Economic Volatility: What I Told the Governor

Governor Kulongoski met with his Council of Economic Advisers last week. Here's what I told him:

1. The economy is becoming more volatile. The period 1983-2007 was the calmest ever in American history, in terms of macroeconomic fluctuations. This was also the period of time when today's leaders in business, government and non-profits learned how to be leaders. (I'll elaborate on my forecast of greater volatility in the coming decade in a future post.)

2. State revenues are inherently hard to forecast. Fluctuations are driven by corporate profits, proprietors' profits, capital gains, and sales people's commissions, much more than by total employment of salaried employees.

3. I advise business clients to tighten up the time lag between changes in underlying sales an the business reaction to increasing volatility. Companies should pay more attention to their sales pipelines, watch inventories carefully, etc. However, the Oregon legislature, like many other states, will begin debating in January 2011  a budget for the July 2011 – June 2013 period. That's a very long way into an uncertain future. Perhaps the state should budget based on the pessimistic forecast from the state economist, with some "if-funds-available" add-ons to be implemented over the course of the biennium.

4. In a more cyclical environment, businesses should run with more margin for error, meaning less leverage and more working capital. The state policy equivalent is to re-build up its rainy day fund as fast a possible.