As kids we played chicken all the time, daring someone to do x or cross over a line. The same game of chicken is being played now with the Minnesota budget and economy. First it was between the Governor and the Republican legislature during session, now in Court and the participants have expanded to include the Attorney General, interest groups, and the courts themselves.
At Thursday’s hearing in Ramsey County (which I attended) Judge Gearin closed the day by indicating that all of the sides were playing chicken with the state. And numerous times she admonished that the stakes were high, the problems serious, and that no one should expect her to bail them out. In many ways, her threat too was one of chicken. Do not expect her to blink. See my first thoughts on the court proceeding on Fox 9 from Thursday, June 24, 2011.
There are numerous agendas at play here. Of course, there is the agenda to secure a budget by July 1, to avert a shutdown. There is also a broader agenda between contending and philosophical views on state spending and what role we view for the government in our society. But there are also significant other economic, political, and legal or separation of powers issues here.
The economic stakes are significant. I discuss them on Kare 11 on Thursday, June 23, 2011.
According to the Bureau of Labor Statistics the May unemployment rate in Minnesota was 6.6%. This is based on a state workforce of 2,977,400, with total employed being 2,781,000 and unemployed 196,300. Assume all 36,000 state workers given notice are furloughed. Using the May figures, this pushes the total unemployed to 233,300, yielding an unemployment rate of 7.8%. The economic consequences of the shutdown are apparent–nearly a 20% increase in the unemployment rate almost immediately.
Laying off state workers and cutting state services is only the beginning. There is also the multiplier effect. By that, for every dollar of state spending, it produces more down the line. Paying public employees means they will additionally purchase food or consume items, thereby resulting in more spending across the economy. Now some market fundamentalists claim the government adds no value and produces no multiplier. Yet they are often the same ones who claim that tax cuts for the wealthy trickle down to the poor.
Mainstream economists who have studied government spending verify that multiplier effects exist. University of California San Diego Professor Valerie Ramey is considered the leading expert. She indicates that the historical average for the United States government is 1.4. For every government dollar the ripple effect across the economy is $1.40. Money spent early in a recession has a larger multiplier than in a recovery. The multiplier effect varies with consumption. Government spending placed in the wallets of those who will consumer more of it will produce greater multipliers than those who do not. This is the concept of marginal propensity to consume.
Minnesota’s current gross state product (GSP) is about $275 billion. One estimate from the United States government is that Minnesota spending is $20 billion per year, or about 7% of the GSP. Assume a State multiplier of 1.4x; then total annual state spending produces additional effects equal to another $8 billion. Suddenly state spending accounts for over 10% of the GSP.
The shutdown will clearly have dramatic effects on the economy and unemployment rate beyond laying off state workers. The State recently informed 572,000 Minnesotans on cash welfare, food support and health care programs; 7,000 families receiving adoption assistance payments, and 26,000 families receiving child-care subsidies that they may not receive help after July 1. All these are individuals who will most likely consumer most money they receive from the government, thereby producing a higher multiplier effect. But the multiplier does not stop there.
Many private vendors and contractors doing business with the state–including those from the private and non-profit sectors–may not get paid and would stop work. Local governments too, facing uncertainly and a halt to payments, might also be forced to layoff. It is not inconceivable to see a partial or total shutdown of the state pushing the unemployment rate to over 8%.
The political stakes here are significant. The GOP Legislature and the Governor are in a battle over who controls the state and the political agenda. But both are also battling with their bases.
If the GOP blink and compromise they have a better chance of winning re-election in 2012. But if they do they alienate their political base and Tony Sutton, facing challenges from the right. They are trapped by their own rhetoric.
Dayton so far has played it well with the cut spending and raise some taxes and then agreeing to cut more and reduce some taxes. Public opinion still supports him but recent polls show support for him is down to about 43%–approximately his vote last November. He is down to base politics in terms of support for his leadership. But support for the legislature is in the 25% range–even worse. Dayton can continue to use the 4/2 strategy to his advantage. He is up for election in 2014, the GOP next year 2012. An angered public takes it out on them first.
If Dayton forces the GOP to crumble because of public opinion and fears of 2012, he breaks the GOP’s back. He does that by pushing Tony Sutton and the TEA Party wing to challenge the already conservative state GOP, forcing a war within the party.
Dayton has to win this battle to retain support of his base, he appears to have lost support from all but that. If he gives in anymore he damages support to his core constituency. Thus the reasons or why Dayton added medical payments at the last minute to his list of core functions to be funded–better not alienate the grandma in the nursing home vote.
The legal battle here are amazing and reveal contrasting views of the State Constitution and political power.
AG Swanson has produced the best legal brief and arguments that build on past state law. She has argued for a more expansive notion of core functions, using her consumer advocate role to represent the people. Her brief argues for continued funding of federal mandates, the constitutional obligations, statutory requirements, and protection of vulnerable people in the event of a shutdown. This would result in a soft shutdown, less onerous than Dayton.
Dayton’s legal arguments are most fascinating. He first asks that Judge Gearin order mediation. She cannot do that since the legislature is not a named party and therefore cannot be brought into mediation. There also are constitutional problems (separation of powers) in issuing this order. not issue any orders until after July 1. Dayton’s second legal argument is that the issue is not ripe. He also opposes allowing the joining of additional parties, contending that there is no real dispute here yet. His attorney argues that once July 1, hits, then maybe one can go to Court to order certain action but until then there is no real legal issue. But more importantly, Dayton has suggested that he has inherent constitutional authority as governor to act on July 1, to keep core state functions going! This is an amazing argument based on separation of powers and the governor’s veto. His arguments remind me of Nixon during Watergate, Bush after 9/11, and Pawlenty when he acted to use unallotment to end the budget impasse. This is a significant assertion of authority. Dayton’s arguments for the funding of core functions by the court is far less than Swanson, but the legal implications of his arguments more extensive.
Now the GOP. First the four GOP senators who cannot shoot straight. First they go to the Supreme Court asking a halt to the Ramsey County proceeding. The basis of their claim is that they did not think they could win in district court so therefore they wanted to go to the Supremes. (They also mentioned in their brief that they did not want the court to intervene since it would change the balance of power in a political dispute). The Supreme Court correctly told them to go to district court. They reminded them they would take original jurisdiction only in emergencies and this was not one. Overall they instructed them on Civil Procedure and Law School 101–file complaints in the proper court and don’t venue shop.
Then on Thursday the same gang of four ask the judge to order Dayton to convene a special session. They somehow forgot the plain language of the state constitution textually commits this decision to the governor. Somehow all the language about the political question doctrine, separation of powers, and constitutional interpretation they developed in their Supreme Court brief was forgotten. This is also the gang that takes what they think is a literal reading of Article 11 of the State Constitution in contending (wrongly) that only the legislature can appropriate funds. Obviously they have forgotten about issues such as the Supremacy Clause and do not understand the difference between the state and federal constitution.
Then there is the House and Senate GOP. Their main legal strategy seemed to be to agree with Swanson and allow for more of the government to be run as core functions. If Swanson wins then the GOP get the minimal government they want.
Finally, the courts are a major player here. They too have filed to make sure they are funded. And then of course Gearin. She made clear her disgust with the whole process, threatening minimal action that will please no one.
Overall, everyone is playing chicken. But what are the real stakes here? Former AG Mike Hatch stole the show. He indicated he was representing a woman who received state medical assistance to breathe. He pointed out that she wanted to continue to do so after July 1. That summed it up.
How long the shut down? Submit your answers to my blog. I do not know how long but am certain it better not go to State Fair time. Imagine 1.6 million angry Minnesotans talking to elected officials at the Fair.