Can John Lynch capitalize on the slim advantage of Keynesian economics?  .

First off, Obama is couching his spending addiction in Keynesian economics.  He has to realise that it won’t actually work unless he has spending a) on projects that will have a positive economic impact on long term growth outside of government, and b) tax cuts that actually expand economic opportunity and stimulate short term growth in the business community now.

Tax cuts are the key.  They create long term stability and attract business and investment that will eventually increase revenue to offset the initial deficit spending.  Government spending never creates more revenue for the government, so when deficit intolerance intrudes on poor spending choices, taxes are raised–killing growth–and the Keynesian model collapses, creating economic stagnation, and a drawn out recession.

President Obama’s stimulus is destined to fail without a major retool because his spending is loaded with handouts that do no significant long term economic good, and what he calls tax cuts are actually welfare checks that do no short term lasting good.    Keynesian spending was never meant to fund art or special interest groups and if Obama persists he will have stimulated nothing of lasting value, including his usefulness as a leader. 

But John Lynch has an opportunity to make New Hampshire the place to do business—partly on the Federal dime–if he has the sense to take a chance and makes the right decisions.  He may get up to 300 million, and if he handles it properly, he might save New Hampshire some of the pain other New England states are pre-destined to suffer because of their tax policies.

First off, the Governors current plan to cut government back down to size and to trim the budget should continue and  expand.  The spending portion of the Keynesian model was never really meant to enlarge government—because big government is inefficient  and wastes resources better spent on projects that enhance infrastructure like widening roads, and repairing bridges, or improving air-ports; anything that makes commerce easier or cheaper is a good spending project for a Keynesian model.   But guaranteed raises for the growing bureaucracy or an expanding state payroll do not create business growth so Lynch needs to cut deep to make the most of what he has, and he needs to sustain that model until the job picture improves.

Second, 260 million doesn’t solve New Hampshire’s spending problem anyway, which no handout will honestly resolve if bad spending habits are not corrected, so to try and use federal dollars to balance bloated budgets is a mistake.  Departments need to shed jobs and programs that do not support basic civic needs.  They should also plan to project-out cuts to limit payrolls and expenses for 2-5 years now, so that they do not suck on any improved revenue from tax cut stimulated growth two to five years down the road. 

State employees have to accept that having a paying job is better than no job, and if the state employees resist, Lynch has to cut them loose; there’s plenty of professionals in this kind of economy willing to do their job at a better price if it needs to be done, and that job pool gets bigger the longer we allow the government to waste its resources—which will only result in more job losses later in every sector.  Government does not create lasting job growth, and government employees and taxpayers are better served if those people find jobs in an expanding private sector.

That 260 million also—if it’s coming—can provide some much needed leverage in making some of the infrastructure investments that attract business, particularly given our current funding dilemmas.  Don’t think of it as creating jobs for people who actually build the infrastructure because most studies indicate that while it may save some jobs, it’s not likely to create many if any—think of it as creating a framework that attracts the kind of businesses that bring jobs and opportunity here.  If we don’t use the money to enhance the business environment—we will have wasted it. 

And making New Hampshire more appealing than any other place in the North East is the only thing that will save jobs, (eventually create new jobs), soften the affects of the recession, and increase tax revenue without creating new taxes; new taxes stifle growth and extend recessions without exception.   If you don’t believe me, study Japan’s 10 year economic drought for harsh lessons learned.

That brings us to tax cuts.  Business operates best when its cost of doing business is limited to things they can control like labor and materials.  Regulation and taxation are a huge impediment to growth in any economy, but doubly destructive in a recession.  They are also a lousy selling point for a state that needs to create jobs that will outlast the taxpayer’s ability to fund them, or the handouts from up on high that are supposed to “create” them.   (Let’s face facts here.  No amount of government money is going to create a job that taxpayers won’t have to continue paying taxes to support and without more revenue sources—more business and more employees—that load falls on a diminishing few the longer you try to sustain it.)  So the governor and the legislature need to make a hard choice; they need to cut New Hampshire’s business taxes to make the state the only island of opportunity in a part of the world that has relied too heavily on taxation to make ends meet.

If other states raise taxes, or don’t see the value in cutting them now, a business looking to survive is going to find New Hampshire an even better value with lower business taxes than it already is.   If you attract more businesses you will employ more people, create more wealth (or bring more wealth here) and generate more revenue for the state, while supporting the broad range of other services that employed residents rely on.   But you have to be willing (or able) to run and manage a deficit (or a very lean budget) for a few years, until the business base builds and the increased revenue overcomes the planned deficit spending, eventually creating a surplus of state revenue.

Whenever you choose to build more government, you are simply dragging an anchor behind you that will reduce or obscure any positive impact from the broader base of businesses that elect to take advantage of your improved business environment.

I know—we can’t run a deficit, and most states wont, but that does not make the model unusable, so we need to balance the budget, but instead of using our own money to spend—creating a deficit at the state level—use the federal dollars to accomplish some of the same thing while making government more efficient and freeing up dollars to shore up the initial decrease in business taxes over the first 18 months of the plan.  Will it work?  It will if we can offset decreased business taxes, no matter how much we have for infrastructure, to make New Hampshire more attractive and create more jobs.

So we may need to find other temoprary streams of revenue, because while the federal dollars can be utilized to widen highways and make land zoned for business more accessible, (and 260 million isn’t much) the state may still need additional money to operate it’s tooled down government structure and support more projects during the initial lull in business tax revenue.

Given the current cost of fuel, a short term gas tax might offer an opportunity if it is small, and has built in triggers that terminate it; like when other revenues meet specific plateaus, or if oil and gas rise above a certain price.  Sin-taxes are also good (yes regressive) but a suitable target for short term revenue growth if the same rules apply.  Otherwise you are simply adding a long term tax burden on a declining revenue scale–people will stop buying cigarettes and liquor; you just want short term sources to offset revenue you gave up to jump start business growth. 

There may be other places to improve revenue, but as long as they are timed to expire, and coordinated with long term reductions in business taxes, (and government stays small) the Keynesian model can be made to work, if the spending actually attracts job-creating resources to the state.

Will it happen?  I don’t know if anyone has the will, but whether you agree with any of this or not.  Jobs do not come from the government, and business will not grow in lousy soil.  Whatever we do in New Hampshire, we have to attract business, keep more of the ones we have, and reduce the taxes and regulation that drain resources that might otherwise go to jobs (to keep jobs) or to the kind of business spending that creates jobs in other sectors.

One more thing.  Lynch needs to suspend RGGI and the Renewable energy resouces mandate for 2-5 years to remove the crippling price pressure they put on business byincreasing energy costs–which significantly affect the cost of business, and will stifle growth.

Obama’s got it wrong.  Lynch could try to do it right.