less clear, and far less progression is likely optimal. 13

Suggestion 3 Help introduce ways to stop giving away the ship. Introduce the equivalent to government reverse mortgages for those who cannot afford to pay their taxes, rather than letting them not pay their taxes at all. Have a heart, but make that heart hard, not soft. Two examples: Property tax rebates for the elderly and the income poor, but house, or asset, rich. Low income should not exempt people from incurring their tax obligation. Instead of tax rebates, government could provide automatic tax loans secured by a could have reverse mortgage loans from the government, where the tax on the house could be That loan portfolio could be used to back up government bonds and borrowing, reducing the problem slightly 14

Conclusion I could go on with some additional suggestions, which I can make because Im not in any political line of fire. My take away for you is you are a key part of the solutionyou are the ones who have to give the talk to the front line politicians, who in turn have to give it to the public. I wish you good luck. 15