Horizon, Host: Ted Simons

May 22, 2008


Host: Ted Simons

Arizona's Ailing Economy


  • Can government rescue the economy? Tax cuts, rebate checks, economic stimulus plans? We talk with ASU economics professor Dennis Hoffman, and Byron Schlomach, chief economist for the Goldwater Institute about how government can best aid the economy.
Guests:
  • Dennis Hoffman - Economics Professor Associate Dean, W.P. Carey Seedman Research Institute, Arizona State University
  • Byron Schlohmach - Chief Economist for the Goldwater Institute, and Director of its Center for Economic Prosperity
Category: Business/Economy

View Transcript
>> Ted Simons:
Tonight on "Horizon," why Arizona's school vouchers for kids with disabilities are found to be unconstitutional. And local economists tell us what government can do to rescue our struggling economy. That's next on "Horizon."

>> Ted Simons:
Hello, and welcome to "Horizon." I'm Ted Simons.

>>> Ted Simons:
Economic stimulus plans, tax cuts, rebate checks. Can they really cure Arizona's ailing economy? As we continue our series, I'll ask local economists how the government can help. But first, David Majure talks to a local banker about her views on the subject.

>> David Majure:
Candace Wiest is president and C.E.O. of West Valley National Bank, headquartered in Avondale, Arizona. She's also a director of the federal reserve bank of San Francisco, which gives her a say in the nation's monetary policy. We asked Wiest what government can do to rescue the economy.

>> Candace Wiest:
There are things the government is doing. I think the actions taken by the fed when Bear Stearns was going down, I think that is a great example of what the government can do.

>> David Majure:
What about the tax rebate checks?

>> Candace Wiest:
It's probably not going to make substantial differences, long-term differences in people's life. So I look at the rebate checks, I say, "It's nice. I think the real value for that is, maybe it gives the consumers confidence of the government is doing something. We want you to do something. We don't know what that is. This check is something. And the question is, when the check's gone, then what's the next something?

>>David Majure:
Maybe it's a $1.4 billion economic stimulus plan. Arizona universities are asking state lawmakers to help finance an effort to build and improve university facilities.

>> Candace Wiest:
First of all, let me say that I think anything we can do to build the university system in this state should happen. I don't buy that this is an economic stimulus package. I look at this as the deferred maintenance that should have been funded by this state a long time ago. So I think it's a good thing. I think we ought to call it what it is. I think we ought to do it, but at the end of the day I think the question comes down to this -- we're still taking on debt. That debt is going to have to be repaid. What is the source of repayment other than the portion the university is paying? And can we do that?

>>David Majure:
And can we do anything to insulate Arizona from economic ups and downs?

>> Candace Wiest:
Why are we a boom or bust state? And I think there are a bunch of answers here and the first is we don't control our own capital in this state. We have a bunch of tiny little de nouveau banks like mine, but we control about 6\% of the deposits in this state. So at the end of the day, if Arizona shows up on lists, worst schools, Arizona shows up on the declining values list, and all of a sudden all of our equity lines get cancelled because some guy in the Midwest is reading that and going, geez it must be really bad out there, Bob cut it off. Let's turn these things out. I think other than relying on as long as there's sunshine in Arizona, we're going to be fine, I think we've got to do things to really stimulate the banking and the capital and controlling the capital in this state.

>> Ted Simons:
Joining me now to talk about government and the economy are Dennis Hoffman a professor of economics at A.S.U. and Associate Dean of the university's W.P. Carey Seedman research institute. Also here is Byron Schlohmach, Chief Economist for the Goldwater Institute, and director of its center for economic prosperity. Thank you both for joining on us "Horizon."

>> Byron Schlomach:
Thank you.

>> Dennis Hoffman:
Thank you, Ted.

>> Ted Simons:
Dennis, can government help turn around a faltering economy?

>> Dennis Hoffman:
Certainly government stimulus properly designed can have a positive effect. The checks that we're getting from the federal government, estimates suggest two to $2.5 billion dumped into the Arizona economy. Is it a permanent fix? Will it bring permanent prosperity? Certainly not. Take $2.5 billion, put it in a helicopter, drop it over the Arizona economy, it is something that might spur retail sales confidence that is really really very low right now.

