Q&A: Dean Baker explains how Rhode Island is like Greece

April 2nd, 2013 at 5:00 am by under Nesi's Notes, On the Main Site

dean_baker_thumbnailThe iconoclastic liberal economist Dean Baker is famous for discovering the housing bubble years before better-known economists did so. Baker is the co-director of the Center for Economic and Policy Research in Washington. He visited Rhode Island last week to speak at the Economic Progress Institute’s annual budget conference.

Baker sat down with WPRI.com after the event for a wide-ranging interview about the economic issues facing Rhode Island. (Previous selections discussed the Superman building’s fate and the pension fund’s outlook.) In this section, Baker discusses how he thinks Rhode Island should balance its budget.

The transcript has been lightly edited for length and clarity.

You mentioned in your talk how Rhode Island is like Greece, though you were quick to couch it. I was thinking when I heard you were coming here that one thing I wanted to ask you was, we don’t have a central bank in Rhode Island, we have to balance the budget, we can’t get a looser federal fiscal policy – therefore I’m wondering how to apply what liberals suggest to do for the economy when you get down to a state-level economy. It seems like there aren’t a lot of tools. So when you said Rhode Island is like Greece, what did you mean by that?

Essentially, exactly that. Greece can’t just say, “OK, we’re going to run a big deficit to boost our economy,” because they have to borrow the money from someone, and basically they’re in a situation where the European Central Bank and the IMF are saying, “Here’s the deficits you have to run.” They’re constrained in what they can spend. They don’t have the central bank – the ECB’s deciding what they can do in terms of interest rates, money creation – they don’t have much leeway that way. So the question is, what can you do given those two really big constraints? You can try to do what you can with the resources you have, but you’re basically going in a fight with your hands behind your back because you can’t do the obvious things.

And that’s very much what a state like Rhode Island faces, as a state – just not a lot of levers to pull.

That’s right. I don’t mean to imply insofar as in Greece you had people not paying their taxes – I don’t think that’s the issue up here in Rhode Island.

So with balanced budget requirements and everything, it really is a challenge even for the smartest policymaker who could do the full Dean Baker plan for Rhode Island – it would be hard for Rhode Island, just as Rhode Island, to get some huge increase in job growth.

Yes. You’re very much constrained as to what you can do. You have clear spending limits that don’t apply to the federal budget or a national budget in general and, again, you don’t have your own currency.

And you’re not recommending we create our own currency.

(Laughs) No – for Greece I’d suggest it, because I think there’s more to be gained, but the eurozone obviously hasn’t been there for 200-odd years.

Yeah, we’re pretty baked in with the dollar.

Yeah. It’s hard to know what that would look like.

I’d imagine at least some of the conservatives who read my blog will say, “See, even Dean Baker is admitting Rhode Island shows the liberal project has failed – that having a relatively sizable government and high taxes breaks a state, and now we have double-digit unemployment.” I know you’re not an expert on Rhode Island, but what do you think of that argument?

You can look across states – there’s no clear correlation between tax burden, however calculated, and job performance or growth performance. You have relatively low-tax states – Nevada, for example, that certainly doesn’t have much to boast about right now.

I don’t know enough about the specifics of Rhode Island but it’s a New England-wide phenomenon, we know that – Doug Hall gave a very good presentation [pdf] about that – though I realize New England in general is relatively high-tax. But still, you have common factors affecting the region. It’s not the just tax rates.

You know, look: taxes, other things equal, always are bad. You’d rather pay lower taxes, both psychologically but obviously also you don’t pull money out of the economy needlessly. But if you’re educating your people – you know, people point to Texas as this great model. Well, it’s low-tax but you have very low wages, high poverty rates, poor educational standards, uninsurance – so I don’t think if you just gave people, “Here’s Rhode Island, here’s Texas,” just snap your fingers and you’d want to be Texas. I doubt many people would go for that. Maybe you’d have a somewhat lower unemployment rate, but a lot of people would be working at jobs that are paying them much, much lower than the jobs they have today. So I don’t think that’s obviously a positive step.

Again, what you want to make sure is that what you’re taxing, the money you’re taxing away, is being well used. Clearly to some extent that’s true – I’m not going to vouch for every dollar spent, but you certainly have much higher educational outcomes than Texas, much better health-care outcomes than Texas, so you are getting something for it. Again, you’d have to look at it more carefully and say, “OK, dollar for dollar, are we doing better?” But it’s not as though you have all these taxes and nothing to show for it. That’s just not true.

You’ve written that all things considered, you’d prefer lower taxes. I’m wondering, when you think about state-level taxes, which of the broad-based ones do you think states should look to ease up on and which ones would you use more?

It’s interesting. A lot of people say that economists like sales taxes and dislike income taxes. I’m kind of inclined to say the opposite for a couple of reasons.

