Inflation having big impact on Mass. public policy
Budget proposals are bigger, but they actually spend less
USUALLY, IF YOUR boss offers you a 5 percent raise, that’s good news. Right now, it’s a pay cut, thanks to inflation.
That may sound strange, or depressing, but it’s our economic reality. Supply chain problems, war in Ukraine, and generous federal stimulus have driven inflation to triple or quadruple the expected rate. And we need to think harder about what this means — particularly for state policy.
Take the state budget. In recent months, the House of Representatives, the Senate Ways and Means Committee, and the governor have all released budget proposals for the coming year, complete with lots of optimistic talk about big investments and new initiatives.
But once you account for spiking inflation, these budget proposals actually look pretty meager. In particular:
- They all spend less money and make fewer real investments than our last pre-Covid budget in FY 2020.
- In all three, aid to cities and towns is lower than any year since 2017
- Even K-12 spending — which should be growing to meet funding targets in the Student Opportunity Act — is relatively flat
Inflation isn’t some abstract or wonkish concern. It’s a reality-check, a way to reflect the very real fact that hiring has gotten more expensive, rents have gotten more expensive, food has gotten more expensive — and so have a good many other things.
Alternatively, you can think of inflation as eroding the value of money. Every dollar in the state budget (and every dollar in your pocket) is now worth less because we can buy fewer goods and services with it.
It doesn’t really matter which framing you prefer – inflation as an increase in prices or inflation as a decline in the value of money – the basic takeaway is the same, and it holds for individuals, families, Massachusetts, and states all across the country. We’re going to have to spend a lot more money just to keep doing the same things we were doing last year or the year before.
To appreciate how this plays out in practice, let’s look at early education and child care, where there’s a broad consensus that investments would pay big dividends for parents, kids, and the state economy.
Because of inflation, the raw size of needed investments has risen dramatically in the past two to three years, particularly in terms of staff salaries.
Once-aspirational proposals for pay increases among early education and child care workers have been outpaced by rising wages at restaurants and warehouses. Merely keeping up with these increasingly-attractive alternatives, and preventing today’s early education workers from leaving, will require big funding increases.
Broadly speaking, this doesn’t seem to be happening. Average weekly wages for early education and child care workers in Massachusetts barely budged in 2021. And across the country, the gap between private sector pay and wages in state and local government is wider than it’s ever been.
Spend the same amount, get less stuff. That’s what we mean by inflation.
Meanwhile, both the governor and the House in their budgets would reduce real spending on early education and child care compared to the last few years. Only the Senate Ways and Means budget includes an increase large enough to represent a real investment on top of inflation.
Now, there’s still plenty of good economic news out there. Jobs are plentiful, low-wage workers are getting a large share of the gains, and homeowners are sitting on a new cache of property-related wealth.
Plus, state finances are remarkably healthy–even after adjusting for inflation. If interested, the state has the money it needs to outpace inflation and pass a budget for next year that would genuinely increase spending in high-priority areas.
But it’s hard to convince people to spend more money on key investments when they think they’re already doing that.We’re woefully out of practice when it comes to thinking about the real-world effects of high inflation. And how could it be otherwise? The last time we faced this issue baby boomers were in their 30s and the typical Boston home cost $80,000.
Evan Horowitz is the executive director of the Center for State Policy Analysis at Tufts University.