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Tough times

 

Donald L. Klepper-Smith, chief economist for DataCore Partners in New Haven, characterizes the current recession as a “perfect storm,” because all three of the primary generators of consumer wealth are in crisis: housing, stocks, and jobs.

“I think we’re probably in the fifth inning of a nine-inning game. The next two to three quarters are going to constitute tough sledding for many businesses and consumers,” says Klepper-Smith, who is chairman of the Governor’s Council of Economic Advisors, which was formed a year ago. “Consumers are feeling gun-shy about spending dollars, knowing they might need them for the essentials. The outlook is more uncertain than at any time I can remember.”

Klepper-Smith said the “wealth effect” holds that for every dollar consumers lose in the value of their homes, they curtail their own spending by 6 to 7 cents; for every dollar consumers lose in the value of their stocks, they curtail spending by 4 to 5 cents. Add to that job losses and the fear of losing a job, and the downward pressure on the economy becomes enormous, he says.

Edward J. Deak, chairman of the economics department at Fairfield University, says the financial industry will be restructured and the federal government will play a direct role in helping states cope with the crisis. He predicts that the government will first extend and broaden programs such as food stamps and unemployment compensation in order to help individuals and will then provide $70 billion to $90 billion in direct aid to the states.

“The federal government has to do something,” Deak says. “You don’t want to print money, borrow money, or further obligate the taxpayer, but it would be far worse to have a real depression.”

What other states are doing

Connecticut is not alone in this economic crisis. Thirty-one states are facing budget shortfalls, according to a mid-November report by the Center on Budget and Policy Priorities, a Washington, D.C.-based research institute. Among those were some of the 29 states that already had closed shortfalls in their 2009 budgets.

States cannot run deficits like the federal government, so they must cut spending or raise taxes in order to make up for budget shortfalls. However, both spending cuts and tax increases tend to make an economic downturn even worse. In addition, states find themselves cutting services at the worst possible time, when economic woes increase the need for health care and other services among residents.

The center reports that 29 states and the District of Columbia closed budget shortfalls of $48 billion when putting together their fiscal 2009 budgets, which began July 1 in most states. The deficits made up an average 9% of the states’ operating budgets.

Since then, 31 states and Washington, D.C., have identified further shortfalls producing midyear deficits of more than $24 billion. The center estimates that 2010 state budget deficits will total $100 billion.

So far, 25 states have cut services and several have raised taxes, the center reports. At least 20 states have cut their state workforce, and other cuts have been made to health insurance programs, elderly and disabled services (such as home care, rehabilitative and medical care), public education and early education programs, and public colleges and universities.

Many states have increased taxes, restricted tax credits, raised tuitions, or implemented other revenue-raising measures, the center reports, citing Maryland, Michigan, and New York, which each have increased revenues by more than $1 billion for fiscal 2009.

Some states also have used budget reserves to make up shortfalls, the center reports. Several, including California and Massachusetts, have reported problems obtaining short-term loans in the face of the nation’s credit crisis.

Prescription for recovery

The state will work through these economic troubles as it has in the past, but it’s important for the governor and legislators to focus on making Connecticut stronger as it moves beyond the current crisis. “Connecticut’s leaders need to make economic competitiveness their top priority,” Rathgeber says.

Any actions taken by state lawmakers should foster economic growth, because Connecticut’s residents and communities need the benefits that come from a vibrant economy—good jobs and wages and a better quality of life. A thriving economy also generates the tax revenue that enables state and local governments to provide services.

To ensure that Connecticut returns to a healthy economic condition after this crisis passes, lawmakers need to cut the cost of doing business, enhance the education system to increase the number of skilled workers, and revamp the transportation system so that prospective new companies will know they can be connected to the global economy.

To those ends, CBIA urges state officials to

• Encourage economic growth at every opportunity
• Strive to make Connecticut attractive to potential new employers
• Resist raising taxes, fees, and other costs associated with conducting business
• Avoid imposing new regulations on businesses
• Make structural changes at the state level
• Adopt best practices in state and local government
• Set benchmarks and run state and local government more efficiently
• Encourage cities and towns to enter into regional cost-sharing agreements
• Avoid using the Rainy Day Fund as long as possible
• Work together in a bipartisan spirit

Connecticut is entering into an extremely challenging period, during which its leaders and residents alike will be strongly tested. The way to meet the challenge is to measure every idea and proposal against a single goal: Maintain a healthy business climate over the long term—one that provides Connecticut residents with high-quality jobs, greater financial security, and an ever-improving quality of life.Steve

Higgins is a freelance writer in Wallingford.

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