>>Ted Simons:
That helicopter action, the metaphor there, should that be, though, a last option?

>>Dennis Hoffman:
I think it's something that is -- it's clearly much more symbolic than substantive. And I think that we need to be concerned about where that federal government gets the money to drop out of the helicopter. Unfortunately, this probably means more borrowing at the federal level, and there's a very different, very, very much a difference I think between borrowing to finance, say, current consumption, and borrowing to finance long-run investments. Very different.

>> Ted Simons:
Byron, back to the symbolism aspect of all this, is there something to be said for that, especially in a rough economy?

>> Byron Schlomach:
Well, no. I don't think so. The fact is that dropping money as though it's manna from heaven, that's nice, but the fact is that we're borrowing the money. It has to be paid back eventually. Government spending tends to crowd out private spending that would occur otherwise. The fact is we don't have the knowledge, and I don't believe we ever will have the knowledge, no matter how many economists you get in a room, to tweak and adjust the economy as if it's some giant machine with a bunch of knobs and levers to fine tune. If you think about it that way, I think it's a machine that has too many knobs and too many levers for us to ever fully understand and adjust.

>>Ted Simons:
Are there, though, projects that are so big that to wait around for private industry to take control, to take those particular bulls by the horn, you would be waiting and waiting and maybe if you had gone ahead with the government option to begin with, something would have been done by now, and the economy and the greater good would have progressed?

>> Byron Schlomach:
Well, the government's job is to make sure individuals can handle their own problems in the best way they see fit. Make sure that people -- money isn't taken out of people's pockets needlessly to make sure that people have the wherewithal, the legal arrangements as well as the financial arrangements, and there is a role for government to play in the monetary area, to take care of their problems and -- but -- and then there are obviously public works issues that the government should be involved in. Large investments and borrowing can play a part in that. But the -- and that serves to a certain extent as a stimulus when you borrow and build capital projects.

>>Dennis Hoffman:
Ted, I thought Byron and I were going to disagree tonight, but we completely agree, it sounds like. There are certain public works projects where borrowing makes sense, where it can be a stimulus. And I completely agree with him that the fundamental goal is to provide an infrastructure or foundation, a legal structure, a tax structure to allow individuals to flourish on their own. But again, there's a very, very different issue between, say, borrowing for the $1.4 billion stimulus package that has been described here in Arizona to improve or fulfill, actually, the constitutional obligation that the legislature has to fix the university and provide for the development improvement. It's right in the Constitution. It's cheap now, capital costs are down. And it actually is going to provide a needed short-run stimulus.

>> Byron Schlomach:
But you want to make sure that you are in fact borrowing for true long-term investment as opposed to maintenance that just hasn't been done for whatever number of reasons. The fact is, government -- there are incentives in government that are very different from incentives in the private sector, and government has demonstrated a tendency to neglect investments. And you don't want to incentivize that further by borrowing money to do what is some of it really ought to be handled from operating funds.

>> Dennis Hoffman:
Ted, you need long-run return on this investment. So what's long-run return on an investment in fixing university buildings, investing in new university buildings, investing in the universities at all? What's the long-run return?

>> Byron Schlomach:
You get a long-run return on a lot of things with a better return even than universities provide. But there's some agreement here, but the particulars are pretty important.

>> Ted Simons:
Well, and I want to get back to some other aspects of what we're talking about.

>> Dennis Hoffman:
By the way, the answer to that question is over $2 billion a year is the long-run return. If we raise the labor force share of college graduates in this state by 1 percentage point, it's over $2 billion per year.

>>Byron Schlomach:
But government --

>> Dennis Hoffman:
That's the fact of a federal stimulus every year. We do it on our own, we do it in perpetuity.

>>Byron Schlomach:
The government should invest in assets that create a social return, and most of the returns in universities are personal. They're personal to the individuals who get the education.

>> Ted Simons:
Ok, away from the universities, I want to talk about another government action, that's tax cuts. When do tax cuts work best, when do tax cuts work the least?

