Quarterly the Colorado Legislative Council Staff, Economic Division, provides an analysis of key economic factors in the State of Colorado. The purpose of this analysis is to guide legislators in balancing the annual budget. The latest report was released this week, and contains some good news for Colorado’s economy.

The good news:

·         Jobs are being created, which will start chipping away at unemployment.

·         School cuts will not be as drastic this year as they could have been because there is some increased revenue that will find its way into education.

·         The unemployment insurance fund will no longer be broke and borrowing money from the Federal government.

The bad news: There is still a budget shortfall for the 2012-2013 budget, which will require about $600-million in cuts in order to balance the budget.

The nation’s economic picture is slightly better than Colorado’s. Nationally economic output has been increasing for seven quarters, in Colorado personal income has been increasing for the past five quarters. Employment has been improving over the past year in Colorado, but new jobs have not kept pace with both the unemployed looking for jobs and new entrants into the labor force. The economy is still negatively impacted by problems that created the slowdown—banks are restructuring and high fuel prices impact consumer attitudes and debt levels as well as contribute to inflation.

Believe it or not, the disaster in Japan could have an impact on Colorado’s economy because Japan is Colorado’s sixth largest export market. But one of the largest factors keeping economic recovery sluggish is problem commercial real estate loans at Colorado banks. Colorado banks have more loans secured by commercial real estate than do banks across the nation—64% in Colorado vs. 43% nationally. As a result of the risk profiles in these banks, they have not been aggressively pursuing new loans as evidenced by continued tight lending criteria. Residential real estate has been improving slightly, with a slight increase in applications for building permits, although the supply of foreclosed homes is keeping housing prices from increasing.

Unfortunately the rest of Colorado is doing better than Western Colorado, including Mesa County. This part of the state’s growth during the past decade was primarily driven by the energy sector. When it crashed in 2008, unemployment increased dramatically. Although activity picked up a bit in 2010, it is not robust enough to change the unemployment figures quickly, and most of the growth is in Garfield County, not Mesa County. Grand Junction is showing more economic weakness than other communities in Western Colorado.

Homework

March 2011 Economic Forecast for Colorado

Two stories caught my eye today, both related to our financial markets. One was about the merger of a European and US derivatives exchange that may require SEC approval. The other was a story about the Obama administration requesting additional funding for the SEC.

For a very long time, I’ve been saying that blaming the FED for the melt-down of the financial markets was silly, unless the SEC shared in the blame. The Fed is primarily charged with regulating some commercial banks in order to keep inflation in check and the financial system healthy. Their mission became a little fuzzy when investment banks and commercial banks started looking a lot alike. So, it is no surprise that journalists started simplifying their writing to use the generic term “bank” regardless of its traditional business lines. On the other hand, the SEC is charged with protecting investors and making sure that public financial markets are sound.

For years the SEC has been under staffed and underfunded. The budget submitted by President Obama yesterday proposes a 28% increase in funding for the SEC. Republicans, on the other hand, want to slash funding to the agency. The SEC was charged with implementing some of the financial reforms mandated by the last Congress in a bill sponsored by Dodd in the Senate and Frank in the House. But the increase recommended by Obama for 2011 has never passed, in part because the 2011 budget has never passed. The head of the SEC, Mary Shapiro, says that they don’t have enough money to do their job.

Shapiro estimates that it will take an additional 800 employees to implement the new regulations in the Dodd-Frank bill. The Los Angeles Times reports: Schapiro testified last summer that the SEC needed to hire 800 more employees to implement new regulations called for in the Dodd-Frank financial overhaul law. She said Friday that the lack of additional money has "hampered our ability to do what investors and capital markets deserve."

So nothing new here. The SEC is still under staffed and underfunded. But you have to wonder who the Republicans represent. It seems that they don’t support protections for consumers or protections for investors or stable financial markets. I think they’ve gone stark raving mad.

Homework

Deutsche Boerse & NYSE

Mission of Federal Reserve Bank System

Mission of SEC

Obama's Budget Increases Funding for the SEC

Mary Shapiro Talks About the SEC Budget

Summary of Dodd Frank Bill

Al Capone, who was eventually taken down by the IRS, was famous for his involvement in the Chicago St. Valentine’s Day Massacre. The modern version is about to occur. President Obama will deliver his budget to the House on St. Valentine’s Day. Both sides have started choosing their weapons.

Yesterday Jacob Lew wrote an Op-Ed in the New York Times about the priorities of the Obama budget. In a piece titled The Easy Cuts Are Behind US, Lew sounded the themes laid out by Obama in his State of the Union speech. Lew writes “our goal is to win the future by out-educating, out-building and out-innovating our rivals so that we can return to robust economic and job growth. But to make room for the investments we need to foster growth, we have to cut what we cannot afford. We have to reduce the burden placed on our economy by years of deficits and debt.”

The Obama budget will call for a five-year spending freeze on any discretionary spending not related to national security.  He predicts this freeze will cut $400-billion out of the deficit over the next 10 years. He also notes that to get to this level of savings, programs with strong Democratic support will have to be cut. One of the programs called out for cuts by Lew is Community Service Block Grants. The proposal is to cut the grants in half, for a savings of $350-million and to change the program from a formula driven process, to program where grants are given to the organizations most effective at helping low-income communities.

Obama has used competition in the past. That was the basis for the Race to the Top money ear marked to provide education funds to states that were willing to make substantial reforms in how they approached everything from curriculum to teacher evaluations. There is an even longer history of the federal government using competition to achieve policy goals in the field I’m most familiar with—economic development. A lot of people in the field were shocked when New Markets Tax Credits were targeted toward low-income communities, with no state-by-state defined carve-outs, and awarded to the eligible organizations scoring the highest in policy-driven criteria.

The Obama budget also calls for taking $125-million from the Great Lakes Restoration Initiative, which is charged with cleaning up and protecting the environment around the Great Lakes. And the big headline should be that the budget calls for a $300-million cut in Community Development Block Grants. These are grants that go to cities, counties, and states to help with everything from affordable housing for low to moderate income families, to road and sewer projects, to economic development. The Incubator in Grand Junction was originally funded with money from Community Development Block Grants, as was the new community center in Fruita.

The budget also calls for cuts in military spending, specifically taking $78-billion out of the Department of Defense budget over the next five years. He plans to scrap the C-17 transport plane, saying it costs too much and we don’t need it.

Finally, Obama asks that Social Security be protected and that the tax code be revamped. Good luck on that tax code thingy. I’ve been saying for a very long time that the code is way too complicated if a person like me, with a degree in finance, has to hire a CPA in order to make sure that everything is correct when filing a tax return. Corporate taxes are even more complicated between tax credits and property depreciation.

Complicating matters, the last Congress never passed a final budget for 2011. So, while they are wrangling over how to finish last year’s work, they also have to deal with finding an approach to the Obama budget. There is a split in the Republican Party about what should be cut and how much the cuts should be. When Paul Ryan released his projections, they were short of the $100 billion in cuts that many Republicans promised to deliver in the unfinished 2011 budget. They are looking for an additional $45 billion in cuts to the 2012 budget without touching Defense and while requiring that spending be cut before any debt limit increases are approved. And just to make the whole thing more fun, Speaker Boehner has promised unlimited amendments and debate on the Continuing Resolution, which will end up being reconciled with the Senate version where Democrats are in control.

Who needs soap operas when we have Congress?

Homework

GOP's Strategy to Cut Spending

Wall Street Journal Talks about GOP Budget Strategy

DEM Budget Strategy