NC Policy Watch
By: Bill Schweke
June 9, 2010
How do we plan for the next economic downturn? It may seem a trifle premature to be tackling this task. After all, the North Carolina economy is just beginning to start its recovery from the Great Recession. And if the current European slump remains under control, we should be able to count on a sustained, if slow and uneven, economic upturn for some time.
But there is clearly much that we have learned from the recent downturn and much that we can do to soften the blow of the next, inevitable business cycle slump.
One truth of which we need to remain cognizant is that the death and birth of businesses is to be expected. Business downturns are times that troubled firms go under. Such job losses, layoffs, and closures are what a market economy is all about. Economists call it "churning," reflecting the fact that every day the US loses and creates large numbers of businesses.
Indeed, research documents that the places experiencing the most firm deaths and contractions are often also generating the most job creation on a net basis. Capital is moving where it is demanded. It is called the "process of creative destruction." It is capitalism's "forte."
Moreover, state governments are not all-powerful. States cannot run budgetary deficits and pursue their own Keynesian fiscal policies. They cannot create money, or set overall interest rates like the Federal Reserve.
We must also acknowledge that each state experiences the business cycle differently. Some are less influenced, due to greater industrial diversification. Some are affected when the recession starts. Others are late-comers.
Acknowledgement of all of these facts is not, however, counsel for sitting on our hands and doing nothing. The deeper and longer the downturn is, the more the populace will rightly demand action.
Here, then, are some specific recommendations to help us cope with the next downturn:
Establish a bigger "rainy day fund" - Although most states earmark money in good times for later use in bad times, these funds need to be larger, thereby smoothing out the business cycle some and curbing some of the desperate hunt for tax revenues during a recession.
Reform business "incentives" - This means getting rid of wasteful tax expenditures and institutionalizing the collection of data needed to assess their effectiveness.
Modernize the state's tax and revenue system - A number of commissions and committees have recommended this reform in the recent past. The state should "bite the bullet" and improve the fit between its tax code and the nature of today's more service- and information-based economy.
Avoid big permanent tax cuts during good times - State leaders must be more careful about changing the tax structure and lowering the revenue yield, during expansionary periods. If policymakers feel the need to provide tax relief from budget surpluses, use rebates instead.
Find government efficiencies - One tactic in this area is a budget-setting process developed by the group Public Strategies that is called "budgeting for results." This makes the focus on efficiency and effectiveness less episodic and frenzied, as in times of crisis and institutes a commitment to continuous improvement in the public sector.
Address the job loss threat directly - State leaders should enact legislation that would provide tax credits to firms that agree to shorten their work week but maintain the labor force; create time-limited grant subsidies to cover some of the costs of wages and benefits for existing small firms that agree to hire the jobless; and replace existing job creation tax credits with a more carefully designed employment expansion in credit. Each program would be triggered by unemployment rates and turned off when jobless figures fall.
Develop an improved business retention, expansion, and modernization service - There are a variety of ways that state government can and should upgrade its capacity to deliver better technical assistance to troubled, but still viable, enterprises, as well promising new firms. These include software enhancements for surveying and needs identification, business visit standardization, economic development practitioner training, and improved referrals.
Improve federal trade adjustment laws - Finally, North Carolina's congressional delegation and state officials should push for improvements in federal trade adjustment laws that would assure the federal government sets aside enough money for matching state "rainy day" commitments. This would make the recession-busting program more timely and state-tailored and assure that the state could use its funds for private sector hiring subsidies, public service employment, youth jobs, public works, and fiscal aid.
Of course, none of these changes will come easily. Each will require planning, forward-thinking and sacrifice. That's why, even as we just begin to emerge from the last recession, there's no time to waste in planning for the next one.
William Schweke is Senior Fellow at CFED in Durham, NC.