>> Dennis Hoffman:
My opinion, tax cuts work the best when you start with very high marginal tax rates. The Kennedy administration. You started with 90\% marginal tax rates. Moved it from 90 to 70. Reagan started with 70, moved it from 70 and at one point all the way down to 28\%. High marginal taxes to -- when you can make big moves. Unfortunately my observation, and I've lived here since 1979, I don't see any kind of moves that we've made in Arizona that have resulted in the kinds of economic growth that the economic -- that you can argue that occurred in the results of those federal cuts.

>>Byron Schlomach:
Tax cuts work best when you're cutting taxes on things that shouldn't be taxed. Or that -- or excessively taxed. Compared to other things. For example, the property tax in Arizona on commercial property is twice as high, twice the rate. We have twice the assessment ratio compared to property taxes on residential property. We need to cut back on that. The fact is that we have an economy that is overly dependent on housing construction, and that's by design. We have an economy in Arizona that compared to the rest of the nation, is small on manufacturing. But that's by design. We tax manufacturing property. We tax housing property less.

>> Ted Simons:
Is there an argument, we talked about symbolism to start the conversation. Is there an argument that when you cut those kinds of taxes, the company in Iowa says, maybe Arizona is not so bad?

>> Dennis Hoffman:
Possibly, but we've lost the opportunity, Ted. We've taken every advantage that we can to cut taxes on individuals. Loaded up on business, be tax friendly to individuals. That's what we have done in this state. We do it at the peak of business expansions. I've heard this argument. The tax cuts have stimulated growth. We have cut taxes right at the peak of expansion. Most recent tax cut, May 2006. Wow. That certainly brought growth, didn't it?

>> Ted Simons:
Last question here. What can Arizona do to better protect itself when the next economic downturn comes around? And what can government help Arizona do?

>>Byron Schlomach:
First of all, we need to understand that economic downturns, the business cycle has been with us always. It will be with us always. Obviously we want to mitigate the effects as much as possible. We do that by creating the most robust economy that we can, and we do that with the smallest government possible. Again, we have institutions that encourage growth that protect private property rights, and that is our best defense from a faltering economy in a business cycle.

>> Dennis Hoffman:
Major investments in the infrastructure. Major investments in infrastructure, public and private infrastructure. Roads, another Palo Verde, water systems, we need major investments. Provide a foundation for growth to occur. Diversified growth to occur. Education and skills in the labor force, we'll get diversity in that labor force.

>>Ted Simons:
Alright. Great conversation. Thank you both for joining us.

>> Dennis Hoffman:
Thank you, Ted.

>> Ted Simons:
Arizona laws that give tax dollars to disabled and foster kids so they can attend private schools violate the state's Constitution. That's the opinion of the Arizona Court of Appeals, which ruled in the case last week. In a moment, I'll talk with people on both sides of the school vouchers issue, but first David Majure shows us how one family benefits from the voucher program.

>>Teacher:
Touch wagon. Nice job Lexi. High five.

>> David Majure:
Six-year-old Lexi attends Chrysalis Academy in Tempe. It's a private school that specializes in children with autism. Children like Lexi, who was diagnosed when she was 3-years-old.

>>Andrea Weck:
It has changed her completely. She's very social with her sister. She's got a twin, and her little sister is a year younger. Ad it--once we started here, her world started opening up.

>> David Majure:
Andrea Weck is Lexi's mother. She says thanks to a lot of one-on-one and small group attention, her non-verbal daughter is learning sign language and other ways to communicate. As a single mom Weck says she could not afford to send Lexi to the Chrysalis academy without the scholarship she gets from the state.

>> Andrea Weck:
No. No. I wouldn't even be able to do it, ever. Without the voucher program, we wouldn't be here.

>>David Majure:
On May 15th, the Arizona Court of Appeals ruled that the state's school voucher programs for disabled and foster kids provide aid to private schools in violation of the Arizona Constitution. Specifically, Article Nine, Section 10, that says there shall be no appropriation of public money in aid of any private or sectarian school.

