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Real World Economics: ‘Good problem’ of state surplus is still a problem



Real World Economics: Parsing COVID’s mortal impact

William Shakespeare saw only two permanent issues, war and lechery. Obviously, he never saw Minnesota’s state budget seesawing back and forth as it now has for decades.

Edward Lotterman

Be glad we are in the easy phase of the cycle; fighting over a projected surplus of some $7.75 billion in available funds relative to planned spending. That is a lot of money. Disagreement is natural. What is unhealthy is the way both political sides focus on specific spending increases or tax reductions without considering the circumstances that brought us to our present situation.

That Minnesota’s fiscal system swings between deficits and surpluses is not inherently bad. In large part, this is a result of conscious choices we have made to make our society more just and our economy more efficient. But these choices make both taxation and spending amplify externally caused fluctuations in state and national economies.

When these fluctuations result in boom times, Minnesota tax revenues can rise sharply and some categories of spending will fall. When recessions hit, tax revenues can tank, and the same spending rises. The surplus or deficit is the end of the fiscal whip that gets cracked.

One also must remember that the “surplus” and “deficit” amounts cited  are always projections made by the Minnesota State economist. They are not pots of money or piles of overdue bills already sitting on the desk of the treasurer. Yes, the forecasters do a remarkably good job and, when one looks back, actual inflows and outlays of money usually come close to forecasts. However, changing economic forecasts or sudden external shocks can provoke abrupt zigs and zags.

The tax system is volatile because the two main sources of revenue, the individual income tax and the sales tax, both are designed to be progressive, that is, to impose less of a burden on low-income households than on high-income ones. The more money you make, the more taxes you pay as a percentage of income. Ditto, to some extent, for the money you spend.

Minnesota’s income tax has more rate brackets than most other states. So state revenue climbs when employment, overtime, bonuses, profits and dividends are high — boom times. There also are more specific exemptions and credits. The result, an intended one, is that state income taxes are a small burden on low-income people but take a sharp cut into earnings of those with high incomes.

The state sales tax exempts food and most clothing — a break for the poor. But it means that autos, electronics and appliances and other more discretionary items that are more durable, provide a higher fraction of sales tax revenue than do essential items that everyone, rich or poor, buy. Again, a boom for boom times.

On the outlay side, in addition to federal anti-poverty efforts, Minnesota has its own means-tested programs with broader and higher benefits than many other states. When the economy tanks, more people are eligible. Outlays increase. Budget deficits are the result.

These features of both taxing and spending are politically contentious in themselves. This works against across-the-aisle cooperation at extremes of the cycle.

In both boom times and recessions, many Democrats want more social and educational spending — family leave and sick time head the list right now. Republicans want lower tax rates and even rebates of taxes already paid.

Inherent fluctuations on both sides of the budget remind one of Old Testament Egypt’s seven fat and seven lean years. Joseph’s prescription of grain storehouses has a modern equivalent in reserve funds. Minnesota long has had a “rainy day fund,” but the size of this relative to state finances is inadequate and there is a perennial problem of who or what should determine when things are fat versus lean. This is evident in the utter absence of references to “cyclical” versus “structural” income and spending in the current budget debate.

To economists, “cyclical” variations are caused by underlying business cycles, and can change forecasts. “Structural” conditions are long-term that change little from booms to busts.

Auto sales, mining and tourism are highly cyclical. Wyoming’s ability to depend on taxes on coal sold to other states is structural.

A structural budget deficit or surplus is one that you have when averaged out across the cycle of economic fluctuations. Cyclical factors, such as the pandemic recession and resulting relief payments, add to extremes such as now.

So one must consider the effects of the historic “exogenous shock” of COVID-19 with a national death toll headed toward 900,000 or more. Its unexpected impacts on economic activity are the largest such national shock since the outbreak of World War II. But it is a one-time event. Even accepting it as a “new normal,” by default, normalizes it. And we adjust.

The pandemic hit some sectors particularly hard. It devastated whole industries, like hospitality and commercial real estate; it gave labor markets erratic spasms, although Minnesota’s unemployment rate is back to pre-COVID levels and excellent by historic standards. The federal government responded with unprecedented levels of spending, including large transfers to states that figure in our now large forecasted surplus.

What elected officials should be doing, rather than proceeding directly to the GO of tax cuts or new spending, is determining what our longer-term, structural fiscal situation really is, all after parting the smoke of COVID.

Unless we are clear that, on average, we will have a substantial surplus going forward, we should not add permanent programs without raising additional revenue. And we should not cut tax rates without cutting spending. Advocates for each alternative should be forced to offer specifics on these.

