Don't fall into the 'Thrift Paradox'

I am impressed with the new leadership in the Utah Senate and House of Representatives. Our governor and this new leadership have made big efforts to reach out to the business community and gather input as to how they should best handle a shrinking budget while at the same time investing in our state's infrastructure and most innovative programs. Fiscal conservatism in Utah has left us with more than $400 million in our rainy day fund and with a triple "A" bond rating from all three of the major rating agencies. The question that our state's leadership now faces is: How much should we slam on the brakes of spending and how much should we hunker down for more challenging times that certainly lie ahead? This question presents the "Thrift Paradox," a trap that I hope we can avoid.

The Legislature and governor have recently settled on the 2009 budget but now face the more daunting challenge of working on the 2010 budget. Having spoken with numerous business leaders in the past several weeks, I am certain that legislators will soon be given tax revenue numbers that will disappoint even the most cautious and perhaps pessimistic legislators. The natural response to growing shortfalls will be to make large cuts in the 2010 budget. However, it is herein that we find the "Thrift Paradox." The more we cut spending, the more layoffs we will have at our schools, universities and various state agencies. Dramatic cutbacks will also have a profound impact on the private sector, and the hundreds of companies that service these schools and state programs will also be forced to cut back.

Obviously, laid-off workers will then spend less but so will workers who are still employed but feeling less secure. It is easy to see the chain reaction resulting from large cuts that leads to Utah collecting even less income and sales tax, which then forces even more cuts, which leads to more layoffs.

Fortunately, Utah is one state that can avoid being trapped by the "Thrift Paradox." Recently, the Salt Lake Chamber organized a lunch with noted national economist Mark Zandi. He was asked, "What can Utah do to be better positioned than other states as we manage our way through this tough economy?" For an economist, Zandi's response was remarkably simple. He said four things: First, "it's raining so use your rainy day fund." Next, "Utah has worked hard to earn its triple 'A' bond rating, now it should use it to its full extent." He also explained that some programs deserved more investments than others because of their impact on job creation and concluded by explaining that investments in schools and universities would have the greatest benefit to Utah's long-term competitiveness.