The Fight Over Counting Inflation is a Prelude to the Real Battle.

No right-of-center pundit or politician can speak about the legislative session, it seems, without inserting a reference to the so-called $2.2 billion state surplus. It's almost as if they all had one of those annoying Microsoft Office Assistants automatically inserting the phrase whenever they typed "budget."

It's bad enough when Katherine Kersten or Jason Lewis act as if the $2 billion — ripped from widow's egg money, orphan's piggy banks and shop welders' take home pay — actually were in hand and about to be delivered by Margaret Anderson Kelliher to Carl Pohlad, the teacher's union and an unmarried teenage crack mom. Now, former Independence Party gubernatorial candidate Peter Hutchinson piles on from a different direction.

Unlike the give-it-back conservatives, Hutchinson says in the Pioneer Press that the state should spend  the money — $1 billion in the bank and another $1.2 billion projected from the last budget forecast. His beef is with the assumption that inflation will already claim about half the money. That's not using "the surplus to get more where it matters most." (We'll return to Hutchinson's thoughts in another post.)

Indeed, how to handle inflation is shaping up to be a legislative struggle — even with a DFL majority in both houses. Right now the state factors inflation when projecting how much revenue will come in. But departments can't estimate the impact of inflation when planning how much they'll need to spend in future years.

This budget process, mandated by law in 2002, has two possible effects, both creating downward pressure on spending. 1.Inflated revenues appear to exceed deflated spending estimates. This spurious surplus supports the notion that we're taxed too much. 2. Departments and programs are funded at less than actual costs, forcing cuts that aren't directly traceable to the politicians who caused them.

This "let's pretend" approach to inflation is politically devious and intellectually dishonest, according to  some, including Senate Majority Leader Larry Pogemiller and Sen. Ann Lynch (DFL, Rochester), who says:

“This leads citizens to believe there is money to spend on education, health care, and safe roads, when the fact of the matter is that the money isn’t there.”

Former state finance commissioner John Gunyou, who served under Republican Gov. Arne Carlson, notes the denial required:

"The teachers will never get a raise. The price of the gasoline going into the school buses will never go up ... This is, I think, close to criminal. You're lying with the forecasts."

Another Republican former finance commissioner, Dan McElroy, doesn't like the S-word, and the I-word is part of the reason, notes the Mankato Free Press:

"Surplus implies psychologically that it’s ‘extra money’ — money that the government doesn’t need, money that should go for tax rebates or tax cuts,” he said, adding, “The money on the bottom line isn’t extra or frivolous dollars. It’s money that in the past would have been baked into the forecast for inflation.

Paul Anton, a member of Minnesota’s Council of Economic Advisers, told the legislature choosing not to restore the inflation calculation would be making a deliberate choice to mislead the public about the true financial condition of the state.

Not so fast, say others like Sen. Betsy Wergin (R, Princeton). Maybe excluding inflation isn't straightforward accounting, but putting it in is like an automatic tax increase. Leaving it out enforces discipline that legislators don't otherwise exert. When departments can't count on automatic spending increases, it encourages innovation. They must figure out how to deliver the same services for less.

So is the current practice Republican budget hijinks or flawed but needed fiscal discipline? A bit of both. A stealth starvation diet seems no better to me than automatic increases that encourage the status quo.

But focusing on inflation tricks misses what really matters. How do we know our spending achieves the outcomes we want?

Comments

[Ed Kohler]

Great points. We need more fiscal maturity so we at least know what we're arguing about.