Bill Watkins, PhD, is an economist who served at the Board of Governors of the Federal Reserve System before becoming executive director of the Economic Forecast Project at the University of California Santa Barbara in 2000. He and his team recently accepted an offer from California Lutheran University in Thousand Oaks to expand CLU’s economic forecast program and launch a graduate program in economic analysis and forecasting. We caught up with him during his transition to ask him about the real-world impacts of the state’s budget meltdown.
Calbuzz: As a practical matter, what difference does the budget mess in Sacramento make to private sector businesses in California?
Bill Watkins: Unfortunately, the budget is pro-cyclical and reinforces the economic decline. That is, as the economy declines, government spending is declining and taxes are increasing. This is the exact opposite of an economic development program. The other issue is that until there is a permanent solution to the budget, businesses’ future tax environment is uncertain. Since businesses avoid uncertainty that is just another reason businesses may not invest in California.
CB: What is the fallout from cuts in education on the private sector?
BW: California’s schools, including higher education institutions, will shrink, decline in quality, or do both. The decline in education will negatively feedback to economic activity.
CB: What about the tax increases in the budget deal?
BW: Tax increases always increase cost and decrease the volume. The retail tax is particularly questionable given the multi-year decline in retail sales, the ease of purchasing out of state, and the ascendancy of the internet.
CB: The governor and legislative leaders cast the February budget agreement as a momentous step in turning around state government’s long-running financial woes. What’s your view?
BW: After years of financial mismanagement, California’s government is finally being forced to confront its structural deficit. The plan completed in February was inadequate. While some hard decisions were made, the Governor and Legislature still resorted to bailout funds, borrowing and rosy projections. It was recently announced that we have another $8 billion problem, and the ink hadn’t dried on the most recent budget.
CB: Bottom line?
BW: Most economists would agree that cutting state spending and increasing taxes in a deep recession is not a prescription for stimulating economic growth. Quite the contrary, it is a prescription to slow growth. California is compounding the problem. Tax increases and spending cuts were unavoidable after years of profligate fiscal policy. Imposing new regulations that make California increasingly uncompetitive with other states is not necessary. However, California is proceeding to implement increasingly onerous regulations on business. The result will be a very weak economy for years, perhaps decades.