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Adviser to Virginia governor predicts ‘train wreck,’ resigns

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'TRAIN WRECK': That's where Virginia is headed with its new tax-raising transportation bill, says the economist who resigned from Gov. Bob McDonnell's Joint Advisory Board of Economists.

‘TRAIN WRECK’: That’s where Virginia is headed with its new tax-raising transportation bill, says the economist who resigned from Gov. Bob McDonnell’s Joint Advisory Board of Economists.

ALEXANDRIA— Richard Rahn has a pithy summary of the last-minute legislation roaring down the tracks out of the Virginia General Assembly and into the governor’s office: “train wreck.”

Rahn, a globally recognized economist, resigned this week from  Gov. Bob McDonnell’s Joint Advisory Board of Economists — a protest, he said, of the General Assembly’s proposal to raise taxes for a controversial $6 billion road and rail funding plan.

What Virginia really needs is to reform expensive entitlements, pensions and tax policy, Rahn told Watchdog.org in an exclusive interview on Thursday.

Instead, the state is getting “a predictable train wreck.”

“Virginia is relatively in a very strong position,” Rahn said. “You know, we have a surplus, and I’ve always liked the way Virginia is managed. I don’t’ want to overstate how bad it’s going to be in Virginia, but it’s not headed in the right direction.”

RESIGNED: Richard Rahn, who has worked under multiple presidential administrations as an economist, has resigned from a state board over the state's new transportation plan.

RESIGNED: Richard Rahn, who has worked under multiple presidential administrations as an economist, has resigned from a state board over the state’s new transportation plan.

Rahn, one of 15 governor-appointed economists on the board, created a buzz this week with his widely circulated letter of resignation.

“The new taxes and spending will grow the size of the Virginia government relative to (the) state’s GDP — a large and unnecessary step backwards,” Rahn wrote in his March 4 letter to the governor.

Rahn, chairman of the Institute for Global Economic Growth, a nonprofit institute that researches pro-growth policies around the world, should know.

Rahn doesn’t oppose all public spending. His economic theory, the Rahn Curve, suggests there’s a level of government spending that maximizes economic growth; beyond that, spending limits growth. Factors vary, but generally for countries, under 12 percent government spending-to-GDP is too little, and 25 percent government spending-to-GDP is too much, he said.

The United States’ spending-to-GDP relationship is nearing 25 percent.

Of course, Rahn isn’t alone in predicting harm to taxpayers and the Old Dominion’s economy as a result of the plan. Dozens of small-government policy and taxpayer groups warned Virginia’s leadership, too.

Even Democrats criticized how the plan will play out.

To me, the final bill represents bad economics and bad transportation policy,” said Sen. Adam Ebbin, D-Alexandria.

This is a lose-lose situation for taxpayers and Virginia’s economy,” said Lee Schalk, state government affairs manager for the National Taxpayers Union, as the bill was being hammered out in the General Assembly. “Whether it comes alongside damaging federal online sales tax legislation, or includes an even higher gas tax rate, the plan unfolding in Richmond would further damage a struggling economy and burden taxpayers.”

Rahn, whose extensive resume as an economist includes serving as vice president and chief economist of the U.S. Chamber of Commerce, and economic advisor to President G.H.W. Bush, had suggestions for fixing the transportation plan.

But he wasn’t asked.

McDonnell spokesman Jeff Caldwell said there’s nothing odd about that.

“The advisory board is not used to review policy decisions and has never been consulted for policy decisions,” Caldwell said in an email. “The governor thanks Richard Rahn for his service on the Advisory Council.”

Under Virginia Code, the board’s sole responsibility is reviewing a one-year economic forecast. The board meets formally just once a year in fall.

So waiting until fall to hash out the economic policies passed in spring makes the board irrelevant, said Rahn, who said he knew before taking the position that sitting on a board is mostly “window dressing.”

“Legally that’s true and there’s no obligation for the governor to talk to me or anybody else, but it’s also rather silly to have people with the expertise that many of us have and then after the house is burning to say,‘Do you think our estimate is okay?’” Rahn said.

Until February, Rahn said he had no problem with the board or its relationship with the administration. Rahn, who said his dispute is purely policy rather than personal, emphasized that he has nothing but respect for the Department of Taxation workers and the chief economist of revenue forecasting, John Layman.

But the transportation legislation points to a more serious, overall problem in Virginia leadership — a lack of innovation, Rahn said. The next governor needs to show more “imagination” than McDonnell has, Rahn said.

“Let’s rethink the entire state government here — how we do it, how we tax, how we spend the money, what things we’re doing, what things could we do a whole lot better with less money,” Rahn said. “And I think you’d be surprised at all the things you could do.”

Rahn is at work writing “Starting Over,” a book on how to rebuild a country after economic collapse, and he has plenty of suggestions for Virginia and the U.S. One basic question to start with, he said, is this: Should this service be done by government in the first place, or can the private sector do it better?

Government, Rahn said, shouldn’t be a safety net for everything — only for the most “catastrophic” events, like natural disasters and extreme scenarios.

“I would like to see a much greater use of the insurance principle,” Rahn said. “ And by that I mean, government, for a large part is there like a big insurance company. We ensure ourselves for basic public safety.”

Here are some of his reform ideas:

  • Privatize, or further involve the private sector in, such areas as transportation (public-private partnerships) and education (vouchers, school choice)
  • Copy states that have nixed the corporate and state income taxes, and rely more on user-based taxes, like the sales tax
  • Decrease entitlement spending (on Medicaid and Medicare), which he called the most immediate threat to the state’s economy
  • Consider allowing for a two-term governor, to prevent short-sighted moves and allow governors to feel the consequences of their policies (like the transportation bill)
  • Find a way to fully fund or shrink publicly funded pensions

Rahn in his resignation letter offered his services to help restructure the state’s archaic and complicated tax system, which is putting the commonwealth at a competitive disadvantage with states that have nixed both, he said.

“I am prepared to volunteer time to assist in a serious effort to reform the Virginia tax structure — which is badly needed,” Rahn wrote.

Caldwell refused to say whether McDonnell will take Rahn up on his offer.

But Virginia can still turn this train around, Rahn said.

“I’m hoping to the extent that there’s a little bit of publicity about what I’ve said and some of what the others are saying, that whoever’s running this next year, that maybe someone will pick up some of the ideas,” Rahn said. “Because we have such a huge amount of expertise here in the state.”

Email Kathryn at [email protected]