It is certainly true that a vibrant private sector will always be the main engine of economic growth in a capitalist economy. Public spending can at times crowd out private investment, although, as economists like Brad DeLong argue, during times of sluggish economic growth like the present,  government spending can be vital for keeping the economy from grinding to a halt and for incentivizing private investment. But more fundamentally, this polarizing conception of “government versus the private sector” misses the important ways in which businesses, as well as families and communities, cannot thrive without a strong and effective public sector. You cannot have a vibrant, productive private sector without state and local government helping to:

• Educate our children and train our workforce;
• Police our neighborhoods, investigate crimes, and detain lawbreakers;
• Enforce patents, copyrights, torts and other foundations of the legal system;
• Coordinate the response to natural disasters and outbreaks of disease that threaten public health and safety;
• Maintain and upgrade our roads and bridges;
• Assist those unable to support themselves due to age, disability, disease, or poverty;
• Protect the quality of our air and water supplies;
• Allow consumers to know that the products they buy and the food they eat are safe;
• Support research and development.

In addition to all these functions that the public sector assumes directly, government is also a primary payer of services to private for-profit businesses and not-for-profit agencies providing a vast array of health care, social service, correctional and educational services – from nursing homes, private hospitals, and home health agencies to private prisons and educational testing companies.

The deep and prolonged state fiscal crisis is leading to a decay of public services that affects the private sector both directly and indirectly. The Oklahoman recently reported that budget cuts to the State Fire Marshall, for example, are leading to delays of up to two to five months in issuing the fire safety plans required by every new business. The reimbursement rates paid to medical service providers have been cut by the Oklahoma Health Care Authority,  the Department of Mental Health and Substance Abuse Services, and other agencies. As school districts, state agencies, counties and cities struggle to operate on reduced funding, they cut back on their purchasing and contracting with thousands of private vendors. Layoffs and furloughs of public employees, no less than private sector job losses, leads to less economic activity and slower economic growth.

The broader point is that we are all in this together. Oklahoma’s success depends on the public sector as well as the private sector, along with non-profit organizations, the faith community, local communities, and families all playing a role.  If we “shrink government” to where public school children are taught in larger classes and offered fewer programs, crimes are not investigated and prosecuted in timely fashion, infrastructure is allowed to deteriorate, and vulnerable individuals and families are not protected, the quality of life that we all count on and that is required for our security, health and economic prosperity suffers. That isn’t good for business and it isn’t good for Oklahoma.

What I have been calling “going to hell” really means a failure to adapt: increasing difficulty in focusing on issues beyond the immediate news cycle, and an increasing gap between the real challenges and opportunities of the time and our attention, resources, and best efforts.

One of the prime examples he quotes of the apparent inability to acknowledge and respond to pressing issues involves the declining state of  the nation’s physical infrastructure. It’s worth quoting him at length:

The American Society of Civil Engineers prepares a “report card” on the state of America’s infrastructure—roads, bridges, dams, etc. In the latest version, the overall “GPA” for the United States was D, and the cost of bringing all systems up to adequacy was estimated at $2.2 trillion over the next five years, or twice as much as is now budgeted by all levels of government. In 1988, the comparable study gave an overall grade of C, with many items getting B’s. Now, the very highest grade was for solid-waste systems, at C+, or “mediocre.” Roads, dams, hazardous-waste systems, school buildings, and public drinking water all received a D or D–. The average dam in the United States is 50 years old. “More than 26%, or one in four, of the nation’s bridges are either structurally deficient or functionally obsolete,” according to the latest report. Improving existing bridges would cost about $17 billion per year, or about twice as much as currently budgeted. Worn-out water systems leak away 20 gallons of fresh water per day for every American; replacing systems that are nearing the end of their useful life would cost $11 billion more annually than all levels of government now plan to spend. “Engineers don’t usually put things dramatically, but the alarm about infrastructure is real,” Stephen Flynn, of the Center for National Policy, told me. “Our forebears invested billions in these systems when they were relatively much poorer than we are. We won’t even pay to maintain them for our own use, let alone have anything to pass to our grandchildren.”

The decline of our public infrastructure – the roads and bridges, sewage systems, school buildings, etc. – threatens not just our material well-being, but our public health and security as well. As Fallows notes, the deterioration of our public structures stems from our growing unwillingness to raise the public dollars needed for basic maintenance and upkeep.  Whether we succeed in preserving a stable and functioning society hinges on if our political system proves able and willing to make the hard choices needed to pay for ongoing investment in our public structures.

This acute drop in revenue collections has set off a debate among politicians, editorial boards, and others about whether tax cuts approved by the Oklahoma Legislature during the economic boom years of the mid-2000s are to blame. During those years, the Legislature voted to cut the top income tax rate from 6.65 percent to 5.25a percent, greatly expand the standard deduction, increase exemptions on retirement income, and phase out the estate tax, among other changes. Many of the tax cuts were backloaded – they were structured so as to phase in over a number of years, so that the full fiscal impact of the cuts would not be felt until at least FY ‘11.

Are the tax cuts responsible for today’s budget woes? The Tulsa World says they are, while The Oklahoman emphatically says they are not. Our own view is that the truth lies somewhere in between. On the one hand, there can be little doubt that Oklahoma would now be experiencing serious fiscal woes regardless of what tax policies had been enacted prior to the downturn. States across the nation are facing staggering budget deficits, including those that cut taxes minimally or not at all when their economies were strong. Yet, we contend that the tax cuts have contributed to the severity of the budget crisis and may make it harder for decimated budgets to recover.

What may be even more harmful is if, once revenues begin to rebound or even before, the calls for further tax cuts are again sounded in Oklahoma. If so, we hope that the role that deferred tax cuts approved during a time of robust economic growth are having in compounding revenue shortfalls and exacerbating budget cuts during a severe economic downturn will at least serve as a cautionary experience for tomorrow’s elected officials.

There are lessons that should be taken regarding the consequences of tax cuts adopted in earlier years. First, as we showed in this brief from 2008, income tax cuts greatly dampened state revenue growth prior to the economic downturn. As a result, state revenues grew by less than 0.5 percent in FY ‘08 (see the chart below) and the Legislature was forced to adopt a flat, stand-still budget in FY ‘09. This meant that before the economic downturn hit Oklahoma, most agencies had already pulled hard on their belts to make up for not being funded to cover rising employee retirement and health care costs, general inflation, or growing caseloads. The premature onset of tough budget times has made it much harder for agencies to absorb 5-7 percent cuts to their initial FY ‘10 appropriations, and monthly 5 percent mid-year cuts, without cutting into the bone of core staffing and public services.

Secondly, time-released tax cuts enacted several years ago are still kicking in during the economic downturn.  A final cut in the top income tax rate – from 5.5 percent to 5.25 percent – remains on the books to take effect as soon as revenues are projected to grow from one year to the next by more than 4 percent. Our projections suggest that this tax cut, with a revenue impact exceeding $100 million, will be triggered in 2011, well before appropriations have returned to pre-downturn levels. Unless the Legislature acts to defer or repeal this provision, this final phase-in of tax cuts enacted in 2006 will hinder our ability to restore budgets to levels at which agencies are able to effectively deliver services.

There will be time for a fair debate about the right levels of taxes and public services, and the best paths to the state’s prosperity. As we engage in this discussion, let’s hope we remember the lessons of our current situation: policy decisions have complex and long-term consequences.