Sunday, September 20, 2009

Reasons to Be Cheerful Part 2

The economy is on the rise. The Dow finally passed 9800 and all the leading indicators are up. As one would normally expect, lagging indicators like unemployment will continue to rise even as the economy recovers as employers wait for greater certainty before increasing hiring. But in the mean time, business investment, and exports are on the rise.

Another reason to be cheerful is the decline of unproductive labor in the finance industry. Over the past decade, some of the best and brightest minds of our generation went into the financial services industry to create products that duped people into thinking they could afford them. The percentage of workers in the finance sector doubled between 1996 and 2006 and as recently as 2007, 40% of the graduates of Harvard and 30% of MIT graduates went into the finance industry because that is where the big money was. Now less than half that number is going into that unproductive industry.

This could be a real boon for the economy. Innovation is what drives our economy forward. If our our best and brightest brains are engaged in the creation of new businesses that make new products that fullfill real demand we have one more reason to be cheerful.

Monday, September 14, 2009

Questions of 2009: What does it mean for 2010?

The most consistent trend in American politics is that in economic terms, the bottom third of voters vote Democrat and the top third votes Republican. Despite all the recent rhetoric about the so-called, "liberal elite", the trend has only strenthened in the past decade or so as better information has moved allegiances away from family and region to ideology.

Consistent with this voting trend is the values of the underlying parties. Democrats tend to support government policies that help the middle class and those at the bottom. Republicans tend to support policies that minimize governments' role in the economy. Not surprisingly, Democratic values are more consistent with labor unions and Republicans with Business.

Given these facts, it should be no surprise in 2010 if the Democratic legislature moves to compensate for some of the "bad labor votes" that were taken in the 2009 session. Boeing has made it clear that state policy is no longer the issue in terms of their future plans and as the state emerges from the recession, unemployment not business climate could become the big issue.

The other boomerang issue is obviously going to be budget and taxes. With the shackles of Initiative 960 off, legislators are free to raise taxes without a vote of the people. There are good reasons to be believe that increases in sin taxes like alcohol or cigarettes would be popular and could go a long way towards reducing cuts to essential programs. However, anything beyond that will have to face up to the very tough election coming up in 2010.

Senate Democrats have at least four tough races coming up and House Democrats at least twice that many. While control is unlikely to be threatened, the current majorities may not be sustainable at today's levels. More importantly, off-Presidential year elections are tough for the party in the White House. In Washington state, in 23 of the last 29 elections, the party in power in White House has lost seats in the legislature. This is going to make it hard for legislators from tough districts to take risks.

Whether or not the ending fund balance from the 2009 session is going to hold up or require more cuts in truly an open question. The last revenue forecast indicated that even bigger cuts would be needed. More recently, revenue collections were down a bit. However, there are 3 more forecasts till the legislature leaves town and the economy is likely to be looking up. My guess is a wash.

Sunday, September 13, 2009

Big Questions of the 2009 Session

The other major question that loomed over the 2009 legislative session was whether or not Boeing would begin to move their operations out of state. The previous Fall, Boeing and the Machinists engaged in a strike that cost the company billions of dollars and left workers in the lurch for weeks on end. Boeing's top brass told the Governor and legislative leaders that "Chicago" (company headquarters 'out of state') was considering moving at least some of their operations to South Carolina. They indicated that the bad labor climate and the cost of doing business in Washington was making the state "uncompetitive". The local brass told leaders that they were fighting the move but needed some evidence to convince "Chicago" that things were changing.

There was a lot of talk about this. Mostly negative and quite awful. But again, it came down to one simply question. In the midst of the deepest recession in 28 years, do we risk losing our state's oldest and largest industry? Countless discussions and meetings bantered back and forth as to whether Boeing was just bluffing and trying to extort another billion or so out of the State or whether the threat was real. For the most part the debate was not ideological. It was real. People didn't know the answer.

There was a lot at stake. Labor had been pushing a bill that essentially banned companies from requiring workers to attend meetings on union issues when unions didn't have the same access (that wasn't the on the surface debate but that's what it boiled down to) . Boeing argued that given the recent strike, that if the legislature passed this bill it would be difficult to keep the company here. The unions argued that it was a matter of choice and privacy. In the end, many of the elected officials were simply unwilling to take the risk that Boeing might not be bluffing.

The other issue had to do with unemployment benefits. The legislature had just passed legislation providing a major increase in unemployment benefits to workers as an economic stimulus. Despite the recession the unemployment trust fund was still healthy and business demanded a tax cut as well. Labor was wiling to stay neutral on a tax cut but wanted to reclaim cuts in benefits they endured from previous legislative sessions. The impact of labor's proposal would have been to significantly reduce tax cuts for business. Labor argued that in a recession, spending, not tax cuts was the best stimulus. Business would just sit on the money from the tax cuts. Boeing argued that unemployment costs in Washington were uncompetitive.

In the end, a majority of legislators (perhaps a third of the Democrats and all of the Republicans) again decided they were unwilling to call Boeing's bluff.

Labor has not forgiven legislators or the Governor for backing off of either of their proposals. In the end, we still don't know what the right answer is. Boeing still could move a lot of their operations despite the strong support they received from the legislature in Washington.

A very important side question has to do with Boeing's 747 debacle. Their biggest investment, which the state of Washington plunked down a couple of billion dollars to support, was way behind schedule. They fired the VP for their commercial airlines division last week. But it's also beginning to look more and more like the union and the state business climate could be a another scapegoat for their own outsourcing and management errors.

The definitive questions of the 2009 session - Budget and Taxes

Thirteen legislative sessions have taught me that to really understand has happened or is about to happen during a legislative session is to find what the big questions are. The populists among us believe that you just have to figure out what the special interests want and then figure out who buys who and who sells out to who. Others like to see it as a battle of political wills as political leaders both houses, both parties and the executive branch vie for power to enact their own agenda.

I think it's a lot simpler than that and a hell of a lot less interesting. Quite frankly, most of the issues before us come from somewhere else and just land on our lap. Last session was the rule not the exception. A deep recession resulted in both job losses and a deep decline in revenues.

There were a lot of zero sum game type questions on the budget. Like how much do you cut the items you actually have discretion over. The House cut Higher Education and social services more and the Senate did less in education. These sorts of little battles were important but not definitive.

The definitive question was do you give the voters the opportunity to cut less and raise taxes a bit or do you cut deeply and then leave town. Many House and Senate Democrats believed it was just plain wrong to cut tens of thousands of people off health care and to send homeless people back into the streets. At the same time labor groups wanted to mitigate the impact of cuts on teachers, prison guards, college faculty, home care workers and nurses.

Legislative leaders started meeting with stakeholders as early as November and did a half dozen polls between January and mid-April. What was fascinating was the results, spread over that time period, with three different pollsters yielded consistent but indeterminate results. No matter what the tax was and what it funded, a solid 45% was against it. And no matter what the tax was and what it was used to fund, 49% to 54% of the public supported it. Making things even more determinant was the the only 15% of the public were strongly supportive of taxes. The anti-tax sentiment wasn't much stronger.

In mid-stream, several major stakeholder groups looked at the results and put their cards down and folded. They didn't see a referendum to the people worth the investments. Others wanted to do more polling and trying wording the questions differently and changing the tax or dedicated fund. Nothing changed and ultimately, most of these groups came to the same conclusion. Possible but not likely. Legislative leaders polled their members and results were close but mixed as well. It was all pretty logical and in the end damn boring.