WashACE Blog

U.S. - Canadian Free Trade Critical to Our State's Economy

At the AWB Spokane Board meeting Canadian Ambassador Michael Wilson spoke of the importance of US-Canadian trade, a topic of particular importance to our state's economy. In his column in The Columbian, AWB president Don Brunell expanded on the theme. The numbers are astonishing.

Last year, Canada was Washington’s leading market for non-aerospace goods, more than twice as large as Japan. More than 153,000 Washington jobs depend upon U.S.-Canada trade.

In 2006, bilateral exchange between Washington and Canada increased six percent to more than $19.2 billion, with our state shipping $5.4 billion in goods north and the Canadians sending $13.8 billion worth of goods south.

While the numbers are skewed toward Canada, $8.4 billion comes to Washington each year in the form of energy — mostly electricity, natural gas and petroleum products. Ambassador Wilson pointed out that his country, not Saudi Arabia, is the largest supplier of oil to the United States, and unlike the volatile Middle East, Canadians are close, friendly producers.

Don makes the right point.

Hopefully, our elected officials will look beyond the raw spontaneous emotions that drive protectionism and realize we have too much at stake to trigger another round of trade wars. That won’t help American workers or our economic recovery.

Exactly.

Preliminary Economic Forecast: Bouncing Along the Bottom

Wednesday, the Economic and Revenue Forecast Council posted the "Preliminary June Economic Forecast." As we've come to expect, some good news and some not-so-good news. Here's both in a concise couple of sentences from the memo.

We believe the recession will officially end sometime in the third quarter with a peak-to-trough decline in real GDP of 3.7%, only slightly weaker than the 3.5% drop expected in March. The forecast assumes a “U” shaped recovery. Growth turns slightly positive in the second half of 2009 but remains weak for a year, picking up steam in the second half of 2010 and 2011. 

Brad Shannon has a bit more at his Olympian blog, concluding with the main point for budget watchers.

Raha offers his formal economic review on June 5 in the Cherberg Building on the Capitol Campus. His more closely watched two-year revenue forecast is scheduled for release at 10 a.m. June 18.

I don't look for big changes in the June forecast, other than what's necessary to reflect underperforming tax collections since the March forecast. 

Schmudget notes that the unemployment rate will continue to rise through the third quarter of 2010. 

The "U" shaped recovery may be an optimistic scenario. Some economists still foresee a "W," with a short respite followed by another dip before the economy gets back on track. Regardless, the employment picture will continue to keep the public off balance. This morning's Rasmussen Reports shows that, despite some official optimism in D.C., public opinion has changed little in the last month.

President Obama nd Treasury Secretary Timothy Geithner both said this week that they see optimistic signs in the U.S. economy, but the short-term and long-term perspectives of most Americans remain unchanged over the past month.

Confidence that the economy will be stronger one year from now is up slightly from the first of the year, but looking five years down the road, economic confidence is down six points from March.

That lack of confidence continues to depress consumer spending. As well, strapped consumers are unlikely to respond positively to appeals for higher taxes to sustain public spending.  I posted this on the California election May 19. In today's Puget Sound Business Journal I explore the message from California in a little more detail. 

Tax Wary Voters Demand Spending Control

A couple of good editorials draw sharp lessons from last week's election in California.

Tracy Warner, editorial page editor for the Wenatchee World, says our state can learn from the California way.

A California economy built on bubbles has popped. Unemployment is closing in on Depression levels of 15 percent. The state government is bankrupt, with a $45 billion deficit, a big cash flow problem and a credit rating so poor it can’t borrow half of what it needs to stay afloat in the short term. The state could run out of cash by July. The government sustained by the eighth-largest economy in the world is on the verge of functional collapse.

There's plenty of blame to distribute, he notes, particularly the state's binge spending and excessive reliance on a highly progressive income tax.

We have the same tendency toward binge spending in flush times and budgetary denial when it goes bad. We paper over fundamental weakness with short-term tricks and one-off spending. It is almost chic in this state to say that an income tax on the very wealthiest will solve our revenue volatility and smooth over our problems, when in California taxing the rich has the opposite effect.

Cautionary.

The Walla Walla Union-Bulletin also weighs in on state budgets. Writing about a proposed $800 million tax hike in Oregon, the U-B's editorial board says,

This tax plan had no chance of voter approval from the moment lawmakers approved it because, to quote former President Clinton, "It's about the economy, stupid."

<snip>

Oregon, California, Washington and the other 47 states will not embrace a new or higher tax until the economy has rebounded.

Government officials at all levels must accept that reality and curb spending.

Even as Washington's revenue projections continue to slide, that is the reality.

State Missing Biofuels Targets ...

Recent years have seen the rise of "long fuse politics." Politicians gather to celebrate the initiation of a process that promises great payoffs sometime in the future. They light the fuse, assume success, and depart before the big bang.

Back in 2005, as Jerry Cornfield reports, biofuels enjoyed such a moment.

