What Wisconsin Governor Scott Walker Means for the Economy

The recall election for Wisconsin Gov. Scott Walker will decide a significant battle in the war over whether the size and scope of state governments should be restrained or expanded. And this has substantial meaning for economic vitality in America, future business expansion, and the U.S. market as a whole.

The Gov. Walker recall campaign has mainly focused on government employee union outrage over the Wisconsin legislature's successful effort to limit the collective bargaining power of public sector workers. That the loss of this power has not led to any of the dire circumstances warned about during the riots last year almost seems beside the point. Underneath this political battle is a tension that lies between whether states should be cutting back on their commitments in order to balance budgets - by restraining the expansion of public programs and payrolls - or whether they should be raising taxes and fees to cover those spending initiatives, hoping that unfunded liabilities will sort themselves out from future increased revenues.

In the coming fiscal year, 30 states have projected budget deficits that total $49 billion, according to The Center on Budget and Policy Priorities. Every one of these states faces the same budget decision tensions. If Gov. Walker loses the election it will be a big setback for efforts to restrain the size of state governments, how much they spend, and thus how much they tax. Government unions, and other advocates of additional government hiring and programs, will be empowered to push harder in other states. A loss by Gov. Walker will certainly mean more of the economy consumed by government and more resources pulled out of the private sector.

No pressure.

Now, from the perspective of opinion leaders who argue that government expansion is the cure for the jobless recovery, a Gov. Walker loss would be a positive thing. Government payrolls could become a broader jobs program rather than provider of specific, taxpayer funded public goods. And we could continue trying to stimulate away the weak demand.

However, a continuation of this economic policy approach would be a drag on the economy, job creation, and markets in at least two major ways.

The first thing to consider is the impact of taxes on businesses. If states do not restrain spending, they will have to look for revenue to fill budget gaps. Raising taxes is unpopular, but less so if they are hidden or devised as populist efforts to target specific groups under banners of "fairness." Unfortunately, corporate and business taxes often fit that bill nicely.

Nevada, Minnesota and California are openly considering higher business taxes to balance their budgets. Maryland and Illinois already raised business taxes this year. Illinois' massive and notorious business tax increase even prompted Gov. Walker to promote his neighboring Wisconsin by reaching out to Illinois businesses and encouraging them to move there for lower taxes. How ironic it would be if Gov. Walker loses, and Wisconsin tries to follow Illinois rather than compete with it.

Hiking business taxes is a pretty straightforward path to reducing employment growth. A recent study from the National Foundation for American Policy found employment growth between 2000-2006 was 54 percent higher in areas with the lowest tax burden than in the 50 highest-tax areas. Jacking up taxes to feed the size of state governments will inhibit job growth and further slow our economic recovery. And then there are destroyed resources as businesses flee high tax states - one need only look at the flow of firms from California to Texas in recent years to see that at play.

The second way that markets could be hurt is the continuation of government waste. The collective bargaining rights of government unions amounted to a monopolistic control on resources that added millions in unnecessary Badger State spending. Since Walker pushed through the negotiation changes, Wisconsin has been able to save nearly $1 billion in education spending according to a BusinessWeek analysis earlier this year. The combination of more teacher contributions to pensions with cuts in waste led to the savings, which came at the same time as the state increased the total number of teachers in schools, hiring more than were fired in 2011, while reducing the number of administrators.

Last year the World Economic Forum report on global competitiveness ranked the United States 68th out of 139 countries in wastefulness of government spending. Too much of the tax revenue already collected by state governments is spent on programs that are relatively unproductive or fail to deliver benefits commensurate with their costs.

This is particularly true when you look narrowly at government workers. Combined salaries and benefits for state employees consume about 30 percent of most states' general fund expenditures. A McKinsey Global Institute study of labor productivity finds that government worker productivity in the United States is about 10 years behind its private sector workforce. It estimates that closing just half of that gap would save us between $100-$300 billion.

A Gov. Walker win could help other states push back against the trends highlighted by the World Economic Forum report. The alternative to reigning in spending and improving state worker productivity is essentially like saying "It is a better plan to raise business taxes and kill private sector jobs and to keep state worker costs and productivity where they are, even if that wastes $400 billion a year, give or take." And that attitude would just put Wisconsin back in the mess Gov. Walker has been working to get the state out of.

However, let me be clear that a Gov. Walker win does not suggest that Republicans should be the ones to gain political power and follow the Wisconsin election. Data from the Bureau of Labor Statistics shows that red states actually have a higher level of government workers per-capita than blue states. It is not necessarily Republican leaders who restrain government spending, but fiscally responsible ones.

Gov. Walker's recall election is just the first fork in the road America faces in a path of restraint and fiscal responsibility or a path of larger state governments, higher taxes, more wasted resources, and less private sector growth. I, for one, will be up late on June 5th watching those election results.