Foundation study: Federal stimulus will cost Texas additional jobs

Research shows temporary federal funds for unemployment insurance lead to permanent higher taxes on employers and lower economic output

AUSTIN – The recently passed federal stimulus package increases overall government spending to a level that will hinder Texas’ private sector growth and cost the state at least 131,400 jobs, according to research findings released today by the Texas Public Policy Foundation.

“These findings show clearly that growth in government crowds out growth in the private sector,” said Talmadge Heflin, Director of the Foundation’s Center for Fiscal Policy and former chairman of the Texas House Appropriations Committee. “Texas taxpayers and workers will pay a high price if our legislators use this supposedly free, one-time federal money to expand state government programs.”

The Foundation released the report, “The Economic Impact of Federal Spending on State Economic Performance – A Texas Perspective,” at a press conference in the Texas State Capitol. The Foundation commissioned Arduin, Laffer & Moore Econometrics – the research firm of internationally renowned economist Dr. Arthur Laffer – to produce the report.

The research looks at historical patterns of economic growth and spending by federal, state, and local governments; implications for Texas unemployment payments and taxes; and estimated effects that the recently passed federal stimulus package will have on Texas private sector economic activity and employment.

The report highlighted that the federal government’s short-term assistance with unemployment benefits has historically increased federal control over program eligibility and benefits. Because of that, the taxes paid by Texas businesses to support the unemployment program increase substantially once the federal money runs out.

“The Texas data shows significant increases in tax collections in the years that followed the infusions of short-term federal funds,” said Foundation Senior Fellow Donna Arduin. “Such surges are consistent with the need to build an adequate revenue reserve to pay for the higher costs that were mandated by the federal government in return for the extra revenues during the recessions.”

Heflin pointed to the report data showing a clear negative correlation between increased government spending and reduced private sector output. The report concluded that the federal stimulus package would reduce net business output by 2.5%, which would translate into between 131,400 and 171,900 additional job losses in Texas.

“The federal stimulus package was bad policy and the wrong direction for America,” Heflin said. “These findings show how important it is that the Texas Legislature reject the unemployment stimulus funds, as well as all others that would lead to permanent increases in state government spending.”

“The best way to reduce unemployment is to create jobs, and the best way to create jobs is to allow businesses to keep a greater share of their revenues so they can invest and expand,” Heflin said. “Expanding unemployment eligibility would take Texas in the wrong direction, reducing the ability of businesses to invest and expand and keeping more Texans out of work and for longer periods of time.”

Joining the Foundation for the release were numerous state legislators, as well as leaders representing the Texas Association of Business, the National Federation of Independent Business – Texas chapter, the Texas Conservative Coalition, and the Texas Conservative Coalition Research Institute.

The report is available on the Texas Public Policy Foundation’s website, www.TexasPolicy.com.

Donna Arduin is a Senior Fellow at the Texas Public Policy Foundation, and a partner with Arduin, Laffer & Moore Econometrics, which provides economic, fiscal, and policy advice to governors, legislatures, think tanks, and corporate clients throughout the country. She served as California Gov. Arnold Schwarzenegger’s Director of Finance from November 2003 until October 2004, and has served as a top budget advisor to former Florida Gov. Jeb Bush, former New York Gov. George Pataki, and former Michigan Gov. John Engler.

The Honorable Talmadge Heflin is Director of the Center for Fiscal Policy at the Texas Public Policy Foundation. Heflin served 11 terms in the Texas House of Representatives and chaired the House Appropriations Committee in 2003, leading the Texas Legislature’s successful efforts to close a $10 billion budget deficit without a tax increase.

The Texas Public Policy Foundation is a non-profit, free-market research institute based in Austin, Texas.

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TPPF COMMENTARY: Correct call to reject federal UI strings

By James Quintero

The sharp increase in the number of Texans losing their jobs has many wondering whether Gov. Rick Perry made a correct choice to reject the $555 million in unemployment insurance (UI) assistance offered by the federal government.

On the surface, bringing home an extra half-billion dollars for Texans who've lost their jobs through no fault of their own seems like a no-brainer. But peel away the veneer of "free money" and you see flawed public policy.

To draw down these one-time funds, Texas would be forced to make permanent changes in its unemployment eligibility system.

For the first $185 million, Texas would have to allow the use of an "alternative base period" for unemployment eligibility. Under current law, Texas reviews an applicant’s last four calendar quarters of wages to determine if the applicant worked enough to be eligible. The Obama Administration wants states to provide a bypass, allowing applicants to qualify if their wages would have been sufficient in the last one quarter.

The Texas Workforce Commission's cost estimate of this change: $212.4 million over five years.

