This is a letter authored by Binder and signed by her and eight other economists that was sent Monday to Gov. Bill Richardson and lawmakers.
We realize that elected officials face a difficult and crucial task in closing a projected $433 million shortfall for the current fiscal year. As economics and business professors, we advise a measured approach to the budget that will help New Mexico emerge from the recession sooner rather than later.
Though it might appear simple and equitable to propose across-the-board cuts to government programs, the worst thing to do in a recession is to cut government spending.
As the economy weakens and people lose or fear losing their jobs, they cut back on spending. When people spend less, businesses suffer, leading to layoffs and creating a vicious circle that spirals into an economic downturn.
Quite literally, when states reduce spending, they make the recession worse. Far from being equitable, spending cuts will hurt the low- and moderate-income families most at risk for losing their jobs. The worst thing to do in a recession is to make deep cuts in education, health care, public safety or other state services that take dollars directly out of local economies. If you cut the salary of a teacher, firefighter or police officer, or if you cancel a contract with a local vendor or cut reimbursement rates to nonprofits, you remove money they would otherwise spend locally.
It is not nearly as harmful to the economy to raise taxes on those with high incomes. This is because the affluent typically do not spend all of their income — they save at much higher rates than their lower-income neighbors. So reducing their income by a few percent does not reduce their spending by as much.
The alternative — a corresponding budget cut that reduces the income of low and moderate income households — results in a much larger hit to the economy.
Raising revenue responsibly
There are many options for raising revenue responsibly. One is to raise taxes only temporarily on the highest income group. Another is to close tax loopholes and make other adjustments to the tax code that would enhance efficiency in the future.
New Mexico is not alone in this predicament — every state is facing difficult choices on how to raise revenues. In fact, lawmakers in all western states except New Mexico and Alaska have enacted or are considering increases to a variety of taxes and fees.
The glum budget outlook is forecasted to pass in a couple years, and revenue strategies that are no longer fruitful or necessary can be phased out. In short, we urge you to protect state spending, since spending cuts are sure to hurt the New Mexico economy more than a carefully designed revenue strategy.
Binder is an associate professor of economics at the University of New Mexico. Signing this letter along with her were UNM’s Kristine Grimsrud, David Hamilton, Kate Krause, Christine Sauer and Richard Santos; New Mexico State University’s Jim Peach and C. Meghan Starbuck; and the Santa Fe Institute’s Samuel Bowles.