There is some agreement right now. We have a COVID-caused deficit in the state unemployment fund. If not replaced, by law, unemployment tax rates must rise. We similarly owe pandemic-related money to the feds.

There is general agreement on some payment to “front-line” workers even if there is much dispute on the details. Ditto for some drought aid to farmers. There also will be agreement on elements in a “bonding bill” this session that will maintain existing buildings and transportation infrastructure.

Republicans scoff at Gov. Tim Walz’s proposed $350 per person rebate as a gimmick. It may be, but a similar one in 1999 was popular, and it might be wiser than poorly-thought-through long term tax and spending changes.

What we desperately need is better, mutually accepted information on where our state finances stand structurally. Similarly, we long have needed a broad, objective, assessment of where we stand in terms of our extensive infrastructure, especially in roads and educational facilities. Are we improving these? Or are we just depreciating them out like a South Bronx slumlord?

These questions exceed the capabilities of our excellent state economist’s office or that of any legislative committee. How to provide this information must be the subject of another column.


MN Senate Democrats make final push to legalize marijuana



MN Senate Democrats make final push to legalize marijuana

A late push by Minnesota Senate Democrats to legalize marijuana failed Wednesday, underscoring that recreational pot use is unlikely to be allowed in Minnesota this year.

Marijuana is legal in Minnesota for certain medical purposes.

Wednesday’s effort, which failed in a procedural vote almost entirely along party lines in the Republican-controlled Senate, can be viewed through the lens of election-year politics.

Two cannabis-legalization parties are active in Minnesota, and Democrats fear that candidates from those parties can peel off some of their voters who feel strongly about marijuana. Wednesday’s maneuver by Senate Democrats, while doomed, can serve as DFLers laying down a marker that they are united in their support for total legalization.

The Democratic-Farmer-Labor-controlled House passed a plan to legalize pot last year, with some Republicans voting in favor of it, and Gov. Tim Walz, a Democrat, has said he would sign it if it were to reach his desk.

However, support among Republicans in the Senate has never been strong, and many are stridently opposed. Some Senate Republicans have been amenable to “decriminalization” plans that would lessen penalties for pot and expunge records of those convicted for minor possession. Former state Sen. Scott Jensen, the Republican-endorsed candidate for Governor this year, supports such expungement.

On Wednesday, Senate Minority Leader Melisa Lopez Franzen called such measures “piecemeal” and said they wouldn’t suffice.

Wednesday’s vote in the Senate wasn’t actually on the merits of legalization, but on whether the proposal should be brought to the Senate floor. Every DFLer who voted on the measure voted in favor of that idea, while every Republican who voted cast their vote against it. Two retiring independents, Sens. Tom Bakk of Cook and David Tomassoni of Chisholm, split their votes, with Bakk opposing and Thomassoni supporting.

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Tartan High senior chosen as ThreeSixty scholar for four-year scholarship to St. Thomas



Tartan High senior chosen as ThreeSixty scholar for four-year scholarship to St. Thomas

Gwynnevere Vang, a senior at Tartan High School in Oakdale, has been chosen as the ThreeSixty Journalism Scholar and will attend the University of St. Thomas in St. Paul on a four-year, full-tuition scholarship.

The honor is awarded each year to one student enrolled in the nonprofit high school journalism program, which draws participants from across the metro area. There are currently four ThreeSixty Journalism Scholars enrolled at St. Thomas.

Housed at St. Thomas since 2001, ThreeSixty Journalism launched at the University of Minnesota in 1971 as the Urban Journalism Workshop, providing basic journalism training to Minnesota high school students, particularly low-income teens and teens of color. The program was part of a nationwide effort to increase the presence of people of color in newsrooms in order to better reflect and serve increasingly diverse communities. The Pioneer Press and Star Tribune are active partners.

Vang, in a written statement, said her career goal is to travel the country — if not the world — telling stories about the earth’s natural beauty and environmental movements. She joined ThreeSixty in summer 2020 and remained active with the program during the school year, completing a TV Broadcast Camp and high school journalism classes while contributing to her school’s online newspaper, the Plaid Press.

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Amber Heard’s sister, friend back her assault claims against Johnny Depp



Raquel Pennington testifies in a previously recorded video deposition, as a picture of actor Amber Heard is seen on screen in the courtroom at the Fairfax County Circuit Courthouse in Fairfax, Va., Wednesday, May 18, 2022.

