Wednesday, January 31, 2007

For Better Planning, "Stop Pretending"

Paul Anton, our Chief Economist at Wilder Research, began an editorial in today's Pioneer Press as follows:

"Imagine projecting your family financial situation five years from now in
the following way. You assume that your income will increase every year in
line with expected inflation; but you also assume that the prices of
everything you buy - clothing, gasoline, food and health insurance - will
remain unchanged. Undoubtedly, you would predict a surplus of money in your
bank account. Unfortunately, you would be wrong.

The State of Minnesota is making that same unfortunate error."

He proceeded to describe four dangerous implications if the state uses inflation when projecting revenues but not when projecting expenses. Simply speaking, the state can't make meaningful and useful financial projections.

You have probably said to yourself already: Does it require an economist to determine that the state can't reasonably assume that inflation will only affect its income and not its expenses? Isn't that perfectly obvious? However, sometimes what seems obvious might not actually be so obvious; or it might be obscured by other considerations at a time when legislators attempt to make a decision or pass a law.

Whatever the case, the legislators made a big mistake when they adopted this formula for financial forecasting; now they need to correct it. More accurate forecasts will enable us to better analyze and plan programs to meet the needs of the state's population.

Take a look at Paul Anton's editorial. And, as always, if you have any thoughts about how we can do our work to improve public policies and improve the quality of life in this region, please let us know.

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