I’VE BEEN STRUGGLING to find the right metaphor for our current economic situation. After the great recession of 2007-2009, my go-to was a staircase: the recession had knocked us down a flight of stairs and it took us a decade to climb back up.
But that won’t do today. If COVID knocked us down the stairs, our response was to leap – like some superhero – up and out of the building. Only afterwards did we realize we don’t know how to land.
Or how’s this analogy…to avoid a dangerous tangle on the highway, we successfully accelerated around it – only to discover that our brakes aren’t working well.
You get the point. For the first time in decades, the problem with the US economy is that it’s running too hot, with plentiful job opportunities driving unsustainable wage growth and consumer demand keeping inflation above healthy levels.
Fixing all this is mostly a job for the feds. But lawmakers here in Massachusetts have an important role to play: they need to adapt.
To start with a straightforward example, we need to stop looking for policies that will create jobs. That goal is simply futile with the Federal Reserve working hard to slow the job market.
Instead, efforts to help workers and spur economic development should emphasize skill-building and job matching – so that less-educated workers and those held back by discrimination can benefit from the surfeit of opportunities. At the same time, we can help underperforming regions of the state by copying place-based approaches being successfully used in states like California.
Ultimately, though, the real challenge of this moment is far broader. Over the last few decades, Massachusetts has passed a host of major laws and regulations that made good sense at the time but aren’t well-suited for our current, overheated economic environment. Recall the recent kerfuffle over state tax rebates and 62F, and then imagine it splintered across the policy landscape as other long-standing laws have their unforeseen quirks exposed by a new economic reality.
Take Proposition 2 1/2, a 1980s-era ballot initiative setting strict limits on property taxes in cities and towns. Among other things, Proposition 2 1/2 says that property tax revenues can’t rise faster than 2.5 percent per year (with some exceptions that we can set aside for simplicity sake).
This cap made a certain kind of anti-tax sense when inflation was muted and real estate prices were rising at a steady, but not extravagant, pace. In those circumstances, it acted as a meaningful but not debilitating check on local taxes across the 351 cities and towns in Massachusetts.
But at moments of high inflation and tight labor markets – like right now – Proposition 2 1/2 takes on a whole different character. It doesn’t just limit local tax growth; it forces municipalities to actually cut taxes (in real terms) even as it gets more expensive to hire municipal workers and purchase construction materials.
Last year, real property taxes in Massachusetts fell 2.6 percent, the first decline since the early 1980s – and possibly the start of a worrisome pattern for Massachusetts municipalities. And while the state could compensate cities and towns for this lost revenue, that’s hardly guaranteed. Not to mention that if the state did use its own tax revenue to backstop municipalities, the ironic effect would be to transform Proposition 2 1/2 from an effort to constrain taxes into a mechanism for expanding the importance of Beacon Hill’s own, much more potent taxing authority.
Here’s another example: health care costs.
Massachusetts has a well-established but weakly-enforced target for health care costs, where spending per person is not supposed to grow faster than 3.6 percent per year (the exact benchmark varies but it’s never been higher than this). As with Proposition 2 1/2, it’s a totally reasonable – and justly celebrated – way to limit health care cost growth, provided that inflation and economic growth stay within certain bounds.
But in overheated times like today, or economy-cratering times like early 2020, our whole approach breaks down – and not just temporarily but for years.
To understand the issue, consider recent events. Health care spending actually declined 2.4 percent in 2020, as COVID lockdowns stopped all manner of elective and deferrable treatment. That’s obviously way below the 3.6 percent benchmark. But it also sets up a weird problem, because when you try to measure spending growth for 2021, you’re starting from this aberrant baseline. So your calculation will inevitably show a huge increase in health care spending.
We don’t yet have precisely comparable figures for subsequent years, but other sources suggest state health care spending increased around 8 percent in 2021–and then another 7 percent through the first half of 2022.
Do these gyrating numbers tell us anything meaningful about health care costs? Did we do something right in 2020 and something terrible in 2021? Obviously not. They merely reflect the limitations of our year-by-year approach to health care cost when inflation is high and the economy in turmoil.
And while it’s tempting to shrug or share some patient counsel about waiting for a return to normalcy, this isn’t a great alternative, as it leaves us blind to potentially meaningful shifts happening right now. Plus, there’s a better response: with a different set of tools, our monitoring system for health care cost growth could be made to work, despite the weirdness of the moment (I won’t bore you but one place to start is to target levels rather than rates of change).
I could go on, but unfortunately there are too many examples. Some of the pillars of state policy were built for a very different economic world, one where inflation was mild enough to be treated as background noise and job creation was a driving challenge. But these pillars are starting to crack; we’d be well served to fix some and replace others.
Evan Horowitz is the executive director of the Center for State Policy Analysis at Tufts University.