FALLS CHURCH, Va. — Amber Heard’s sister testified Wednesday that she found herself in the middle of fights — literally and figuratively — between her sister and Johnny Depp during their troubled relationship.

Whitney Heard Henriquez is the first witness to testify at the five-week civil trial to say she personally witnessed Depp hitting Heard. Depp has testified he never struck Heard.

Henriquez testified the fight occurred in March 2015 — a month after Depp and Heard’s wedding — when Heard found evidence that Depp had already had an extramarital affair.

Henriquez recounted that an inebriated Depp blamed Heard for forcing him into the extramarital encounter.

At one point, she said, she was caught between Depp and Heard as he charged up a staircase to confront Heard. Henriquez said she was struck in the back, and Heard became enraged and “landed one” on Depp, with Henriquez stuck between the two.

One of Depp’s bodyguards intervened and broke up the fight but “by that time Johnny had already grabbed Amber by the hair with one hand and was whacking her repeatedly in the face with the other,” Henriquez said.

It was the only time, Henriquez said, that she personally witnessed a physical assault. But she said she saw the aftermath of other fights, including bruises on Heard.

She said she had the nickname “marriage counselor” for her frequent efforts to mediate arguments between Heard and Depp.

“Clearly not very well,” she said of her mediation efforts.

But she acknowledged on cross-examination that she sided with Depp at times in their disputes, and said she worked to keep the couple together even after she watched her sister be physically assaulted.

“If my sister said that she still wanted to be with Johnny and if I could help with that in any way I was going to support her. I was going to be there for her,” she said.

Henriquez admitted that once, she even joked in a text message that Depp should hit Heard, but she said she didn’t really understand what her sister was going through at the time.

Henriquez also told a story about Depp’s behavior at Heard’s 30th birthday party in April 2016, one of the final fights between the couple. She said people took turns sharing favorite memories of Heard. Depp, who arrived late and intoxicated to the party, decided to tell a story about when he first met Heard as she auditioned for a movie and “she sat on the couch and her perfect (posterior) left the perfect imprint on the couch.”

“We were all kind of embarrassed,” Henriquez said.

Depp is suing Heard for libel in Virginia’s Fairfax County Circuit Court over a 2018 op-ed she wrote in The Washington Post describing herself as “a public figure representing domestic abuse.” His lawyers say he was defamed by the article even though it never mentioned his name.

Also Wednesday, a friend of Heard testified she saw the bruises and cuts left in the aftermath of multiple incidents of abuse inflicted by Depp.

In a recorded deposition played for jurors, Raquel Pennington said she never personally witnessed Depp strike Heard. But she said she saw the injuries, and she took photos of Heard’s face in December 2015 after a fight in which Heard says Depp head-butted her and perhaps broke her nose.

The photo shows a swollen nose, a cut lip, and two moderately black eyes on Heard’s face.

She also took a photo of strands of hair that she said were ripped from Heard’s scalp.

Heard “often had to cover bruises and injuries on her face” with makeup, said Pennington, one of many witnesses whose testimony was previously recorded.

Pennington said she doesn’t really consider herself a current friend of Heard, and that the two grew apart in the last year.

The December 2015 fight is one of several disputed incidents. While jurors have seen the photos taken by Pennington documenting the injuries, they have also seen video of Heard’s appearance on a late-night talk show the next day in which those injuries aren’t visible.

Heard has said the injuries were just covered by makeup.

Raquel Pennington testifies in a previously recorded video deposition, as a picture of actor Amber Heard is seen on screen in the courtroom at the Fairfax County Circuit Courthouse in Fairfax, Va., Wednesday, May 18, 2022. (Kevin Lamarque/Pool Photo via AP)

Pennington’s testimony came after Heard wrapped up her time on the witness stand Tuesday, including two grueling days of cross-examination in which Depp’s lawyers questioned Heard about the truthfulness of her allegations of physical and sexual abuse.

Pennington’s testimony provides corroborating evidence to several of the alleged assaults. In addition to the December 2015 incident, Pennington said she saw cuts on Heard’s feet when she returned from a trip to Australia in March 2015. Heard testified that Depp sexually assaulted Heard with a liquor bottle on that trip and that she cut her feet on broken glass from the attack.

And Pennington, who lived for a time in a suite of penthouses along with Depp and Heard, said she was the first person to see Heard during a final fight between the couple in May 2016 that precipitated the couple’s divorce.

Pennington said she interjected herself between the two and Depp knocked her hands away. She said she then covered Heard with her own body on the floor as Depp screamed at Heard to get up. She said she later saw Depp wielding a wine bottle to smash and knock things off the walls and counters.

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