Economic forecasting key to state’s planning

BILLINGS — An economist can’t be Chicken Little, constantly claiming the sky is falling. To be credible, an economist should be more like Paul Revere, galloping across the country accurately warning folks, `The recession is coming.””

By Jan Falstad of Montana Lee Newspapers

That’s what economist Greg Harkenrider told a group of business leaders in Billings Wednesday. Like Montana, his state of Kentucky must make painful budget cuts.

“ We have had a mild economic recession nationally, but the states have really taken it on the chin,” Harkenrider said. “ This recession has been terrible for states.”

One key to easing the misery, he said, is for states to customize their economic projections to more accurately predict when the bad times will hit home.

As chief forecaster for Kentucky, Harkenrider visited Billings to help Montana State University-Billings econo mists refine their numbers.

MSU-B’s economic indica tor series began in September, and the university’s Center for Applied Economic Research now releases a monthly index of statistical trends for Eastern Montana and northern Wyoming.

Harkenrider’s first lesson was that national economic indicators don’t necessarily work well for individual states.

“ The joke is that it (one national indicator) predicted 12 of the last five recessions. It was always predicting a recession,” he said.

Most recently, national pre dictions were too rosy, he said.

For five years, Harkenrider has crunched several economic indicators for Kentucky into a compos ite index to help predict where the state was headed.

He said his boss, Gov. Paul Patton, fancies himself an “ armchair economist” who likes financial research, but governors still want one number. “ He doesn’t want 11 charts. He wants a thumbs up or a thumbs down,” Harkenrider said.

However, only 10 states, including Kentucky, do their own customized economic model, he said. Montana is not one of them.

In the last two fiscal years, Kentucky had to cut $872 million, or 13 percent, from its $6.5 billion yearly general fund.

Neighboring Virginia cut its budget 15 percent across the board. Even the sacred cows of corrections, Medicaid and K-12 school budgets were not sparred.

“ That’s huge. That’s a dra conian change,” he said.

So, if misery loves company, Montana has plenty of friends.

Montana is facing an estimated $241 million short fall in its biannual budget of $2.7 billion. If all that comes from spending cuts as Gov. Judy Martz has proposed, that could amount to a 9 per cent reduction.

Unlike the federal govern ment, states cannot deficitspend to spur the economy. So states tend to transfer money from one program to another and raid cash reserves.

But those are usually onetime fixes, he said.

The only thing President Bush has done so far for the states, Harkenrider said, is extend unemployment insur ance to 39 weeks. He sug gested the president should do more.

“ We don’t have more rabbits to pull out of the hat,” he said.

In the meantime, states can try to soften the blow of a downturn by having an accurate economic model that can predict the bad times before they hit.

In May 2000, when almost everyone else was seeing only sunshine, Harkenrider told the governor that his numbers were turning nega tive and state departments should start tightening their budgets. By August, he was really pessimistic.

That bought Kentucky four to six months of warning and made the cuts less dras tic than they might have been, he said.

Harkenrider had some advice on spending cuts as well. Even though states don’t like to hear it, he said Medicaid spending is an economic windfall. For every dollar a state spends on Medicaid patients, he said, 70 cents comes from Uncle Sam.

“ So when my governor says, `I’m running out of 30 cents to spend,’ I say, `You can’t afford not to. Where else can you get that kind of economic multiplier?’ ”

Transportation dollars are even more lucrative, he said, because the feds kick in 90 cents of every dollar spent on roads.

Finally, he said this down turn is different from past tough times. “ This is not your daddy’s recession. It’s hitting both the blue-collar and whitecollar workers,” he said.

Coming from a state with a 6 percent sales tax, Harkenrider said he was sur prised at the lack of one here.

“ That completely perplexed me: A state with a heavy tourism base without a sales tax,” he said? “ A sales tax is a great way to export your taxes and let the tourists pay.

“ This recession has taught us there is a dubious link between the economy and state revenues,” he said.

— Jan Falstad writes

for The Billings Gazette.

http://www.mtstandard.com/newsregional/rnews3.html