Panel of experts discusses Va.‘s economic outlook

The good news is that Virginia's unemployment rate, at 6.5 percent, is lower than the national rate of 9.8 percent.

The bad news is that thousands of Virginians remain out of work -- so many that the state will need to borrow as much as $1.27 billion from the federal government in the next three years to make its unemployment compensation payments.

The new governor who confronts this landscape in three months also must make further cuts in a state budget weakened by plunging revenue, a task that will be complicated by the looming loss of federal stimulus funds in 2011.

The Richmond Times-Dispatch recently brought together a panel of experts from business, academia and the state legislature to discuss how a governor can help jump-start the economy and put people back to work in trying times. Here are excerpts:

The Virginia difference

(The national unemployment rate is 9.8 percent. Virginia's rate in August was 6.5 percent.)

MASSIE: I agree. . . . But I do think Virginia has a very attractive set of public policies in place that make Virginia a great place to do business. . . . If you have low taxes, low regulation, right to work [under Virginia law, union membership may not be a condition for employment], your economic performance has been substantially better than those states that have exactly the opposite.

BRASTOW: [In] North Carolina, I think their unemployment rate currently is over 11 percent. . . . In the state of North Carolina, over 20 percent of [gross domestic product] is generated by manufacturing. In the state of Virginia, less than 10 percent. So . . . a lot of it is structural, both in terms of government employment, but also in terms of private-sector employment in areas that are faring better in this recession.

ZAJUR: [Having] . . . the suburbs of Washington, D.C., has an enormous effect. And then, again, with the public policy, being the top [business-friendly] state in the country, [is] favorable . . . for employers.

MORRISSEY: There's a perception -- and I think it's supported by empirical evidence -- that Virginia is a friendly state to do business. [In September, Forbes.com named Virginia the best state for business for the fourth year in a row.] We have been able, in very difficult times, to maintain our triple-A bond rating. And [in January] U.S. News & World Report said it was one of the five best states to start a business. . . . If you come to Virginia . . . there's a healthy, educated work force. . . . And then, of course, what some of the other folks said -- proximity to Washington, D.C., and the huge defense makeup makes it sort of recession-proof, in a way.

What can a governor do to prod the economy?

MASSIE: State-specific public policy really matters. And I think Bob McDonnell [the Republican nominee for governor] gets that. . . . So I think having a governor like Bob, who's got an MBA, graduated from Notre Dame with an undergraduate degree in business . . . that's who I want to be a chief executive. . . . The budget is . . . going to be the big issue coming into this 2010 [legislative] session. . . . Governor [Timothy M.] Kaine actually seems to agree with us [Republicans] on this -- that Virginia's budget should be managed via expense reductions, and without a tax increase.

DOLAN: I think it's probably politically important, probably imperative, to act as though there's something that state government can constructively do in this down cycle. I think what government is really better doing is looking longer term in addressing the [business] environment. And I agree with you -- Virginia is a very business-friendly environment. That's the target I would keep my eye on.

WHITLOCK: All businesses, we had to first lower . . . expenses, and then, second, figure out ways to increase . . . revenue. . . . I think it's important to look at, where can we cut? Not making massive reductions, but making smart reductions. You don't cut something just because it would drop to the bottom line really quickly. . . . You cut it because you can live without it. . . . And then as far as increasing revenue . . . we have stimulus dollars. We have to spend [them]. . . . When you develop infrastructure, you develop jobs.

MORRISSEY: Virginia's executive branch seems to come from a good stock. . . . We've got . . . chief executives that have been traditionally fiscally responsible. . . . I think if you look at the current governor . . . several business initiatives were successful. . . . The one-stop portal, where businesses can go to this one location to get around numerous . . . obstacles in starting up a business -- has been very successful. . . . And in Virginia, in the last four years, SWAM [Small, Womenor Minority-owned Business] has grown from 12 percent to 40 percent, with women-owned businesses being a huge component of that. And that was done through the governor's initiative.

ZAJUR: In a downturned economy, it's a great time to evaluate . . . what you have to work with, and really work to develop programs and initiatives, educational programs [so] that we have a very viable work force for the future. Because the economy will come back.

