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Nothing Stupid. Right?

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My friends ask me all the time about the Fiscal Cliff.  The assumption is that, as a person who watches these things, I am supposed to know what is going on.  I don’t, I admit it.  The most reasonable thing I have heard on the negotiations came long ago from a source I can’t remember – that the staffers had more-or-less worked out a deal weeks ago, and it’s simply down to the final posturing by their bosses before something is finalized.

That’s probably over-stating it a bit, but certainly once the election was over the relative strength of the positions was known and there was little point in “negotiating” any more.  Politicians in high office don’t get there by being stupid (usually).  So before we head into the endgame of the year, we can look back on how the Republican position became weaker and weaker – and why they will probably wind up caving on all the most important things before this is over.

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Where does Minnesota’s Money Go?

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Heading into the new Legislative session at the start of the new year, we can expect that things are going to be different.  The DFL is in control of the House, Senate, and Governor’s office for the first time since 1990 – and comes in with a lot of pent-up demand from their own interest groups.  Attention tends to focus on social issues such as universal marriage, but we predict here that most of the time will be focused on the budget.

As discussed here, there is a structural imbalance of $1B per year obscured by a 2002 law that restricts how the forecasters are allowed to figure the state’s budget (though this is not without controversy – see the comments).  We can predict that this will be plugged primarily by flattening out tax rates and making the highest earners pay a similar rate to most of the state, 12.1%-12.3% of defined, taxable income.  And we have determined that, on balance, Minnesota is a remarkably average state in terms of its total size (represented by combined state plus local income) and net tax burden.

But what about expenditures?  How does Minnesota compare with the rest of the nation?

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It’s All Good (except the bad stuff)

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The economy added 118k jobs in November, if you go by the ADP report, or 146k jobs if you go by the noisier official number.  Let’s call it 118k because we’ve consistently touted the value of the ADP report.  By any measure, it was a lot more than was expected, given the landfall of hurricane Sandy at the end of October.

Now that the election is over, there is growing optimism that the economy is indeed … growing.  It’s not a lot, but it’s there.  And that’s where we stand as we move into the next phase of the political season – the part defined by getting down to work and making use of the mandate given by voters.  That mandate is clearly defined by a divided Congress and a Democratic President who are at odds over how to either avoid the Fiscal Cliff or, perhaps, go over it.

Even if the election didn’t tell us much, the economy is.  We’d be wise to listen to it.

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Where does Minnesota Stand?

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The Minnesota Legislative session is less than a month away.  With the DFL in control of the House, Senate, and Governor’s office for the first time since 1990 we can expect that, at the very least, everything will operate differently than it has in a long time.  This is a good time to look around and back to a complete understanding of the state of the state budget.  The most contentious parts have always been taxes, so we should start with them.

As noted before, there is a structural deficit of $1B per year that is hidden by some awful gimmicks.  Fixing that gap will likely be easy, but it begs for more fundamental reform that Governor Dayton is eager to implement.  Before we get too far into it, two obvious questions stand out – where does Minnesota government income stand in relation to other states as well as where we have been historically?

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Minnesota Budget – A Solvable Problem

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The Minnesota state budget forecast came out with more bad news – a deficit of $1.1B for the biennium (2 year) cycle of 2014-2015.  How can we have these deficits year after year?

The answer is a short and simple one:  it’s actually worse than what they are telling us.  But a new DFL controlled legislature will be able to work with Governor Dayton to take care of it, once and for all, without an awful lot of pain.  The longer answer is that we can expect even more fundamental reform in the works.

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