.floatimg-left-hort { float:left; } .floatimg-left-caption-hort { float:left; margin-bottom:10px; width:300px; margin-right:10px; clear:left;} .floatimg-left-vert { float:left; margin-top:10px; margin-right:15px; width:200px;} .floatimg-left-caption-vert { float:left; margin-right:10px; margin-bottom:10px; font-size: 12px; width:200px;} .floatimg-right-hort { float:right; margin-top:10px; margin-left:10px; margin-bottom:10px; width: 300px;} .floatimg-right-caption-hort { float:left; margin-right:10px; margin-bottom:10px; width: 300px; font-size: 12px; } .floatimg-right-vert { float:right; margin-top:10px; margin-left:10px; margin-bottom:10px; width: 200px;} .floatimg-right-caption-vert { float:left; margin-right:10px; margin-bottom:10px; width: 200px; font-size: 12px; } .floatimgright-sidebar { float:right; margin-top:10px; margin-left:10px; margin-bottom:10px; width: 200px; border-top-style: double; border-top-color: black; border-bottom-style: double; border-bottom-color: black;} .floatimgright-sidebar p { line-height: 115%; text-indent: 10px; } .floatimgright-sidebar h4 { font-variant:small-caps; } .pullquote { float:right; margin-top:10px; margin-left:10px; margin-bottom:10px; width: 150px; background: url(http://www.dmbusinessdaily.com/DAILY/editorial/extras/closequote.gif) no-repeat bottom right !important ; line-height: 150%; font-size: 125%; border-top: 1px solid; border-bottom: 1px solid;} .floatvidleft { float:left; margin-bottom:10px; width:325px; margin-right:10px; clear:left;} .floatvidright { float:right; margin-bottom:10px; width:325px; margin-right:10px; clear:left;} State budget busters and economic sourpusses took a scolding last week from speakers at the Business Record’s annual Economic Forecast event.

Iowa Auditor David Vaudt repeated his warnings that a state that has acquired a taste for shifting money from one-time accounts to general fund purchases is headed for dire times, and those times have arrived.

Robert Baur, chief global economist for Principal Global Investors and a former college economics professor, noted that the Debbie Downers spawned by the recession need a change of attitude. He delivered a history lesson on capitalism, where it has brought the country and what it will deliver as the country emerges from the recession.

“I’m just trying to put the depressed attitudes that people have today in some kind of perspective,” Baur said.

The auditor’s view

Vaudt, a number cruncher who cavorts with tables and charts, used a slide show to illustrate his point that budget makers have taken a short-term view of the process, seeking immediate satisfaction at the risk of long-term pain.

He noted that though the state’s population has hovered at about 3 million people since 1980, state government spending has taken big leaps, outpacing the amount of revenue collected primarily from taxes on income and sales.

Vaudt noted that in fiscal year 2007, the state spent $1.01 for every $1 it collected in revenues. Under the original budget for the fiscal year that will end June 30, that ratio has grown to $1.14 for every $1 in revenue.

By way of illustration, he noted that a family with an annual income of $50,000 that was spending one cent more than every dollar it earned in 2007 would have needed to place $500 on a charge card to cover its spending gap. Today, that family with the same income would have to place $7,000 on a charge card to balance the budget.

Much of the state spending has been covered by shifting funds from one-time accounts, such as the tobacco settlement fund and federal stimulus funds, he said. Had the budget planners anticipated the future, the stimulus fund would have covered the majority of the state’s actual spending shortfall, which Vaudt said will be about $690 million in the current fiscal year.

“Over the last several years, I’ve been talking a lot about Iowa’s problems, and some of the things I see in our poor budgeting practices are the lack of clarity and unsustainable spending growth,” he said.

Warnings about pending state budget deficits were being issued in 2008, Vaudt said, but those warnings were ignored. In October 2009, Gov. Chet Culver announced an across-the-board spending cut of 10 percent because of declining revenues.

The challenge of correcting the budget shortfall while providing services is going to be “steep,” Vaudt said.

“It is not going to be easy. But the key is we’ve gotta start taking a longer-term look at Iowa’s finances,” he said. “What got us into this mess has been the short-term focus that our elected officials have had. We’ve put blinders on, and we’ve said: ‘I’m going to balance this year’s budget; that’s all I’m going to worry about. I’m not going to worry about the future.'”

The economist as myth buster

Baur proved to be an economist with a funny bone, noting that there are “three kinds of economists: those who can count and those who can’t.” Furthermore, the United States has a “Rodney Dangerfield economy – we don’t get any respect,” he said. And another, “China is growing so fast they say it will be larger than the U.S. by a week from Thursday.”

On a serious note, he said he did a Google search of “U.S. in decline” and got 52.9 million hits. The same Google search last Thursday returned an even 53 million hits.

The point being that there is a malaise among observers of the economy, a malaise that hasn’t struck Baur.

It is a myth, he said, that capitalism is the cause of our problems – it might be a culprit, but it’s not the cause of the recession – that the United States is no longer the world’s leading economic power and that U.S. manufacturing is dead.

In 2007, it appeared as though the country was headed for something of a run-of-the-mill recession, Baur said, with the cost of gasoline at more than $3 a gallon, interest rates on the rise and home values in decline, creating “huge headwinds for consumers.”

Then international credit houses, such as Lehman Bros. Holdings Inc., declared bankruptcy or were rescued from bankruptcy and the recession spread to the “real economy,” he said.

Business loans became difficult if not impossible to acquire, and without loans, companies slashed inventories and cut workers. Businesses reduced production and capital spending. Inventories collapsed at a faster rate than ever seen, he said. Baur joked that “my wife ordered a toaster and was offered a bank.”

Baur credits the central banks with restoring some confidence in the credit markets by cutting interest rates to nearly zero percent and “essentially creating money out of thin air.” Actions by the Federal Reserve, and not government stimulus spending, have led to a modest recovery, he said.

He noted these “underpinnings” of a recovery:

• Beginning in the last quarter, businesses began to raise production to match sales;

• Profits were growing at the “fantastic rate” of nearly 50 percent per year in the last quarter;

• There has been modest consumer spending coupled with an increase in the savings rate;

• Emerging countries are leading a “synchronized” global recovery; and

• Low inflation means that the Federal Reserve is not being pressured to raise interest rates.

Baur said there appears to be a pent-up demand for durable goods, the trade gap is shrinking and with profits roaring along, companies should be in a position to begin hiring, with a possibility that the increase will be reflected in January job numbers.

Employers probably cut too many jobs in reaction to the credit crisis, he said, meaning that hiring could be more robust than anticipated.

“As we take stock of the economy in the future, it is decent, I would think reasonable, that there’s a respectable chance that this can turn into a sustainable type of recovery,” Baur said.

On a slightly dour note in an otherwise upbeat presentation, Baur said that Iowa might lag the rest of the nation in recovering because it is a center of the financial and insurance industries and because of declines in agricultural prices.