BRASTOW: From Farmville, it appears to me, as a state employee, that in at least the first biennium [July 1, 2010, to June 30, 2012] it's unlikely that the governor's going to be able to spend much. . . . There are things that correlate with growth long-term -- certainly efficiency, innovation, education. And I guess I would hate to see the politically interesting program of today crowd out funding of some things that we know work.

WHITLOCK: The government needs to look at how they're funding the schools . . . not only pushing for development of the higher-ed track, which I think is a very valuable, necessary track -- but also, for the vocational technologies.

MASSIE: The silver lining in this is, the state government ought to do . . . what the citizens of Virginia are doing, what the businesses of Virginia are [doing]. We ought to balance our budget within our means and not increase the taxes on people. . . . What state employees are telling me is, they've been able to cut 8 percent so far out of their budgets, without any major diminution in state services. . . . Can we go another 8 percent? I don't know. . . . We are getting at some of the excesses and waste in state government, and some of the unnecessary programs that we could never get at in a rising economy, rising-revenue environment.

MORRISSEY: I'm not sure that the fat is still there. One of Jimmie's Republican colleagues in the Senate recently said that . . . we've cut all the fat. We're down to the muscle. And we've cut almost $7 billion out of our biennium budget. So . . . I don't know -- with the exception, perhaps, of the Department of Corrections -- where we're going to get . . . billions more in savings. And the reason I say "billions" is because we're not going to have that luxury of $1.2 billion in stimulus dollars that we got to balance our last budget.

Has the stimulus helped Virginia?

DOLAN: One of the typical criticisms of any kind of fiscal stimulus is that it is very difficult to get started. . . . You probably saw in the paper, where Virginia ranks last in terms of spending their stimulus money [for transportation]. Yes, [Kaine] said it's because we want to be strategic. But often, in terms of fiscal stimulus, by the time it hits the road, the economy has already moved on.

MORRISSEY: I think the stimulus definitely helped our economy . . . [Virginia was] the first state in the country to balance its budget with . . . federal stimulus dollars. The federal stimulus money has gone . . . to different things, from shovel-ready transportation projects, to vaccination for swine flu, to payments to military veterans, to monies for community health clinics. The benefit of the federal stimulus dollars is when you have that money that goes into the economy as quickly as possible. And I think insofar as Virginia lagged behind [in] some of those supposedly shovel-ready projects, that that hurt us. Because the whole idea of the federal stimulus dollars is to get that money in there and working as quickly as possible.

ZAJUR: Anything that supports education and building infrastructure for . . . future innovation in technology for tomorrow, that sets the state up, I think is appropriate.

BRASTOW: I have college-aged children. I have friends in other states with them. Their . . . 401(k)s and their college savings plans have been hit. . . . And they're envious of me, having William and Mary, U.Va. and [Virginia] Tech, as state-funded opportunities. Along with [the University of Richmond] and a host of [other] really good private schools. . . . I'm afraid -- again, that this could get lost in budget problems and in political incentives. It's not sexy to say that we need to spend money on basic education.

MASSIE: I would have voted against the stimulus plan had I been in Congress. Having said that, once they voted for it and they said, "Do you want to take the money or not?" as a state legislator in Virginia, I'm going to take the money. Because as Joe [Morrissey] said, it makes it easier to balance our budget. Now . . . you've got to be careful here not to play the role of the enabler. Because . . . the stimulus money is going to run out. . . . And when it runs out, we're going to have another 7 or 8 percent hole to fill . . . assuming the economy doesn't bounce back.

Do tax credits for job creation work?

(Both candidates for governor, McDonnell and Democrat R. Creigh Deeds, are promising tax credits for job creation.)

DOLAN: We have a very recent example of this, Cash for Clunkers, OK? . . . There was a huge increase in automotive sales in July and August. And it turned out to be, we think, borrowing from Peter to pay Paul. What happened to automobile demand in the next month, and the next month? So have you really just shifted demand by these kinds of incentives? You might say the same thing about these employment tax credits. . . . You have to be very careful whether you're temporarily creating a job that would have been created anyway down the road. So in that sense, is it money well-spent? I don't know the empirical literature. But conceptually, there is an issue here.

WHITLOCK: I think it's more important to spend the money to make it easier for business to do business.

