Comptroller Tom DiNapoli and Economist Dr. Irwin Kellner led a discussion about the current state of the economy.
New York State Comptroller Tom DiNapoli, together with economist Dr. Irwin Kellner, led a timely and edifying discussion about the state of the economy. The well-attended event, part of the Landmark on Main Street's "Conversations on Main Street" series, was sponsored by the Angela and Scott Jaggar Foundation.
DiNapoli, whom Kellner called "one of the hardest-working public officials I know," focused on how New York State is affected by what is happening on Wall Street. He said, "The Wall Street financial industry accounts for 20 percent of the revenues that come into the State of New York. In addition, the biggest source [of state revenue] is personal income tax, so when people lose jobs, taxes are down." DiNapoli said that business taxes are down by a half billion dollars. He added, "What we are seeing is not just the hard number, but a trend. As job loss grows, we will see the ripple effect." He did have one piece of good news: Personal income tax collections have been higher than expected.
DiNapoli, previously a longtime state assemblyman, said that in the summer Governor Paterson called on the legislature to cut back about half a billion dollars. In addition, there was a leader's meeting which DiNapoli said that he participated in. He said, "Even with the cutbacks we will be another $1.2 billion down." In addition, DiNapoli noted that as a result of the economic circumstances, the last budget they put together was not sustainable. He said, "Although the revenue came in better than expected, we have spending that exceeded any reasonable anticipation of revenue." DiNapoli said, "Nobody wants to talk tax increases. The governor says that we have to tighten our belts and watch. He is proposing some very tough medicine." He added, "The state is going to have to balance its budget in a way that will have an impact on the average citizen and on local governments."
In response to a query from Kellner about borrowing, DiNapoli said, "We are heavily into borrowing. This has taken dollars that should be used for other programs. One of the challenges is for New York State to be more disciplined about its use of debt and to figure out a way to manage debt more responsibly." In an aside, DiNapoli commented that the City of New York has done a good job of managing, as contrasted with the state, which he said even in good years depleted its reserves.
With respect to the pension funds, DiNapoli said that they were not affected significantly by the fallout from the collapse of the mortgage-backed securities and other related questionable investments. He said, "A number of pension plans had very high exposure. New York State was conservative, and had very little exposure." Nevertheless, the pension funds did have direct investments in financial firms like Lehman and AIG. He said, "We will feel the hit." He pointed out that the retirement fund is a "defined benefit" one, "so the money will have to be there." Kellner suggested, "Now is the time to buy, not sell." DiNapoli pointed out, "We have a very big ship. So we are not panicking and not doing anything too quickly."
Having pointed out the dramatic, negative impact the current economic crisis will have on New York State's finances, DiNapoli ultimately expressed the view that "A crisis is an opportunity. I believe that we now have the opportunity to do things."
Kellner, chief economist for MarketWatch.com and a Distinguished Scholar of Economics at Dowling College, provided a context for the current economic crisis-what he called "the big picture." He tied the current situation in part to the "housing bubble," which burst around 2005. Add to that the fact that banks stopped carrying mortgages on their books, which were packaged and resold (mortgage-backed securities and the like). Therefore, Kellner said, "The banks became less concerned with the viability of the loan. What followed was a tightening of credit, a growing of mistrust among banks and financial institutions, and a volatile, erratic stock market. He described the latter as "closely balanced between fear and greed."
Kellner declared, "We are in a recession although it has not been officially declared." He predicted that we will remain in this recession until spring, adding, "The sooner the umpire makes the call, the better." [Editor's Note: On Dec. 1, subsequent to this meeting, The National Bureau of Economic Research confirmed that the U.S. economy fell into a recession in December 2007.] He said, "Fasten your seat belts; we're in for a bumpy ride." Kellner, like most economists, expected the recession to be as bad as the one in 1981-2, but reassured the audience that we will not face anything nearly as bad as what happened during the Great Depression. He said, "We cannot avoid consequences, but we know a lot more about how to manage the economy."
A lively question-and-answer period followed. One constituent wanted to know where the tax cuts will come from. DiNapoli responded, "The governor and the legislature will come up with the plan." He predicted that many of the cuts will be in health care and education. He expressed concern about the impact these cuts will have on institutions and families. He said, "We have to be smarter than we usually are, and we have to involve the public. We haven't shared enough information with the public." Another question was, "What is the longer-term impact of the rescue plan?" Kellner said, "We are now staring into the abyss." He was concerned about the Federal Reserve's need to ensure liquidity, the danger of inflation, and the government's excessive borrowing. He suggested referring to his column on that subject at www.marketwatch.com.
Other topics discussed were term limits (DiNapoli said that he is philosophically opposed to them, but does not want to tell New York City what to do), and the proposed cap on school taxes (DiNapoli was concerned that this could force serious cutbacks in school programs if it did not include some kind of "safety valve.")
Many who attended commented that they left the meeting feeling far more enlightened than before about the current economic situation.