Economist: 2020s Could Be Arizona’s Best Decade Ever Article originally posted on HERE on December 30, 2019 STEVE GOLDSTEIN: Arizona’s credit rating was upgraded by Moody’s Investors Service this month, thanks to a growing economy and recent budget policies that have built up a hefty rainy day fund. Governor Doug Ducey celebrated the announcement, saying in a statement the upgrade was “further validation that Arizona is going in the right direction and that smart policies do matter.” But what does this really mean for the state? Economist Jim Rounds is joining me this morning to talk about the state’s second upgrade in the last decade. So Jim, what does this really mean for the state going forward, tangibly? JIM ROUNDS: So when you have a better credit rating, it’s basically the same thing as with your individual credit rating. You can borrow at lower rates. And in the case of a government entity, it means that they can save taxpayers money when they issue bonds to pay off major projects, infrastructure projects, things like that. So overall, even though it might only improve the interest rate by a tiny bit, that tiny bit adds up to a lot when we’re talking about billions of dollars. GOLDSTEIN: And one thing the Moody’s folks noted was the growing and increasingly diversified economy in Arizona, something many people have been clamoring for for a long time. How significant you think that is, and is this the direction the state is going to continue to diversify the economy? ROUNDS: So the biggest impact was probably the budget stabilization fund effort led by the governor. That $1 billion, which we happen to support pretty vigorously, is going to help quite a bit during the next economic downturn. That had an impact. It means that we’re a good bet longer term. Diversifying the state’s economy — that’s always important. We’ve been creating more jobs than most other states. We’ve been adding to our personal income. So we’ve been doing quite well in terms of volume, and we’re starting to shift to even higher quality jobs. And that’s going to take some additional investment in things like universities, K-12 in specific areas, things like that. But we’re going in the right direction. And I feel like the next decade — the 2020s — it’s going to be the best expansion the state’s ever had, if we continue this trend. GOLDSTEIN: OK. And let’s go back to the Budget Stabilization Fund for a moment, Jim, otherwise known as the rainy day fund. When it comes to spending a bit, especially on — whether it’s K-12 or universities — education in the bigger picture, there have been some people who thought, well, the governor just wanted that big number, that $1 billion number. Do you think it is more significant to have that equally significant to do some spending? Does that in some way put even a philosophical lock on some of the spending people would like to see? ROUNDS: Let’s treat this bay based on a math equation rather than politics. So in a downturn, the most mild downturn that we could have, which is the most likely scenario, is going to look like 2001 for us rather than 2008. And the government typically loses about $2 billion compared to its normal trend during that downturn. So we’re about 50% hedged against the next downturn. Now I wouldn’t recommend putting $2 billion in the Budget Stabilization Fund. You can always do some budget gimmicks to get through the rest or maybe clean house a little bit with some agencies. But $1 billion is not an excessive amount. In fact, I think that should be considered the standard going forward, at least for Arizona. So the folks that are saying that we should be spending this money on permanent programs just don’t understand. And they haven’t looked at the history of how the state is impacted even in mild downturns. GOLDSTEIN: Well, Jim, what would be the proper approach then by the state with a mild or normal recession, unlike what we had in 2008? ROUNDS: WIth a mild recession — and we have to keep in mind that every downturn that we previously had, we’ve done far better than the U.S. as a whole. It was just 2008 that things flipped over. So the normal downturn for us is still outperforming the U.S., and we’re better prepared for it right now because of our aggressive economic development policies, our competitive tax rates, our competitive regulatory environment. All the things that you would add up to make an economy tick, we’ve been maintaining. In terms of what do we need to do going forward to improve that further? I’m a big believer in requiring anybody that request moneys from taxpayers to calculate what the return on that investment is. Now, some things it’s just the right thing to do — social programs, things like that. You don’t need to necessarily calculate a return on investment, but you can still implement those based on programs that are more efficient versus less efficient. When it comes to improving the economy, I do believe that if we have very specific budget requests — and that’s what we’re seeing from the universities right now — they’re not necessarily issuing a budget request. It was more like an investment proposal. And I think, at least from the numbers that I’ve seen so far, I think there’s going to be a return that’s positive. And I do think that’s necessary to give us that launching pad after the downturn and make the 2020s the best that we’ve ever had. It’s just we have to make some tough decisions. And I think we do have to invest in a couple of key areas. But everybody should be prepared to defend their budget and not just say, well, this is what the number was in 2008 or 2009. You have to explain why this is better than something else. GOLDSTEIN: Well, Jim, it’s the second time you’ve said you think the 2020s can be the best we’ve ever had. Let’s dig in a little bit more on that. Just give me a couple more factors. [What] makes you optimistic it will be and it won’t be stalled by decision makers or the bigger picture in the world? ROUNDS: When we went through the Great Recession, it was a wakeup call. Our prior analyses that we’re done down at the Capitol revolved around whether or not we should be cutting the vehicle license tax or some other tax rate. We weren’t as thoughtful about all the different things that make the economy tick. And then the governor wanted to focus on regulatory impacts. And those can be significant. You don’t want to have the lowest tax rates because then you can’t be investing in the right places, but you still need to be competitive. So we’re focusing on all these things, where in prior expansions we did not. And it took a while to build this up. And this was a very unusual expansion. But in the 2020 we’re basically hitting the full reset button. We’re not going to be in the hole anymore. In fact, we’re already doing quite well compared to the rest of the country. And I think it’s just more of a comprehensive approach to investing in the economy. Again, you still have to have competitive tax rates. And that’s why when somebody asks for a $1 billion for something, they should be prepared to defend why that use is better than all the other options that are out there. But I’m optimistic. I’m more optimistic about the state than I’ve ever been. But there is a difference between taking off like a rocket ship in the 2020s versus just maybe a nice sportscar. GOLDSTEIN: Jim Rounds, economist of Rounds Consulting. Jim, thanks as always. ROUNDS: Thank you.