In January 2005, Gary Locke, in one of his last acts as governor, set a goal for state agencies to be using at least 20 percent biofuel by Sept. 1, 2009.

A 2006 law signed by Gregoire put a tighter timeline into law. It required using a blend of not less than 2 percent beginning June 1, 2006 and reaching a 20 percent blend -- or 20 percent of total fuel use -- by June 1 of this year.

He notes that there were no penalties for noncompliance. And massive noncompliance ensued.

... in the second half of 2008, the state burned 10.2 million gallons of fuel of which 211,500 gallons, or 2.07 percent, was biofuel.

It's better when ferries are excluded, but still far from 20 percent.

All of which makes the ambitious long-term goals of climate change legislation even more suspect. Somewhere, somehow, we have to get realistic about what can be achieved and at what cost.

What's it Mean to Go Green? Climate Change Regulations and Definitions

Last week, Gov. Gregoire announced her executive order on climate change. The announcement coincided with the EPA's Seattle hearing on greenhouse gases and climate change. The order came after lawmakers chose not to pass the governor's preferred environmental legislation.

TVW's Capitol Record has reactions, including a statement from the Association of Washington Business on the EPA's regulatory role.

“AWB has long advocated that a federal approach to climate change policy is much preferred over a state-by-state patchwork of conflicting policies that puts Washington state businesses at a competitive disadvantage with other states,” said Grant Nelson, AWB governmental affairs director on climate change issues. “The proposed changes to reducing greenhouse gas emissions would create higher operational costs for industries, higher costs for goods and services for consumers and threatens the availability of good family-wage jobs.

“While AWB prefers a federal approach, we believe that Congress, not EPA should enact a national approach to reducing greenhouse gas emissions. Congress is better positioned than EPA in representing the interests of citizens nationwide, guarding against further harm to our already fragile economy and job loss,” he said.

This map of carbon geography, from the Creative Class blog, shows Washington is already one of the nation's low-carbon leaders. 

Just how far can the governor go in unilaterally regulating by E.O.? As TNT's Joe Turner writes, it's not clear. And, continuing the uncertainty, what it means to be renewable also is not clear, as the New York Times reports. Todd Myers, writing at the Washington Policy Center blog, also casts some doubt on the green jobs said to flow from new regulation. 

All clear now?

Rasmussen Reports: Public Sees Spending as Chief Budget Problem

According to a Rasmussen Reports survey taken before last week's election in California, 77 percent of U.S. voters see government spending as a bigger problem than voter reluctance to pay more in taxes. By that measure, you could argue that it was surprising that the budget-fixing ballot measures rejected by California voters only went down by 2-1 margins. Read the short Rasmussen piece for more insight into perception gaps between mainstream voters and political insiders.

Speaking of budgets, last week's bill signing will almost certainly not be the last word on the 2009-2011 budget. As The Daily News editorial board writes,

...declining revenue forecasts could render it obsolete almost before the ink on the governor’s signature dries. The state revenue projection for coming months is a moving target. It’s moved downward by nearly $100 million in the two months since the Legislature approved the budget. If the projection falls below what the governor believes could be covered with reserves, legislators will almost certainly be called back to Olympia this year to write a more frugal spending plan.

And they properly note the longer-term challenges:

A lot of state programs and services have been maintained with revenue that will disappear in two years or less. Almost half of the $9 billion shortfall was filled with this way. Lawmakers used some $3 billion in federal stimulus money and diverted almost $1.5 billion from off-budget accounts, according to Woodward. Most of that money will sustain jobs and services that are not slated to go away in two years.

Good coverage of Gov. Gregoire's comments and reactions from Rich Roesler.

From the misery-loves-company file, MSNBC notes the pervasiveness of state fiscal stress (h/t Dave Fisher). Using California as the poster child, Alex Johnson reports:

it is only a funhouse mirror distortion of what is happening in nearly all of the other states, which face critical budget gaps of their own.

The site has handy links to brief accounts of each state's budget situation.

And for fans of ballot box budgeting, a nice assessment from Sacramento Bee columnist Daniel Weintraub of how constitutional restrictions have hamstrung California legislators when it comes to addressing the budget shortfall.

And, although many disagree, lawmakers argue that Initiative 960, requiring a supermajority vote for tax hikes, did not influence them this year. I think they have a point. Although there was a lot of Democratic interest in raising taxes, I doubt than any specific tax plan had simple majority support. Of course, the real test comes next year.

MORE My column in The News Tribune looks at how Medicaid has magnified state budget problems.

Governor Creates Aerospace Council

Yesterday Gov. Gregoire signed an executive order creating the Washington Council on Aerospace. Using the future perfect tense she said,

“Washington is the best place in the world to build airplanes, primarily due to the robust aerospace infrastructure we have in place and our highly skilled, productive work force. Our advantages also include a competitive aerospace tax environment, strong aerospace research and development capacity, and this state’s unparalleled quality of life,” Gregoire said. “But in today’s challenging times and with our faltering economy, we need to do more to stay ahead. The aerospace council is designed to ensure we are doing all we can in a sustained way to be even more competitive.”

