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MENDOZA IN THE NEWS

Daniels' economic task is tall one. State deficit, rising rates obstacles to growth, jobs.

by Norm Heikens, Indianapolis Star
Publication: Indianapolis Star

November 4, 2004

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The federal budget deficit that bedeviled Gov.-elect Mitch Daniels while directing the Office of Management and Budget could complicate his legal mandate to wipe out the state's $800 million budget deficit when he takes office in January.

The swelling federal deficit threatens to push up interest rates and undercut demand for autos and other products made in Indiana factories, economists say. Slowing production would choke badly needed tax revenue.

"We're really borrowing from the future to keep us propped up today," said Randall Eberts, who directs W.E. Upjohn Institute for Employment Research in Kalamazoo, Mich.

"The question remains: How soon can the economy get back on solid footing?"

The U.S. deficit has skyrocketed to $7.4 trillion from $5 trillion in the mid-'90s. Meanwhile, 30 states project a combined 2005 deficit of $40 billion, according to Center on Budget and Policy Priorities, a Washington nonpartisan think tank.

Revenue shrank after the dot-com bubble burst and the war on terrorism and in Iraq was launched.

Both the state and national economies are in fairly good condition -- for now, said University of Notre Dame finance professor Jeffrey Bergstrand.

The nation enjoys low inflation and interest rates, and the unemployment rate is a modest 5.4 percent.

But that could change in a couple of years, he added. Some experts think job growth will be tepid at best.

The Republican-controlled Congress likely will agree to Bush's stated goal of making his tax cuts permanent, which will cause the budget deficit to balloon.

The economy will grow fast enough to erase about half the roughly $500 billion annual budget deficit, Bergstrand predicted.

But an expected 3.5 percent growth in the gross domestic product next year will press the Federal Reserve Bank to raise interest rates to ward off inflation, Bergstrand and other economists say. The next Federal Reserve Open Markets Committee meeting is Wednesday.

Short-term rates will double to 4 percent by the end of 2006, Bergstrand said.

Rising rates could discourage consumers from buying items such as Dodge Ram pickup trucks, some of which have Cummins diesel engines made in Columbus, Ind., for example.

Rising mortgage rates also could dent a strong housing market that's key for sales of appliances and other products made in the state.

And businesses might hold back investments in plants and equipment.

Might companies begin new rounds of layoffs?

"Oh, yeah," Bergstrand said.

Policy Analytics President William Sheldrake, formerly president of the Indiana Fiscal Policy Institute, said oil prices, the war on terror and other factors could hinder economic growth, too.

A rising federal deficit won't ease the task for Daniels and the General Assembly, now controlled by fellow Republicans.

"I do not believe the state deficit will be closed without hard choices," Sheldrake said, stopping short of predicting a need for a tax increase.

However, Jerry Conover, director of the Indiana Fiscal Policy Institute at Indiana University, said the state needs all the revenue it can get because spending cuts alone won't eliminate the deficit.

Government must be streamlined to the point of consolidating some local functions, he said.

Raising the stakes is the need to make daunting investments in order to regain a competitive edge.

Residents must be persuaded to continue education throughout their lives instead of the traditional notion of stopping after high school, Conover said.

Moreover, roads and other traditional infrastructure cry for improvement, and too many rural areas still have no access to high-speed Internet service.

Hoosiers "won't get an improved economy unless they're willing to pay for it," he said.

Indiana employment will increase only 0.5 percent, adding 1,000 to 2,000 jobs a month, Conover predicted.

Daniels made the economy a centerpiece of his platform, repeatedly reminding voters they make 88 cents in wages for every dollar earned by the average American and saying he would make the state more pro-business. But he refused to say if he favored raising taxes.
Contact Jeffrey Bergstrand at Jeffrey.H.Bergstrand.1@nd.edu or at (574) 631-6761.