Search Google Appliance


News

Our state, our money
Author: Interview by Dan McMillan
Posted: May 19, 2008

collage of Oregon industry imagesOregon map imageTHERE'S A LOT riding on the forecasting abilities of Oregon state economist Tom Potiowsky.

In May of odd years, Potiowsky (pictured below) and his staff in the Office of Economic Analysis compile a tax revenue forecast that state policymakers and department heads use to plan the state's biennial budget. If his predictions are too high, the legislature might have to meet in special session to cut programs. If they're too low, the state is obliged to give money back to Oregon residents in the form of a kicker tax rebate check.

Potiowsky, who is also a Portland State economics professor, must like the work--he's in his second appointment. Potiowsky first held the post from 1999 to 2005 and was reappointed by Gov. Ted Kulongoski in January of this year. Currently on leave from Portland State, he returns for the occasional lecture and teaches classes through the Oregon Executive MBA, a joint program of PSU, University of Oregon, and Oregon State University.

Affable and approachable, Potiowsky has an uncanny ability to explain complex economic concepts. He recently took time away from studying the state's economic indicators to talk with Portland State Magazine about recessions, the controversial kicker process, and other matters economic.

Q: What is the economic prognosis for Oregon?

A: If the country goes into a deep recession, Oregon will be in recession too, but not as deep. In absolute terms, Oregon is already experiencing a slowdown in economic activity, but we should weather this downturn better than we did in 2001-2003.

Q: Why do you think Oregon will do better this time around?

A: In the 2001 recession, Oregon entered early because the leading edge of the slowdown was the high-tech sector. That's not the case today. Although all sectors have slowed, we are seeing some resiliency in health services, metals and machinery, and information, which includes software publishers. Exports also are keeping our head above water.

The fact is, no two recessions are alike. While the bursting of the high-tech bubble triggered the 2001 recession, this time around, the bubble is housing. Industries with a strong tie to housing are feeling the pain, including wood products. The wood products industry is really struggling right now, but because Oregon is more diversified than it was in, say the 1970s, we're less affected by the downturn in that sector. Three decades ago, this kind of housing meltdown would have spelled disaster for Oregon. It isn't now.

Tom Potiowsky, Oregon state economistQ: Is it difficult to predict, or call, a recession?

A: It's kind of foggy at the national level. The National Bureau of Economic Research sort of says what their definition is, but they have to meet about it and come to a consensus. There's not some trigger that says, "Ah, now you're in recession."

I look for things such as a drop in personal income levels, or a loss of jobs across all sectors, not just concentrated in one. If the unemployment rate were rising, all those things together would make you want to say you're in recession. But because you're looking backward, you're probably well into a recession by the time you actually demarcate one.

Q: Where is the state losing and gaining jobs?

A: If we look over the longer term, outside the present business cycle downturn, jobs are increasing in all sectors of Oregon's economy. However, manufacturing has grown slower than either our service or public sectors, which is the case across the nation.

The manufacturing sector in Oregon is seeing growth in machinery and metals--the latter being an interesting bright spot. For example, Oregon companies are helping to satisfy an increased need for titanium for new aircraft and also for zirconium for chemical processing plants, especially in China. In addition, we have seen growth in local manufacturers such as Precision Castparts and railcar maker Greenbrier. We may see an increase in firms devoted to products associated with sustainability, such as SolarWorld and Soliacx.

Within the service sector, health care has been one of the fasting growing areas, adding jobs even during recessionary times. In the public sector, local government has been the fastest growing.

hops productiongrain silo on the Columbia River
[Agriculture, including hops production (left), is a major industry in Oregon, with more than 80 percent of all products grown in Oregon exported, as seen here from a grain silo on the Columbia River.]

Q: The subprime lending mess and the resulting rise in home foreclosures has been blamed for many of the nation's economic woes. How is Oregon's housing market holding up?

A: The housing sector is correcting, and housing permits are dramatically down.

But we're in much better shape than many other parts of the United States. Although our foreclosure rate as of January was in the middle of the state ratings, we had one of the lowest foreclosure rates in the nation throughout 2007. We are seeing a drop in house prices in Oregon, but it is likely that it will not be as dramatic or last as long as in other areas of the country.

Q: Lenders have tightened their standards in response to the problems created by years of doling out easy money, including subprime loans. Will that affect more than housing?

A: Possibly. The danger is that the subprime mess will spread to other financial areas, making it difficult to get car loans, small business loans, and lines of credit. If this happens, then Oregon will feel the downturn just as badly as any other state.

Q: As an economist, do you find yourself looking at something like the subprime meltdown and thinking, "The weakness here has been evident for a while, why are people surprised?"