>> Andrea Weck:
I thought, oh, my gosh, what can I do to get that overturned, or I need to get another scholarship. I don't know what I'm going to do. I'm going to cry first, but what can I do to get them to hear me and show them that these vouchers are changing a child's life? And not just one. Half of the students in her school, it's changing their lives.

>> Tim Simons:
Joining me is Tim Keller, Executive Director of the Arizona chapter of the Institute for Justice, which represents families who use Arizona school voucher programs. And Andrew Morrill, vice-president of the Arizona Education Association, the state's largest teacher organization. A.E.A. is one of the plaintiffs that challenged the constitutionality of school vouchers. Thank you both for joining us. We appreciate it. Tim, you're appealing the decision. Tell us why.

>> Tim Keller:
Absolutely. The Arizona Court of Appeals decision was a radical departure from Arizona's constitutional and policy history. As you heard Andrea Weck talking on the introductory -- introduction of the program, for literally decades Arizona has been spending public dollars to educate children with disabilities in both public and private settings. I see a question on your face.

>>Ted Simons:
But we also saw the constitution. And the constitution basically says that it bans public money for private schools.

>> Tim Keller:
What the constitution prohibits is aid to private or sectarian schools. And the simple fact is that using public dollars to purchase an education from a private school does not aid the school. The public dollars are being provided to aid the children. And in fact, I think my friend from the teachers association would have to agree, that purchasing education -- an educational service in a private institution with public dollars cannot be construed to aid those private institutions, because they're placing children every day in those same private schools. Lexi Wecl is at a school with about 30 kids. And of those kids, half of them have been placed there by their parents. The other half have been placed there by public school officials under -- all of the children are having their tuition paid with state funds pursuant to two separate state voucher programs.

>> Ted Simons:
It seems to be one of the overriding arguments on this issue for vouchers is the money is going to parents as opposed to schools.

>> Andrew Morrill:
Well, there's some important differences in what's been described so far. We're really talking about a different relationship. To the extent that public schools to date have contracted with private schools for some special ed students, using that as an example, you still have the public school and the public district as the advocate for the education of the student. And there's a very simple reason for that. It's the law. It's the federal law that a public school must create a free and appropriate public education for its students. Public doesn't necessarily mean that it has to be the building. Public refers to the absolute obligation of the school to provide the best free appropriate education possible. And it really shows you the difference in philosophy between public and private schools. Because a public school will contract with a private school if that is determined by parents and by teachers, and by the counselors and the special ed department at a school that that's the best option. That's the best alternative. But it's important to remember, that student stays an entity, a ward of the public school. But this voucher is very different. Do you want me to--

>> Ted Simons:
Real quickly though. Does that not crack the door open, though, enough to where you can go ahead and challenge everything?

>> Andrew Morrill:
Well, we'll see what gets challenged and what gets upheld. Tuition tax credits have been upheld for a very different reason, but there's no doubt in the ruling of the Court of Appeals, they're fairly clear, vouchers themselves violate the aid clause. And the difference is pretty pronounced. The tuition going to a private school takes that student, that public school student and puts them as a student in a private school. That doesn't happen with most of the other programs in the state.

>> Ted Simons:
Talk about especially the federal aspect of all this, the overriding federal law.

>> Tim Keller:
Absolutely. As Andrew said, the federal law requires that school districts provide a free and appropriate education to children with disabilities. What the Arizona legislature has done has gone beyond the requirements of federal law and has said parents, we're going to allow you to you go out and not find just an appropriate education, we're going to allow you to look for the best available education for your child. Andrea Weck spent -- Lexi Weck spent two years in a public school system and made no academic progress. Since she's been at the Chrysalis Academy using this scholarship program, she's transformed into a different little girl. It's changing lives because her mom was empowered to take control of her education and find a school that worked for her needs.

>> Andrew Morrill:
And that's true, and all of that can continue. Because this ruling from the court of appeals isn't going to threaten the ability of a public school to contract with a private provider. What it's going to do is say tuition can't go directly from public funds to a private school. All of the services that I understand have been offered this student, the program has been offered this student and others can continue. They're not threatened by this.

