For those of us who live in Massachusetts, there is one piece of good news amid the gloom. No matter how bad things get, the economy here is almost certain to fare better than it did in the late 1980s and early ’90s. Then, the bursting of a wildly speculative real-estate bubble sent house prices plummeting — taking the giant Bank of New England down with them. Today, economists agree that real estate, though prices are rising rapidly, is not overvalued. Then, minicomputer companies such as Wang, Digital, and Prime crashed and burned when they failed to adapt to the personal-computer era, and defense contractors such as Raytheon and General Electric went through spasms of contraction following the end of the Cold War. Today, the state has a much more diversified economy in areas such as financial services, health care, biotechnology, higher education, and tourism — things that all existed 10 years ago, but are more important today.
Massachusetts is experiencing low population growth, and the state’s unemployment rate is expected to rise so little that we may get something that doesn’t look like a recession at all. UMass Amherst economics professor Robert Nakosteen, at Tuesday’s conference, presented figures showing that unemployment — currently at 3.9 percent, up from 3.2 percent in April — will probably rise to a high of 5.2 percent sometime in 2002 before falling to 4.7 percent in 2003. (Even as Nakosteen was speaking, mutual-fund giant Fidelity was laying off 760 workers, 400 in the Boston area.) That’s considerably below the 9.6 percent rate recorded in Massachusetts in July 1991. Keep in mind, too, that before the unprecedented expansion of the late ’90s, most economists believed that five percent was about the lowest unemployment could drop without igniting inflation.
But even if Massachusetts escapes relatively unscathed, hard times are ahead — especially for those who depend on government spending. Again, there is no evidence that we’ll see a repeat of the late ’80s, when state officials raised taxes and slashed services. But Governor Jane Swift, House Speaker Tom Finneran, and Senate president Tom Birmingham face challenges they probably couldn’t have imagined just a few months ago (see "Who Will Take the Fall?", page 1).
One person who has attempted to define the extent of that challenge is Jim St. George, executive director of the Tax Equity Alliance for Massachusetts, a liberal advocacy group. Last week, the Swift administration unveiled a plan to close about half of the state’s anticipated $1.1 billion deficit with $600 million in spending cuts. St. George, though, says it’s not going to be so easy. The state’s proposed budget for the fiscal year that began on July 1 (a budget that still hasn’t been passed, by the way) calls for a $575 million increase in spending over the previous year. Yet St. George says that when politically untouchable programs such as Medicaid, public safety, and local aid for schools are taken into account, there’s only $3 million left to play with. In particular danger, he adds, is an increase that would pay for the care of mentally retarded adults — a response to a lawsuit brought by their aging parents (see "The Waiting Game," News and Features, September 21, 2000).
The real problem, St. George says, is that taxes have been cut by $4 billion a year during the past decade. At the very least, he proposes that the income-tax cut approved by the voters in 2000 be delayed, saving $250 million immediately. "We’re not asking to repeal it," he says. "We’re not asking for a permanent tax increase. We’re just saying, let’s hold off for a year."
As tight as the budget squeeze is likely to get, the state is not without options — even if Swift continues to support the tax cut. Michael Widmer, president of the Massachusetts Taxpayers Foundation, a business-backed watchdog group, argues that the gap — which he estimates at $1.2 billion, or slightly more than Swift’s figure — can largely be funded out of cash that was set aside during the good years: $700 million from the $2.3 billion the state has in its "rainy day" fund and other reserves. That would still require $500 million in cuts, which, Widmer concedes, will be difficult given that some $50 million to $100 million is likely to be added for public safety and public health. But he opposes delaying the tax cut for the simple reason that voters approved it by a 60-40 margin. "We have to deal with that reality," he says.
There is another pile of money that’s on the table too. Every year, the state receives $300 million as part of its share of the national tobacco-litigation settlement. It’s been spending less than $100 million of that, mainly on tobacco education, smoking-cessation programs, and health needs, including a new prescription-drug benefit for the elderly. The rest of the money has been set aside to create an endowment fund that would continue paying for those programs after the annual payments cease, sometime in the next 20 years or so.
Swift has proposed moving the entire $300 million into this year’s state budget, which is a good idea. She’s also hinted that she might get rid of the prescription-drug program, which is a terrible idea. But there’s clearly no need to keep paying for anti-tobacco programs. (Is there anyone who doesn’t already know that smoking is bad for you?) And building an endowment is nice in theory, but there are real needs to be met right now.
Let’s say the deficit is, as Michael Widmer estimates, $1.2 billion. If the tobacco money is used and the tax cut is delayed, there’s the $500 million that Widmer wants to cut, plus another $50 million to spare. Make up the rest of the deficit with the $700 million in reserves, as Widmer proposes, and the problem is solved — at least for this year.
"This is not going to be a one-year fiscal problem," Widmer warns. Fair enough. But it can be addressed only one year at a time.
Ron Zooleck, the president and CEO of the South Shore Chamber of Commerce, is planning on a very merry Christmas, damn it. He looks around and sees dramatically lower interest rates, which to his mind should encourage consumers to keep spending. His members — which range from large banks to home-based businesses — have been telling him that, so far, they’re surviving.
"They’re working harder, they’re beating the bushes, but they’re still doing all right," he says. "There’s a lot of cheap money out there, and they’re making it available. I’m not an economist — I’m the farthest thing from it. But I think it’s going to be a good Christmas with respect to purchases."
For that to happen, though, businesses are going to have to overcome not just the gloomy economic forecasts but an increasingly negative psychology as well.
On the Fortune.com Web site is a link that reads, "Layoff Watch: Are You Next? Take our quiz to see if your job is in danger." The quiz includes such questions as "How many steps removed are you from the people with power?", "Do you have two or more champions other than your boss?", and "Have you had trouble catching anyone’s eye recently?" I took the quiz and scored just 35 out of a possible 100 — perhaps because I gave a truthful answer to the question "Are you over 40?" "Dust off your résumé and start calling headhunters," I was advised.
The consensus remains that we’re in for a sharp but short recession. But there’s a nagging something that feels wrong about that. Didn’t we just suffer through the worst terrorist attack in history? Aren’t more people contracting anthrax every day? Aren’t we being warned that the worst is still to come? In such a frightening new world, how can it be possible that the economy will, after a short blip, start rolling along again?
"It’s difficult to see how things can go better, but it’s easy to see how things might go worse," says UMass economist Robert Nakosteen. "We’re trying to forecast the behavior of madmen."
That’s exactly what we don’t want to hear. But the truth is that we have no idea what’s going to happen. The economists themselves concede that if there’s another terrorist attack, or if there’s a major setback in the war in Afghanistan, then all bets are off.
We could be standing near the bottom of a valley — or at the edge of a cliff. We’ll find out which soon enough.
Dan Kennedy can be reached at dkennedy[a]phx.com