A: Well, yeah. But often it only becomes obvious in hindsight. When things are booming--like the real estate market of the last decade--people get caught up in the euphoria. They hear stories about people making money by buying homes, fixing them up, and flipping them back on the market, and they want to jump in. Everybody loves the idea of getting rich quick. It's the same thing we saw with the stock market in the 1990s. During the high times, you tend to tune out stories about the money people lost in the stock market, or lost in real estate.

Q: What is your role in the state kicker tax rebate process, and could you explain that process?

A: Every other year at the close of the legislative session, my office forecasts the tax revenues for the next biennium.

If actual revenues over the biennium come in 2 percent or higher than our forecast, the excess is refunded to households and credited to corporations. In 2007, the state paid out more than $1 billion to individual Oregon taxpayers in the form of a kicker.

Q: Wouldn't it make everyone's life easier to forecast high and avoid the kicker?

A: Actually that would make life harder. If my office predicts more tax revenue than the state actually brings in, the government is spending more than what it has available, and you have to have special sessions of the legislature to fix it, such as in 2001.

A forecast that's on the money (sorry for the bad pun) allows the governor and legislators to work out the budget details using the forecast as a planning tool. The situation is better today with some budgetary buffers in the form of the Educational Stability Fund and the Oregon Rainy Day Fund.

Statistically speaking and especially over a two-year period with a tax revenue source as volatile as ours, making a 100 percent accurate prediction is a near impossibility. If you're within 5 percent you're actually doing very well.

Q: What's PSU's economic role as the state's urban research university?

A: Portland State provides a much broader economic impact then just providing jobs and buying local resources. The state needs to have a well-educated workforce and its citizens need to be able to obtain that education, hopefully, at an affordable price, close to home. PSU fills that educational role, as well as being a resource for the community. For example, PSU's College of Urban and Public Affairs has been a guiding force in the region's land-use planning process, and in that way has helped anchor Portland's reputation for sustainability.

There is a good working relationship that goes back and forth between the city and the university. As the profile of Portland goes up so goes up the profile of Portland State.

Q: So, after you're done with the state economist job, are you coming back to PSU to teach again?

A: My ultimate goal is to come back to PSU. I can't say enough about the place. They've been so good to allow me a leave of absence, and so I'll do anything I can for PSU. Whenever they call, I jump.

Dan McMillan is a Portland freelance writer.

[photo collage at top left includes (top to bottom) WTD Industries stud mill in Tillamook, engineering education at Portland State, Klondike Wind Turbine near Wasco, and metal production at Wah Chang in Albany]

collage of Oregon industry imagesOregon map imageTHERE'S A LOT riding on the forecasting abilities of Oregon state economist Tom Potiowsky.

In May of odd years, Potiowsky (pictured below) and his staff in the Office of Economic Analysis compile a tax revenue forecast that state policymakers and department heads use to plan the state's biennial budget. If his predictions are too high, the legislature might have to meet in special session to cut programs. If they're too low, the state is obliged to give money back to Oregon residents in the form of a kicker tax rebate check.

Potiowsky, who is also a Portland State economics professor, must like the work--he's in his second appointment. Potiowsky first held the post from 1999 to 2005 and was reappointed by Gov. Ted Kulongoski in January of this year. Currently on leave from Portland State, he returns for the occasional lecture and teaches classes through the Oregon Executive MBA, a joint program of PSU, University of Oregon, and Oregon State University.

Affable and approachable, Potiowsky has an uncanny ability to explain complex economic concepts. He recently took time away from studying the state's economic indicators to talk with Portland State Magazine about recessions, the controversial kicker process, and other matters economic.

Q: What is the economic prognosis for Oregon?

A: If the country goes into a deep recession, Oregon will be in recession too, but not as deep. In absolute terms, Oregon is already experiencing a slowdown in economic activity, but we should weather this downturn better than we did in 2001-2003.

Q: Why do you think Oregon will do better this time around?

A: In the 2001 recession, Oregon entered early because the leading edge of the slowdown was the high-tech sector. That's not the case today. Although all sectors have slowed, we are seeing some resiliency in health services, metals and machinery, and information, which includes software publishers. Exports also are keeping our head above water.

The fact is, no two recessions are alike. While the bursting of the high-tech bubble triggered the 2001 recession, this time around, the bubble is housing. Industries with a strong tie to housing are feeling the pain, including wood products. The wood products industry is really struggling right now, but because Oregon is more diversified than it was in, say the 1970s, we're less affected by the downturn in that sector. Three decades ago, this kind of housing meltdown would have spelled disaster for Oregon. It isn't now.

Tom Potiowsky, Oregon state economistQ: Is it difficult to predict, or call, a recession?

A: It's kind of foggy at the national level. The National Bureau of Economic Research sort of says what their definition is, but they have to meet about it and come to a consensus. There's not some trigger that says, "Ah, now you're in recession."