>>Ted Simons:
If programs can continue --

>>Tim Keller:
There's no way because under the existing program, it's up to the school as to whether or not they will actually place the child in a private setting. Andrea sought that from her public school district and she was attending a highly sought -- thought of school district at the time, Scottsdale unified school district. But they wouldn't allow her to take her funds and trans-- and go to a private school. They controlled the decision. The ruling of the Court of Appeals essentially says that government bureaucrats have more control over a child's education than do parents. I can't believe that was the intent of our founders.

>> Ted Simons:
There are some who say that this particular case is special because you're finding, and you're using sympathetic students, very sympathetic students, to try to get legal precedent.

>> Tim Keller:
Absolutely not. They are sympathetic, but they are -- this program is absolutely changing their lives. And in fact, I think in every single one of the instances where you find Institute for Justice defending school choice programs, you'll always find that our clients are in fact very sympathetic and their stories are very compelling. But it's certainly not any attempt to use them to obtain something that the Constitution doesn't otherwise protect.

>>Ted Simons:
Back to the concept of legal precedent, is there some way that the funds can get there -- it seems that this is somewhat limited in scope. Is there some way that those funds and those choices can remain on something this focused?

>> Andrew Morrill:
I think a lot of the choice -- it's important to remember that a parent in a public school system has a great deal more choice than possibly being discussed here. The instrument of the individual education plan, which is that plan, articulated for the needs of a special ed student, that's federally mandated and protected of public schools. So parents actually have quite a bit of access. And then again if it turns out that the best way to deliver the education is with an outside provider, then the federal government mandates that that be done under the I.E.P. I have to say in response to what's being discussed this is a really powerful and passionate topic. Everybody in this state I would venture to say wants to see the best education afforded every student. Special ed students, students in foster programs, all students. But it does seem that after numerous failed attempts to pass a statewide voucher, that certain populations of students that would carry an enormous amount of emotional focus were utilized to at least open the door. And that's a strategy.

>>Tim Keller:
This is a program I'll remind you that was not only passed by the legislature, but it was also signed by our democratic governor, Janet Napolitano. She put her signature on these programs. So this is certainly something that was done with bipartisan support from both the legislature and the governor.

>>Ted Simons:
Is amending the State Constitution, is that basically what you're going to have to do?

>> Tim Keller:
Absolutely not. I believe that not only do we have the equity on our side, but we have the law, and the Constitution on our side. There's nothing in the State Constitution that prohibits the legislature and the governor from aiding families to go out and purchase for their child from private providers the best education available.

>> Andrew Morrill:
Well, one wonders then what the court of appeals was actually reading as far as a document because evidently they have found otherwise.

>>Ted Simons:
The last question here, overriding what we're talking about. School vouchers, and just the basic argument that they drain public funds. Respond.

>> Tim Keller:
Absolutely not. Every study that's ever been done shows that when a voucher program is enacted, public funding for education -- for public schools actually goes up. That's not surprising, because a school choice works. It improves the educational environment. So as private school choice helps those children who participate and get a better education, the competition improves the public school system and legislators are actually more willing to fund public education as a result.

>> Ted Simons:
Why is Tim wrong?

>> Andrew Morrill:
We want a school system that delivers the best education possible for everybody, and vouchers are essentially school accountability waiver. They opt out of several important things. They opt out of federal requirements to create a level playing field for every student. They opt out of financial accountability. They opt a school out of taking the A.I.M.S. test which is the state approved test for standards , they opt them out of the professional standards for teachers and the academic standards for students. They opt them out of financial transparency. We don't need school accountability waivers, we need a public education system and an education delivery system that is well funded, certainly better than 50th in per-pupil spending in the country, that works for everybody.

>>Ted Simons:
Alright. We've got to stop it right there. Thank you very much.

>> Andrew Morrill:
Thank you.

>> Tim Keller:
Appreciate it.

>> Ted Simons:
Coming up on the journalists' round table, Phoenix police announce changes to operations order1.4. Officers will now ask all suspects about their immigration status. And lawmakers try again to make D.U.I. laws tougher in Arizona.

>>Ted Simons:
That's it for now. I'm Ted Simons. Thank you so much for joining us. You have a great evening.

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