Short-term spending squanders surplus

Editor’s note: this is the second in a series of Monday editorials that will examine the state budget surplus.

Lawmakers face hundreds of proposals for spending the state’s $1.3 billion surplus — assuming that they resist the popular urge to simply return the money to taxpayers. Legislators need to establish unsentimental priorities for their spending in the upcoming session. Otherwise, Minnesota risks a repeat of the late 1980s, when several unwisely spent surpluses left the state without the resources needed to weather the 1991 recession.
That year the state faced a $1 billion shortfall. Until mid-1992, demand for state services continued to grow while the tax base contracted. During a recession, the state needs to rely on past investments and limited borrowing to provide more services with fewer tax dollars. Today, like a decade ago, lawmakers risk making short-term spending decisions without considering the long-term inevitability of economic downturns. Legislators must remember that the boom economy that gave them a surplus will end, and probably sooner than later.
The press is full of alarmist reports of the immanent collapse of the world economy. Domino theories that amount to “today Korea, tomorrow Japan and the day after Europe and the United States,” are overstated and simplistic. But the collapse of currencies and the contraction of economies on the far side of the Pacific hint at future weakness here. Already, the state’s 1997 growth figures have been revised down to 2.0 percent — a 0.3 percent drop. The surplus itself is unaffected by the revision, but the changed estimate prompted Gov. Arne Carlson to call for saving about $200 million of the windfall.
That proposal and similar ones are well-intentioned, but show a simplistic view of the recessionary threat. Banking money against future shortfalls focuses on meeting cash receipts rather than restoring growth. According to figures from the Federal Reserve Bank of Minneapolis, Asia buys 32.8 percent of the state’s manufactured exports. Upwards of half, much more by some counts, of the state’s imports are made in Asia. That means that Minnesota is particularly exposed to Asian risk and any effects of currency collapses there will be magnified here. Price deflation and layoffs could follow further Asian decline.
If that sort of recession hits — whether this year or four years from now — covering accounts payable will be the least of the state’s worries. If the state invests wisely today, lawmakers in the next recession will have the tools to respond effectively. Or, in macroeconomic terms, if capital declines, the state will need to improve labor and land. That means spending on workers and infrastructure. Wise spending today in areas such as education, research and transit will enable the state to retrain workers, build new industries and support development when the good times end.