One, sales tax is more regressive, almost by definition. But the other – and this is what I don’t quite understand – you know, conservative economists are often quick to say there are negative incentive effects with an income tax. Well fair enough, there’s some – I think conservative economists overplay it, but it’s clearly not zero. But there’s also incentive effects to sales taxes, and when you have a high sales tax state next to a low sales tax state, what’s going to happen? People aren’t going to go over the border unless they live right at the border to do their grocery shopping, but if they’re going to buy a refrigerator, a television – if you have a 5%, 6%, 7% sales tax opposite a state that has 2% or 3%, we’re talking about a $1,000 purchase and you save $50? Yeah, a lot of people are going to do that.

So I think if you’re going to cut a tax, a sales tax is a good one to cut. And again, this is because in the context of the downturn that’s money directly out of people’s pocket who are likely to spend it. I realize rich people pay sales tax, too, but disproportionately that’s a tax cut that’s going to help lower-income people, so if you’re going to look at a particularly bad tax, I would look at the sales tax.

So you’d look at who is most likely to spend the money quickly that they’d get with a tax cut.

There’s also the point I was making today about switching that from goods to services. I’m very sympathetic to the rationale and I understand the political opposition, because obviously the people who aren’t taxed will scream bloody murder – what you have to hope for is the people who are going to be pay lower taxes will be out there making the case. That just seems like common sense, and a basic principle that economists hope you do – you want to try to have a smaller but broader tax, so there’s less distortions. Rather than taxing the goods people buy at 7%, you could knock it down to 5% or 4% and have that apply to your haircuts. Yeah, no one wants to pay a tax on their haircuts – but then they weren’t happy paying 7% when they bought their clothes. The equalization, I think, would be a really good way to go.

The tax cut we do have on the table right now is Governor Chafee’s proposal to lower the corporate tax rate from 9% to 7% over the next few years. What do you think of that?

I can’t see any logic to it. You’re just giving money to corporations. You’re going to have corporations that are going to close their places anyhow and they’re going to say, “Oh, we did it because of the 9% tax.” They’re responsiveness to that’s going to be very, very little. I think you’re just giving away money.

You know, when Paul O’Neill was nominated to be treasury secretary [by President George W. Bush], he’d been running Alcoa aluminum and before that International Paper, so here’s a guy who’d run major corporations and been the top executive at other major ones even before that, so he’d been at the very top of the echelons of some of the biggest companies in the country. Somebody asked him about tax rates and he said, “I don’t know a single businessperson that ever invested because of taxes or tax breaks.” He goes, “We’re happy to take get them, but that’s not why you invest.”

They probably told him to shut up at the White House – I don’t think he ever said that again, at least not when he was treasury secretary – but I think that’s probably pretty much true. If there are two states that are otherwise identical and one of them is going to give them 6% and one isn’t – but that’s almost never the case. So they’re looking at their transportation costs, they’re looking at what sort of work force they have, they’re looking at where their supplies are – things like that – and that’s going to be 99% of their decision. Then at the end of that and they go, “Oh, we’re only going to have to pay 6%,” then maybe it matters.

That’s interesting. So it could be that Rhode Island isn’t presenting an enticing options to employers, but that doesn’t mean the corporate tax rate is the biggest driver of that – it could be transportation, our utility costs are pretty high – or something else.

You look at locational decisions, people set up shop in Silicon Valley. Well, you can get a helluva lot cheaper property in Mississippi – why don’t they go to Mississippi instead? But they go to Silicon Valley because you have all these people doing high-tech stuff, so you want to be in the middle of it. And they have high taxes in California. So they’re going to have to pay their workers more, they’re going to have to pay more for property, they’re going to pay high taxes – but nonetheless if you’re setting up a high-tech operation, odds are you’re looking at Silicon Valley. It may not be where you end up, but you’re certainly going to look at it. Like I say, I don’t say taxes get zero consideration, but it’s probably pretty low on the list.

On the spending side, liberal lawmakers at the State House have struggled in recent years because they support many programs that they’ve still had to cut because of the budget crunch. If you were a state lawmaker stuck looking at a budget that needed to be balanced, and you know cuts were going to be a part of that, where would you look?

I think you try to do things that aren’t going to hurt in the long term.

First off, you obviously have to do things that are immediate necessities – you don’t want people not to get the health care they need, food and so forth, things like that – you can’t not do that. And then I think you do have to think long-term, and that might mean cuts in places you don’t want to see. There are invariably going to be cuts in some places you don’t want to see.

But you do have to maintain your infrastructure – it’s not clever to not do maintenance. You get a lot of that, pushing things down the road, and it just means a much, much bigger burden later. [Pause]

It’s tough, then.

Yeah. There aren’t going to be simple ones. Anything I say, it’s not going to sound good. You don’t want to cut education because you want to make sure that people’s kids are getting a decent education.

I always think on the revenue side, how can you avoid these things? A lot of state budgets, you don’t have a lot of ways.

You once wrote about looking at the highest-earners in the public sector.