That's not all. The rest of the money would hinge on the adoption of at least two of the following four benefit expansions:

* Allowing benefits to people seeking part-time work, not just full-time employment.

* Providing an allowance of at least $15 per week for each dependent living in a recipient’s household.

* Extending unemployment benefits past the current 26-week limit for persons enrolled in a state-approved job training program.

* Granting immediate eligibility for people who have quit their job for "compelling family reasons" or to move with a spouse.

The five-year cost of these individual changes ranges from $23.1 million to more than $1.4 billion.

Despite efforts from several legislators to craft legislation that automatically end those provisions as soon as they perceive the federal money to have been spent, the stimulus legislation makes clear that dog won’t hunt. The U.S. Secretary of Labor is directed to "disregard any State law provisions which are not then currently in effect as permanent law or which are subject to discontinuation."

Although many of the details are still being debated in Washington, this paragraph has many governors of both parties concerned about losing state autonomy and being shackled with higher costs imposed at Washington’s decree. The fallacy promoted by advocates of these eligibility changes is that the federal funds will "pay" for several years of the expanded benefits. In fact, those dollars will be used immediately to partially shore up the UI trust fund, and employers will foot the cost of the expanded benefits from Day One.

There are better options to address the projected trust fund deficit that control the level of taxes paid by Texas employers and preserve Texas' ability to manage our unemployment system as we see fit.

The federal government has a separate program that provides zero-interest loans to states that need help covering short-term UI trust fund deficits.

Additionally, the Texas Legislature in 2003 authorized the Texas Workforce Commission to issue bonds to cover such deficits. TWC has accessed this provision before – borrowing funds at a super-low interest rate thanks to the state’s strong credit rating, paying them off early, and saving Texas employers $270 million.

Both of these would address the short-term issue of shoring up our UI trust fund and continuing to pay benefits to jobless workers in a way that maintains a more predictable tax burden on Texas employers.

It is beyond dispute that people are losing their jobs, families are struggling financially and emotionally, and many well-intentioned legislators want to help.

But legislators must keep in mind that every additional dollar that Texas employers have to pay for people who aren't working is one less dollar available for job creation and economic recovery. And ultimately, the best way to help people who have lost their jobs is to foster an economy that creates jobs.

James Quintero is a fiscal policy analyst at the Texas Public Policy Foundation, a non-profit, free-market research institute based in Austin.

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Foundation praises Gov. Perry’s decision to decline stimulus funds

Taking federal unemployment insurance money would mean higher taxes on Texas employers

AUSTIN – The Texas Public Policy Foundation praised Gov. Rick Perry’s announcement today that he would formally reject the $555 million offered by the federal government in exchange for Texas loosening its eligibility requirements and increasing payments for unemployment benefits.

“Legislators must keep in mind that every additional dollar that Texas employers have to pay for people who aren't working is one less dollar available for job creation and economic recovery,” said Talmadge Heflin, Director of the Foundation’s Center for Fiscal Policy. “We are glad that Gov. Perry has chosen to keep our state’s focus on those goals, as they are the best path forward for the people of Texas.”

Heflin debunked the popular misconception that the federal funds would cover the cost of these changes for the next several years.

“Employers will likely see an increase in their unemployment taxes even if we were to accept these funds to shore up our unemployment trust fund balance,” Heflin said. “The issue is whether Texas employers should continue to pay these higher unemployment taxes long after our economy has recovered. We agree with Gov. Perry that they should not.”

According to estimates presented Monday by the Texas Workforce Commission, the five-year cost to Texas employers of changing the alternative base period – the pre-requisite for receiving any of the federal unemployment insurance funds – would be more than $212 million. The five-year cost to Texas employers of imposing the other federally mandated changes range from $23 million for the “quit-to-move” and “quit-for-family-reasons” eligibility expansion to $1.43 billion for the dependent allowance benefits.

The Honorable Talmadge Heflin is Director of the Center for Fiscal Policy at the Texas Public Policy Foundation, a non-profit, free-market research institute based in Austin. Heflin served 11 terms in the Texas House of Representatives and chaired the House Appropriations Committee in 2003, leading the Texas Legislature’s successful efforts to close a $10 billion budget deficit without a tax increase.

The Texas Public Policy Foundation is a non-profit, free-market research institute based in Austin. More information can be found on the Foundation’s website, www.TexasPolicy.com.

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Spending the stimulus

In the many debates about whether the federal stimulus bill will, indeed, stimulate the economy or merely increase government spending, there is agreement on one issue. To offer any stimulative effect to the increasing economic malaise, the spending needs to be swift and economically strategic.

Consider to whom this task of rapidly spending almost a trillion dollars of taxpayers' money goes: massive, chronically inefficient, and slow-moving federal bureaucracies. The scale of the purely administrative task is unprecedented. The entire plan hinges on unwieldy bureaucracies turning on a dime to approve contracts and grants.