ZAJUR: I think incentives can be very powerful . . . for businesses wanting to invest -- incentives [to encourage] companies to locate here, to hire more employees. We're competing with states all around the country. We're competing with foreign countries. Incentives can be a very powerful way to do that.

A transportation fix

MORRISSEY: I am not a proponent of increased taxes -- with one exception. And that is . . . I am a proponent of a gasoline tax. . . . It's a user fee that makes people pay according to how much they drive. . . . Every penny gets you about $50 million. A nickel would get you about $250 million annually. . . . If we had a nickel a gallon, it would cost everybody in this room, who uses about 750 gallons a year, $37. . . . So that's my suggestion. And I would do it tomorrow, if I could issue an executive order.

ZAJUR: I think we have a unique opportunity to bring [high-speed rail] here to the commonwealth, for the greater Richmond area. It would bring over, I believe, 150,000 jobs.

MASSIE: I do believe there is a consensus . . . in the legislature [and] . . . between our two gubernatorial candidates, that . . . we need to have a world-class transportation system. The difference of opinion . . . comes down to, how are we going to pay for it. . . . And you heard Joe [Morrissey] elaborate what the Democrats' position is . . . "Let's raise taxes and pay for it." . . . Bob McDonnell is dead-on right, that we have a transportation issue. But raising taxes on the people of Virginia in the middle of the worst recession since the Great Depression, it's not time to do that. And there's a tremendous contrast there between him and Creigh Deeds. [Deeds has said he is willing to raise taxes for transportation as long as the bill arises from a bipartisan consensus.]

Innovation

DOLAN: I love to tell my students this story. And that is that for not a whole lot of money, with your Microsoft Office and your PowerPoint and a not-very-expensive printer, you can be a one-person show. And you can present very glitzy things. So, the startup costs, if you're creative, are really extraordinarily low. . . . And I just think . . . that [innovation combined with technological advances] might be the silver lining to all of our employment losses.

BRASTOW: Virginia's a pretty diverse state. And I don't mean black-white. I mean culturally. More so than I realized. I'm not a Virginia native. And maybe I mean diversity with a small-D -- different backgrounds, different cultures, different ways of thinking, different ways of approaching problems. And it seems to me that in an environment where innovation is important, that's a pretty good thing. That homogeneity of backgrounds and interests and experiences probably doesn't lead to . . . this melding of ideas and ways of thinking that might come up with lots of new things.

ZAJUR: Virginia is very diverse. But [it's] true more in Northern Virginia. For the rest of Virginia, I think, it's probably the last 15 years when we started seeing more diversity. But I think it's [time] to play on that diversity and to showcase that. . . . If we're better-prepared and diverse in language and cultures, it opens a lot of doors for business opportunities.

The outlook

MASSIE: Long term, I am exceptionally optimistic about the United States economy and the Virginia economy because we live in a free political system and a free economic system. And those systems allow for self-correction. . . . In the short term -- and I define that as the next two to five years -- we have got some very large hurdles to get over. . . . There's a tremendous amount of leveraged debt still owed by businesses and consumers. And it's going to take a while to work that off. . . . I'll bet these small-business people tell you it's very hard to get a new loan from our banks.

BRASTOW: I would say we're at the very beginning of a recovery. It's going to be a bumpy one. . . . Large financial institutions, both commercial and investment banks, have done a lot to shore up the problems that they got into early. But the small banks are going to hurt for a while. Their balance sheets are overloaded with commercial real estate lending, a lot of it construction and land development loans for residential properties. Gosh, [in] Chesterfield County . . . I drive in on Hull Street, and there are some big ones out there that are in receivership. It's going to take awhile for that to work through. And there's going to be some additional pain there. So, green shoots, maybe, but I suspect [recovery will be] slow. And the confidence will kind of ebb and flow as it gets bumpier, I suspect.

WHITLOCK: I feel like this [recession] has been the great forest fire. . . . You know, it's needed, to clean out the dead wood and clean out the underbrush and . . . make it possible for new ideas, new businesses, to come up, for existing businesses that never could reach the light of day to really thrive. . . . I hate that that means that some businesses won't survive. But . . . that's life. . . . A roller coaster isn't one downhill ride. . . . We've gone over the big hill, but there's still a few on the way.