You could try to do that. You do have people in the bureaucracy, sometimes the higher-earning people are getting paid a lot – I’m thinking universities, you often have a lot of people at universities that get paid. I don’t know how much that is at the University of Rhode Island -

They’re more and more separate from the state after a lot of budget cuts.

So it sounds like you can’t really make cuts there. Again, it’s not the idea of cutting a college education, it’s that you have faculty who are getting high six-figures – I don’t mean $900,000 but you get $200,000 or $300,000 or $400,000 – which seems kind of high to me.

There aren’t great places, but one of the areas that I have looked at a little bit is – not that you’re going to find huge savings here – but a lot of states pay huge management fees on pensions, and that’s something really should be scrutinized. I think oftentimes they’re being ripped off, so that’s almost a free lunch.

One thing that jumps out to me on this: Steve Rattner, the guy who was the car czar, ended up making a settlement with the Securities & Exchange Commission, I think he paid $7 million. And the specifics was he was charged with making payoffs to get control of management of a portion of New York State’s pension fund. Now this raises all sorts of red flags, because let’s assume it’s true – I don’t know that it’s true, but he paid a lot of money, he must have felt there was something there – why would you pay money to manage it?

Well, because you were going to get more back in fees. So I think there is a lot of fat there that, if you really scrutinize the payments – and again I don’t know Rhode Island’s case – but I think in many states you have managers that are ripping off funds. They’re promising big returns which maybe they can deliver, I think oftentimes they don’t – or even if they can deliver them they would probably deliver them at a lower cost if they were pressed on it. So that would be a place you’d just be carving fat out of the system.

What about borrowing right now while interest rates are low?

Absolutely – I think it would be crazy not to. If you have legal options that allow you to borrow I think it’s crazy not to take advantage of that. Again, be fully transparent about it, get on the record, but businesses are doing it – people always say government should act like a business, well, businesses borrow when costs are low. There have been some companies that have borrowed, like, 50-year debt because they said, what the hell, we’re never going to see this again. It’s not that they needed the investment – they just saw the opportunity as a AAA or AA company, and took advantage of really low costs. They can always do something with the money; it’s hard to lose. In Rhode Island’s case, there’s lots of things you could do with the money. Insofar as there aren’t legal obstacles I think it makes total sense to that. •

• More Dean Baker Q&A: ‘Crazy’ idea on the Superman building | How the pension fund can get 7.5%

Ted Nesi ( tnesi@wpri.com ) covers politics and the economy for WPRI.com and writes the Nesi’s Notes blog. Follow him on Twitter: @tednesi

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7 Responses to “Q&A: Dean Baker explains how Rhode Island is like Greece”

  1. Floridian says:

    Some pretty dumb or inconsequential answers from a very smart guy.

    1. Cosmo says:

      You got that right, nothing here that anyone with two brain cells to rub together couldn’t come up with but on the other hand he is right RI has very few options. The last idea about borrowing is the absolute worst. Theoretically a good idea, but in this state the borrowed money would only go toward supporting the existing political corruption, in other words thrown down a rathole, and make any kind of reform impossible. The whole political structure of this state has to be torn out by the roots and replaced before any progress can be made in this sewer. And that is not going to happen.

  2. GaryM says:

    The Greek economy is a mess, no doubt. But on a per capita basis, the average Greek is producing twice as much for export ($2,425 US -2009 estimate) as the average RI resident ($1179). RI is ranked 3rd from the bottom in the US as far as exports go.

    You have to produce something that you sell to someone else in order to have a stable economy. Progressive economists haven’t figured that out yet.

    RI’s economy is seen every morning on route 95 heading north for jobs in Mass. As the price of gas gets higher, and taxes get higher, those commuters will slowly make a decision to get closer to their work. RI will replace those leaving with more on the government dole.

    At least in Greece, they are producing something that someone else buys.

    1. Cosmo says:

      Could not have said it better myself. Bravo!!

  3. lost in ri says:

    has mr baker ever heard of GE and jack welch?

    thay have a tax department with over 1000 employees and openly state that they pursue low tax states and countries.

    1. Ed says:

      Lost in Rhode Island. There are many companies that will set up shop in Rhode Island, not just GE. You think companies owe tax dollars to pay your overcompensated sorry excuse of a human being and your public sector union brethern and that includes the public school teachers? The taxes in the United States and especially Rhode Island are too high on business to keep run their businesses in the US. With the all the money held overseas by US companies, if was brought back to the United States they would have to pay the US Government 35% of the money. What type of incentive is that to a company to transfer assets to the US? Lower the tax rate to 10% max you might get 75% of those funds back in the United States. Now my question to you, when are you and your public sector union brethern including the public school teachers going to take a 20% cut in present pay, a 50% reduction on present pensions and pay 35% of the cost of your benefits? The taxpayers have been bled dry now it is time for you to make a sacrifice.

  4. [...] it’s fair to worry about the fees charged by hedge funds – something Dean Baker also noted when I interviewed him. Many states “pay huge management fees on pensions, and that’s something that really should [...]