Consider the scale of the challenge for only one agency: Department of Energy (DOE). This agency's total annual budget is now $25 billion. The portion of the stimulus bill going to DOE is $40 billion. Among federal agencies, DOE is known for exceptional delays and cost overruns. The Government Accounting Office has DOE on its "high risk" list for waste, fraud, and mismanagement. Most of DOE's current budget goes to oversight of the nation’s nuclear stockpile and research. Now it is to be a shrewd money manager.

The new Secretary of the Department, Nobel Prize winning physicist Steven Chu, recognizes the stakes of DOE’s new challenge. He was recently quoted as saying its new role necessitates a radical transformation of the agency. "We've got to do it. Otherwise it's just going to be a bust," he recently commented. Not comforting!

Hell, in fact, will freeze over before huge government bureaucracies act quickly, decisively, and prudently as wise investors of taxpayers' money. Giving these bureaucracies billions with the directive to spend fast is a recipe for waste at best and fraud at worst, whereas tax reduction is immediately stimulative and requires no "assistance" from bureaucracies.

- Kathleen Hartnett White

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Foundation joins research, business, and taxpayer groups to deliver "Blueprint for an Effective Budget"

Guidelines on using Rainy Day Fund, improving performance measures, setting funding priorities, and increasing transparency will help legislators make responsible budget decisions

AUSTIN – The Texas Public Policy Foundation joined several other research, business, and taxpayer groups at the Texas State Capitol today to deliver "Blueprint for an Effective Budget," an agreed-upon set of guidelines for the Legislature to draft an effective state budget.

"Our legislators will have difficult budget decisions to make over the next few months," said The Honorable Talmadge Heflin, Director of the Texas Public Policy Foundation's Center for Fiscal Policy. "If they follow these guidelines, they can maintain essential services for the citizens of Texas while positioning our state for a strong economic recovery."

Heflin called for the 81st Texas Legislature to preserve a balance of at least $4.5 billion in the state’s Rainy Day Fund, and to use it only for emergency tax relief or one-time expenditures.

"Yes, we are in a rainy day, but no one knows for sure how long this storm will last," Heflin said. "Texas families have the instinct to stretch their emergency savings as long as possible, and state government needs to show that same discipline."

Heflin also urged the legislature to proceed with caution regarding the pending federal stimulus legislation.

"While we expect there will be some money, it is not guaranteed and we do not know what forms it might take," Heflin said. "This money should be treated the same as our rainy day fund – for use on one-time expenditures."

The blueprint includes several guidelines on how to responsibly establish spending priorities.

"The mathematical task of closing a budget shortfall can be straight forward – just cut everything across the board," Heflin explained. "But writing an effective budget in these times requires that you separate needs from wants, and that you prioritize your spending based on what you're required to do – first by the Texas Constitution, then by state law – and by what produces the greatest value to the taxpayers."

Heflin said that it was important for the Texas Legislature to continue the state's movement toward complete financial transparency.

"Through websites like the Comptroller's Where The Money Goes and our own TexasBudgetSource.com, we’re engaging all Texans in the effort to ferret out waste and fraud in government spending," Heflin said. "We need to ensure that all budgets, expenditures, contracts, and other relevant financial information are published online in a searchable and user-friendly format."

The nine guidelines in the "Blueprint for an Effective Budget" are:

• Limit the growth of state spending to no more than the sum of population growth plus inflation, or the growth in personal income, whichever is less.
• Prioritize state spending on the basis of constitutional mandates, followed by statutory requirements.
• Return excess fee and tax revenues to those who paid them.
• Limit the use of the Rainy Day Fund to either emergency tax relief or one-time emergency spending items.
• Maintain a Rainy Day Fund balance of at least 5 percent of the general revenue and general revenue-dedicated funds spent in the 2010-11 budget.
• Make it easy to identify and report government fraud and waste by posting all budgets, expenditures, contracts, and other relevant financial information online in a searchable and user-friendly format.
• Structure state agencies' performance measures to reflect outcomes rather than outputs.
• Fund only those programs that return a greater value to the taxpayer than the program's cost.
• Avoid duplication of services by focusing on programs that are not provided by local governments or the private sector.

"Blueprint for an Effective Budget" and the Texas Public Policy Foundation’s research on state tax and budget issues can be on the Foundation's primary website, http://www.TexasPolicy.com, and on its government spending transparency website, http://www.TexasBudgetSource.com.

