Boston Business Journal - May 5, 2003

From the May 2, 2003 print edition
Opinion 

The state's budget woes: Déjà vu all over again

Al Gordon  

It cannot be said that Massachusetts always makes the same mistakes when confronted with a fiscal and economic crisis. The commonwealth has a penchant for making entirely new ones. Unless Massachusetts realistically addresses structural issues in the state economy and public budgets, more errors and more woes are inevitable.

In 1975, newly elected Gov. Michael S. Dukakis inherited an economy that was plunging head-long into the post-Vietnam recession. According to the Massachusetts Taxpayers Foundation, the indefatigable budget watchdog organization, the resulting state budget crunch was about as severe as the current one. Dukakis' big error: stubbornly sticking with his "lead pipe" guarantee of no new taxes, which precipitated a fight with the Legislature and delayed a solution for months. (OK, some mistakes do keep repeating.) A package of tax increases, budget cuts and borrowing ultimately closed the deficit.

In 1991, newly elected Gov. William F. Weld moved into the corner office in the wake of a recession that resulted when the speculative bubble of the 1980s culminated in a spectacular stock market crash. In Massachusetts, we saw the dark side of the financial services industry (Bank of New England) as well as a lesson on what happens when high-technology companies (Digital, Wang, Prime) cease to be leading edge.

The budget mistake that time can be summed up in one word: "overspending." Seduced by the "Massachusetts Miracle," Beacon Hill policymakers increased spending at an average annual rate of nearly 10 percent in the late 1980s. When the economy slowed, tax revenue declined and deficits were inevitable. Again, tax increases, budget cuts and borrowing were used as solutions. But in truth, the real fix was the economy's quick rebound in the 1990s.

And now: another new governor, W. Mitt Romney, another stock market collapse, another recession. Financial services took a hit; dot-coms and telecommunications took a bigger one. Thus, another massive deficit. The stunning twist this time is that this budget crunch comes after the state made an actual effort to prepare for it -- through fiscal restraint (spending grew in the 1990s at half the rate of the 1980s) and nearly $3 billion in "rainy-day fund" reserves.

A key element of the commonwealth's undoing was tax cuts. Governors Weld, Argeo Paul Cellucci, Jane Swift and the Legislature did their part in the form of corporate tax concessions, most notably to Raytheon and Fidelity. But the commonwealth's taxpayers can take credit themselves for bad policy, voting for the Question 4 tax cuts in 2000, which cut the tax base just as the economy was about to sink.

So how do we get out of this mess?

The starting point is to recognize that as goods production continues to wither in Massachusetts -- it now represents less than 15 percent of Bay State jobs -- and the dominance of service industries grows, the state becomes ever more vulnerable to economic fluctuations. To oversimplify: When you have a unionized auto plant in Framingham, contractual terms cushion the blow of layoffs on workers, but when a dot-com goes "poof!" in Cambridge, the workers are on their own. Accordingly, the state needs to think about its finances in a manner that takes into account the long-term ups and downs of the economy rather than the political trend du jour.

The current political climate offers a unique opportunity to develop a workable fiscal plan. The process (to use the term loosely) being played out on Beacon Hill is to keep cutting the budget and hold off on taxes until the screams of those opposing the cuts become louder than those of tax opponents. It's going to be ugly to watch, but this is pretty much how the political system is supposed to work out this kind of dispute.

The state also needs a serious economic development program. Annual job-growth rates ran higher at the height of the 1980s' boom than in the peak years of the '90s. At least some of that reflects the Dukakis administration's aggressive economic initiatives versus the Weld-Cellucci-Swift inaction. The Massachusetts economy is going to live and die, at least in part, by its ability to turn the bright ideas and bright graduates from Harvard, MIT and other academic institutions into businesses and jobs.

But above all, we need to have some consistency and continuity in fiscal matters. The ongoing absurdity of increasing taxes during the bottom of a recession and cutting them at the height of a boom -- the worst time to do either -- has to come to an end. The best thing to do when recovery comes around is: Don't do anything. No big, new spending programs. No big tax cuts. Use any surpluses to build up bigger rainy-day reserves.

Just once, let's try the novel concept of leaving well enough alone.

AL GORDON, a former reporter and editor for The Patriot Ledger, Newsday and other publications, is a principal of Mary Fifield Associates, a Brookline-based strategic communications firm.

© 2003 American City Business Journals Inc.