How to Grow the State Economy
The proposed state budget, and last two budgets, are missing opportunities to grow Wisconsin’s economy.
Wisconsin economic policy is built on two essential tenets of supply-side economics: that tax cuts will always spawn large increases in business activity and that the public sector is inherently wasteful. These two notions have served as the underpinnings for Wisconsin’s last three budgets; because both are false, it is not surprising that their promised results have not been realized. Currently, the Bureau of Labor Statistics reports that the rates of economic and job growth in Wisconsin are well below national averages. Worse still, few of the jobs added to the workforce pay more than $12.50 per hour.
In their scramble to close the projected state deficit in a responsible way, the Joint Finance Committee has endorsed restoration of $127 million in proposed cuts for K-12 education, but has only restored $50 million of the proposed $300 million in cuts slated for the UW System. Early on there was hope for an uptick in projected revenue, but that has been dashed by the latest Legislative Fiscal Bureau estimates.
The growth of good paying/family-supporting jobs requires sufficient demand for goods and services. As part of the effort to shrink the public sector, the past two budgets have led to a reduction in the number of Wisconsin’s public sector workers and a pay cut for those who remained. Consequently, the demand-side spending power of tens of thousands consumers was substantially reduced. To grow the Wisconsin economy while shrinking its public sector will require that overall demand expand by more than the reduction in demand by public sector workers.
Supply-siders asserted that tax cuts would replace the reduced public sector income and demand for goods and services by stimulating the “job creators.” However, profit-seeking business decision-makers will convert their tax cut into business expansion and more jobs only if they perceive that to be the most profitable use of that money. When demand for what they’re selling is sluggish, they are more likely to convert some or all of their tax cut into alternative spending, much of it out of the state economy, such as financial investments or simply high-end consumer spending.
Several sources of revenue are available that could have eliminated the “need” for the proposed cuts in education. These include freezing the phase-in of additional property tax cuts as well as those scheduled for manufacturers and farm operators. Of greater impact would be the reversal of the ideological rejection of federal dollars earmarked for Medicaid expansion. That reversal would infuse $345 million per biennium into the Wisconsin health care sector to improve the health of the working poor.
An increase in the gas tax would both add revenue as well as create proper incentives for efficient use of our road network. The current proposal to use borrowing to fund much-needed road repairs needlessly subsidizes drivers and encourages over-use. The gas tax works like any price, requiring drivers to treat the roads like a scarce resource. Roads deteriorate as they are used, so it makes sense that drivers should be made to pay for what they use.
Under the current proposal, borrowing to fix roads crowds out pro-growth borrowing to invest. For example, virtually all pro-growth business leaders claim a need for more university graduates in the STEM fields, yet STEM-related projects at both UW Madison and UW Milwaukee are being delayed in the proposed budget. If the road work were financed with the gas tax rather than increasing borrowing, we could shift borrowing capacity to more cost-beneficial investments like education.
William L. Holahan is emeritus professor and former chair of the Department of Economics at UW-Milwaukee. Charles O. Kroncke is retired dean of the College of Business at UWM. They are co-authors of “Economics for Voters.”