Washington can become the best place in the world to build airplanes. And it's the job of the Council to make sure it happens. But as this report makes clear, right now we're not competitive.

Rich Roesler has more in his Spokesman-Review blog.

Bad Company: Most States Face Continuing Budget Woes

Following on yesterday's warning from Gov. Gregoire that the state may not have the money to make it to January, here's a brief inventory of the budget challenges faced by states across the nation.

For context, here's how legislative experts saw things at the end of April.

When enacting their budgets for FY 2009, 44 states collectively resolved a $40.3 billion budget gap. But those actions were not enough to keep budgets balanced. Just a few months into the fiscal year, a new $32 billion gap opened, which eventually climbed to $62.4 billion. Officials hope the FY 2009 gap has peaked, but a few indicate that upcoming revenue forecasts could still add to their current fiscal year imbalance.

“During this legislative session, legislators were left with only tough and unpopular options to balance state budgets,” said William T. Pound, executive director of the National Conference of State Legislatures. “The situation will be even more difficult in the next two years, given the serious cuts that have already been made. The easy adjustments have already been taken.”

Easy adjustments? Not so's you'd notice. But I agree that the next two years will be more difficult.

Governing.com provides a good summary of today's budget report from the liberal Center on Budget and Policy Priorities. In typically understated terms, CBPP report:

States are facing a great fiscal crisis. At least 47 states faced or are facing shortfalls in their budgets for this and/or next year, and severe fiscal problems are highly likely to continue into the following year as well.

Whether or not you agree with the CBPP's policy prescriptions, and I generally do not, their analysis of the states' fiscal predicament is well grounded.

For those who think the difficulties might be eased with an income tax, this CNN/Money report ought to slow down some of the hype. A sample:

The latest blow came from the April 15 income tax returns, which states are tallying now. The weak stock market has decimated capital gains tax revenue, upon which many states depend, experts said.

Already, several states have found revenues coming in well below estimates, prompting officials to scramble to close gaps. Massachusetts and Ohio, for instance, are facing new gaps that could exceed $900 million each. New Jersey is looking at a $500 million shortfall after a government report predicted revenues will come in $1.2 billion below projections, in large part because of sagging income tax revenue. In other states, officials will huddle in coming days and issue new budget estimates.

Jeff Cornwall at The Entrepreneurial Mind looks to Scotland to show what happens to entrepreneurs when government decides to go after the rich. No joy there.

Not much fiscal joy anywhere.

Will Revenue Dip Lead to Special Session?

It's too soon to tell. But yesterday's collections report increased the likelihood that lawmakers will have to make further budget adjustments. The News Tribune reports that the governor is worried.

Gov. Chris Gregoire fears legislators might need to come back to Olympia later this year to adjust the 2009-11 budget to meet expected further drops in state revenues.

“I don’t know if we can get through to next January,” Gregoire told The News Tribune editorial board on Monday.

I'd guess things would have to get a lot worse before that happens. But legislators and the governor will continue to face tough budget decisions in 2010 and beyond, as she acknowledged in her ed board meeting.

Anyone familiar with this budget will tell that ... in two years there is potential for an even more challenging budget,” she said.

For starters and not even considering future loss of federal dollars, Gregoire said, there is “$4.5 billion of one-time spending that is going to hit us in two years.” The majority of that spending is in federal stimulus money that will go away by then.

That's not news. But it's good to see that the governor is already considering her options.

Deirdre Gregg reports on the shortfall in the Puget Sound Business Journal, noting

Gov. Chris Gregoire has not signed the final operating budget bill yet, and she could look for ways to make some additional cuts.

And Joe Turner writes on his TNT blog that lawmakers softened up on some cuts after deciding not to run a tax package to the ballot.

New Forecast Report: Revenues Stay Down - Slow Recovery Seen

The May Economic & Revenue Report has just been released. This is the monthly report from the Economic and Revenue Forecast Council that looks at state revenue collections. The council has expanded the report to provide useful analysis and trend information.

Here's how the collections look:

Adjusted for special factors ($7.5 million in large deposits in May 2009 and $11.3 million in large deposits in May 2008), collections in the current period are down 13.5% below their year-ago level. Unadjusted, the decline is 14.0%.

Collections for this period are $40.8 million (4.0%) below the March 2009 forecast. Cumulatively, they are $82.7 million (5.1%) below.

The jobs picture here, as it is nationally, is getting better by worsening more slowly.

The unemployment claims data suggest that the pace of job loss will decline in the coming months, but a quick upturn in jobs is not likely. We expect Washington payroll employment to continue to decline through the end of the year with the unemployment rate peaking in mid-2010.

The 7-page report contains a lot of good information. And a little good news.