The Honorable Talmadge Heflin is Director of the Center for Fiscal Policy at the Texas Public Policy Foundation, a non-profit, free-market research institute based in Austin. Heflin served 11 terms in the Texas House of Representatives and chaired the House Appropriations Committee in 2003, leading the Texas Legislature's successful efforts to close a $10 billion budget deficit without a tax increase.

The Texas Public Policy Foundation is a non-profit, non-partisan, free-market research institute based in Austin. More information can be found on the Foundation's primary website, www.TexasPolicy.com, or its government spending transparency website, www.TexasBudgetSource.com.

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On the Stimulus Package: The "No" Vote Was the Bipartisan Vote

Will Malven

Every time a Liberal says the word "bipartisan," you should run for the hills. In the Liberal lexicon the word "bipartisan" means Conservatives agree with us. It never means members of the Left and members of the Right will get together and hammer out an agreement which contains some of what Liberals want and some of what Conservatives want.

So when you hear a Democrat Congressman say that they want a bipartisan bill, what they are actually saying is "Republicans, give us some cover so we don't get blamed for our failures."

In yesterday's House vote on the Democrat conceived, Democrat written, and Democrat planned "stimulus package," H.R. 1, an amazing thing happened; 11 Democrats joined with all 166 of the Republicans to vote against the bill. That's a bipartisan vote against the bill.

Now the bill passed anyway, but it passed on a strictly partisan yes vote - 244 Democrats voted "yes" and passed the bill over the objections of a bipartisan minority.

Funny, I keep hearing Democrats talking about "bipartisanship" all of the time yet when it comes down to actually offering a bill on the House floor, they rewrote the House rules to prevent any meaningful way for Republicans to influence what the bill said or how the money was to be spent.

So yesterday, we got a taste of bipartisanship. Problem was, Democrats weren't interested in it...except for that 11. I am certain that Speaker Pelosi will personally let those eleven Democrats who opted for bipartisanship know how much she appreciated their efforts.

Well so much for "change." Looks like Democrats will run things in the House of Representatives the way they always have...like a Democrat Party dictatorship. Too bad there weren't more Democrats willing to place their country above partisan politics and vote against this abomination.

Well, I have little hope that Republicans will demonstrate the sort of backbone in the Senate that they suddenly developed in the House, but one can always hope.

There are entirely too many people in our Congress who believe that bad legislation is better than no legislation at all and far too many of those are calling themselves Republicans...even if they do vote more like Democrats.

Long Live Our American Republic!!!!

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The Japanese experience with fiscal stimulus

The last couple of days I’ve been examining the muddled thinking that is driving the debate over how to get us out of our current economic funk. The solution de jure seems to be more government intervention in the economy, such as the economic stimulus package being worked on by President-elect Barack Obama.

Dr. Arthur Laffer, the author of our Thinking Economically series, recently sent me an email commending a December 16th Wall Street Journal editorial (subscription required) on the efforts to create a stimulus package as “the single best editorial I’ve ever read.” The editorial outlines stimulus package after stimulus package passed by the Japanese Kokkai, or Diet, as their parliament is called in English. Here is a brief excerpt:

“In 1992, Japanese Prime Minister Kiichi Miyazawa faced falling property prices and a stock market that had sunk 60% in three years. Mr. Miyazawa’s Liberal Democratic Party won re-election promising that Japan would spend its way to becoming a "lifestyle superpower." The country embarked on a great Keynesian experiment.”

Here is a listing of what Japan did over the decade: August 1992: 10.7 trillion yen ($85 billion); April 1993: 13.2 trillion yen ($117 billion); September 1993: 6.2 trillion yen ($59 billion); February 1994: 15.3 trillion yen; September 1995: 14.2 trillion yen ($137 billion); April 1998: 16.7 trillion yen ($128 billion); November 1998: 23.9 trillion yen ($195 billion); November 1999: 18 trillion yen.

What did Japan get for all this? Well, mainly a lot of government debt. Japan’s debt-to-GDP ratio started out this period at about 63%. By the time all this spending was through, it had reached 128.3%. It finally peaked in 2006 at 180%. Compare this to the U.S. level that has hovered between 35% and 40% for most of this decade.

What Japan didn’t get was an improved economy. Its economy grew anemically during the 1990s; all of the “stimulus” and negative interest rates didn’t help a bit. As the WSJ said, “Only in this decade, with a monetary reflation and Prime Minister Junichiro Koizumi’s decision to privatize state assets and force banks to acknowledge their bad debts, did the economy recover.”

We face the same situation today in the U.S., and may also have to deal with this in Texas if our economy starts to falter because of the drop in oil prices. Our only hope for a turnaround is turning to the market – rather than the government – to lead us back to prosperity. Our paper, The Economy, part of our Influential Issues series, offers some thoughts and ideas about how to do this in Texas.

- Bill Peacock

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