I look for things such as a drop in personal income levels, or a loss of jobs across all sectors, not just concentrated in one. If the unemployment rate were rising, all those things together would make you want to say you're in recession. But because you're looking backward, you're probably well into a recession by the time you actually demarcate one.

Q: Where is the state losing and gaining jobs?

A: If we look over the longer term, outside the present business cycle downturn, jobs are increasing in all sectors of Oregon's economy. However, manufacturing has grown slower than either our service or public sectors, which is the case across the nation.

The manufacturing sector in Oregon is seeing growth in machinery and metals--the latter being an interesting bright spot. For example, Oregon companies are helping to satisfy an increased need for titanium for new aircraft and also for zirconium for chemical processing plants, especially in China. In addition, we have seen growth in local manufacturers such as Precision Castparts and railcar maker Greenbrier. We may see an increase in firms devoted to products associated with sustainability, such as SolarWorld and Soliacx.

Within the service sector, health care has been one of the fasting growing areas, adding jobs even during recessionary times. In the public sector, local government has been the fastest growing.

hops productiongrain silo on the Columbia River
[Agriculture, including hops production (left), is a major industry in Oregon, with more than 80 percent of all products grown in Oregon exported, as seen here from a grain silo on the Columbia River.]

Q: The subprime lending mess and the resulting rise in home foreclosures has been blamed for many of the nation's economic woes. How is Oregon's housing market holding up?

A: The housing sector is correcting, and housing permits are dramatically down.

But we're in much better shape than many other parts of the United States. Although our foreclosure rate as of January was in the middle of the state ratings, we had one of the lowest foreclosure rates in the nation throughout 2007. We are seeing a drop in house prices in Oregon, but it is likely that it will not be as dramatic or last as long as in other areas of the country.

Q: Lenders have tightened their standards in response to the problems created by years of doling out easy money, including subprime loans. Will that affect more than housing?

A: Possibly. The danger is that the subprime mess will spread to other financial areas, making it difficult to get car loans, small business loans, and lines of credit. If this happens, then Oregon will feel the downturn just as badly as any other state.

Q: As an economist, do you find yourself looking at something like the subprime meltdown and thinking, "The weakness here has been evident for a while, why are people surprised?"

A: Well, yeah. But often it only becomes obvious in hindsight. When things are booming--like the real estate market of the last decade--people get caught up in the euphoria. They hear stories about people making money by buying homes, fixing them up, and flipping them back on the market, and they want to jump in. Everybody loves the idea of getting rich quick. It's the same thing we saw with the stock market in the 1990s. During the high times, you tend to tune out stories about the money people lost in the stock market, or lost in real estate.

Q: What is your role in the state kicker tax rebate process, and could you explain that process?

A: Every other year at the close of the legislative session, my office forecasts the tax revenues for the next biennium.

If actual revenues over the biennium come in 2 percent or higher than our forecast, the excess is refunded to households and credited to corporations. In 2007, the state paid out more than $1 billion to individual Oregon taxpayers in the form of a kicker.

Q: Wouldn't it make everyone's life easier to forecast high and avoid the kicker?

A: Actually that would make life harder. If my office predicts more tax revenue than the state actually brings in, the government is spending more than what it has available, and you have to have special sessions of the legislature to fix it, such as in 2001.

A forecast that's on the money (sorry for the bad pun) allows the governor and legislators to work out the budget details using the forecast as a planning tool. The situation is better today with some budgetary buffers in the form of the Educational Stability Fund and the Oregon Rainy Day Fund.

Statistically speaking and especially over a two-year period with a tax revenue source as volatile as ours, making a 100 percent accurate prediction is a near impossibility. If you're within 5 percent you're actually doing very well.

Q: What's PSU's economic role as the state's urban research university?

A: Portland State provides a much broader economic impact then just providing jobs and buying local resources. The state needs to have a well-educated workforce and its citizens need to be able to obtain that education, hopefully, at an affordable price, close to home. PSU fills that educational role, as well as being a resource for the community. For example, PSU's College of Urban and Public Affairs has been a guiding force in the region's land-use planning process, and in that way has helped anchor Portland's reputation for sustainability.

There is a good working relationship that goes back and forth between the city and the university. As the profile of Portland goes up so goes up the profile of Portland State.

Q: So, after you're done with the state economist job, are you coming back to PSU to teach again?

A: My ultimate goal is to come back to PSU. I can't say enough about the place. They've been so good to allow me a leave of absence, and so I'll do anything I can for PSU. Whenever they call, I jump.

Dan McMillan is a Portland freelance writer.

[photo collage at top left includes (top to bottom) WTD Industries stud mill in Tillamook, engineering education at Portland State, Klondike Wind Turbine near Wasco, and metal production at Wah Chang in Albany]