The state of the State By DIANE ROSS

Thompson squares off with Chamber of Commerce

AS USUAL, Gov. James R. Thompson was the keynote speaker when the Illinois State Chamber of Commerce held its annual Spring Legislative Conference March 16 at the Springfield Hilton. The governor had been stumping the state for six weeks, drumming up support for his proposal to raise the state income tax, a proposal the chamber was actively campaigning against. Nevertheless, the delegates to the conference assumed Thompson would try to sell them on the idea anyway. They were amazed when the governor turned the tables on them, playing the prosecutor and arguing against their case, not for his. Thompson was mad and he didn't mince any words when he told them why.

Thompson told the delegates at the conference that it was business' fault that he had to ask for a raise in the state income tax. It was business' demands for more spending — the chamber's demands — he said, that necessitated the demands for more revenue. He read to the delegates from their own legislative agenda, punctuating each item with a sarcastic: "That sounds like spending to me."

Thompson told the delegates, "You can't have it both ways." On one hand, the chamber blames government for spending too liberally for unemployment insurance and welfare in the past. On the other hand, it demands government spend more liberally for transportation and education in the future. Compounding this inconsistency, Thompson told the delegates, is their refusal to support his proposal to raise the state income tax.

At the conference the chamber had released the latest study it had commissioned to analyze the growth of the Illinois economy, and the author of that study, Dr. A. James Heins, professor of economics at the University of Illinois-Urbana, had detailed his findings for the delegates. Although it was not news that the Illinois economy had grown more slowly than that of other states, Heins says his findings show that the Illinois economy has grown more slowly than it should have. And that, Heins says, is state government's fault.

Reports blaming government for lack of economic growth are not uncommon, but lengthy or detailed responses to them are rarely made. It was the timing of the Heins report, which the chamber said was a comprehensive analysis of the Illinois economy per se, that so infuriated Thompson that he ordered Peter B. Fox, director of the Illinois Department of Commerce and Community Affairs, to take the time to refute it.

Thompson had released the Fox critique to reporters at the conference. During his speech, he waved a copy of it in front of the delegates and described it as a "first-cut effort, sketchy and incomplete." The implication, however, was obvious: First-cut or no, the Fox critique was more than Heins and the chamber deserved. Thompson took one final shot at Heins, joking about the professor's commission from the chamber, "You'd better cash that check fast, Heins." Heins, sitting at the head table, laughed along with the rest of the delegates.

The Heins report is designed to show the rate of growth of the state's economy — measured as aggregate personal income — and to explain why. The report asks — and tries to answer -what appears to be an underlying question: How much can state government, ) per se, do to make the state's economy grow faster? Heins' 1983 report, The Illinois Economy: An Analysis of Economic Growth Since 1947, updates his 1976 report, Illinois Economic Growth Study. Both were commissioned by the chamber. The later report covers economic growth from 1947 through 1981 and compares Illinois with the 47 contiguous states; the earlier report covered growth from 1947 through 1974 and compared Illinois to some 27 other states.

Besides publishing "Analysis and Findings" (Volume I of the Heins report) the chamber added its agenda for the 1983 spring legislative session to the volume. The agenda is based on the priorities which Heins says state government (the Thompson administration) should set to speed the recovery of the state's economy.

Heins' No. 1 priority, solving the state's unemployment insurance (UI) problem, was all but met as the chamber's conference opened. (See "Legislative Action," p. 26.)

Heins' other priorities, also based on his findings, are: No. 2, give spending for transportation and education a higher priority than spending for welfare; No. 3, avoid raising taxes on business; and No. 4, allow business and labor to figure out how Illinois can become more competitive in today's high-tech market.

What did Heins find? He says his findings show that the Illinois economy (aggregate personal income) should have grown at the rate of 3.19 percent since 1967 — but that it actually grew at the rate of 2.62 percent between 1967 and 1974 and that the rate of actual growth fell to 1.91 percent between 1974 and 1981. In dollars, Heins says, that means that since 1967 Illinois has lost a total of $14.5 billion in personal income that it should not have. That finding, Heins says, is based on a study of the relationship between the rate of economic growth and "uncontrollable" factors, those which do not appear to fall under state government control. Heins uses four "uncontrollables":

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climate, population density, discovery or development of natural resources, and the demand for goods and services. For any state, Heins finds a correlation between growth and climate, and to a lesser degree between growth and population density. But he says he finds no ties between growth and the other two "uncontrollables." Heins apparently tried to isolate those uncontrollable factors which may vary from state to state but would not affect all equally.

Heins uses 14 controllable factors, those he sees as under government's control. He shows correlations between economic growth and four of "these controllables," but finds not ties between growth and six other "controllables."

Heins says his findings show that the economies of Illinois and other states appear to grow more slowly than they should when they spend liberally for unemployment insurance, spend liberally for welfare, fail to substantially decrease the business tax burden, and have strong labor unions. But he said his findings do not show any correlation between slower growth and the following six factors: per capita income; spending for education; spending for transportation; payment for services by local government as opposed to payment for services by state government; wages of those with manufacturing jobs, either per capita or as a percentage of personal income; and worker's compensation taxes on business.

Heins' list of "controllables" also includes state and local general revenue; the share of state and local revenue derived from state sources; the mix of income, sales and property taxes; and federal aid.

In his study, Heins says he used "multivariate analysis," describing his use of that economic methodology as isolating a single factor and studying its relationship to the rate of economic growth while holding all other factors constant. He explains his procedure in Detailed Statistical Analysis (Volume II of the 1983 report), which was co-authored by John Graham, assistant professor of economics at the University of Illinois. Volume II was not published until April, but copies of the manuscript became available shortly after the conference.

In his critique, Fox seems to say that Heins fails to answer the underlying question of how much state government, per se, can do to speed the growth of the state's economy. Fox had this to say in general: "It is clear that the emphasis placed upon [spending for unemployment and welfare, the business tax burden and unionization] in the Heins/Chamber. . . study are highly misleading."

Fox calls Heins' finding that the Illinois economy should have grown at the rate of 3.19 percent since 1967 "contrived," arguing that Heins erred when he calculated the rate chiefly on the basis of climate and population density.

Fox does agree that factors are both controllable and uncontrollable and that the "uncontrollables" far out-weight the "controllables."

But Fox says Heins has distorted the imbalance, grossly underestimating the "uncontrollables." Fox argues that Heins totally ignores the most important of the "uncontrollables": 1) the international recession, 2) record high interest rates, 3) record high federal deficits, 4) the national trend away from high-wage manufacturing jobs and toward low-wage service jobs, 5) the decreasing volume of trade in the sales of agricultural products and sales of construction and agricultural machinery, and 6) the international energy crisis of the 1970s. Fox goes on to argue that of the four "uncontrollables" Heins does mention, he relies on two relatively minor ones, climate and population density, and fails to account for the two relatively major ones, discovery or development of natural resources and demand for goods and services.

Fox says: "The Heins/Chamber. . . analysis doesn't adequately distinguish a crucial separation between the direct control state policymakers have over the Illinois business climate and the impact of far-reaching worldwide economic forces, forces that leave Illinois policymakers with little control over the state economy. This distinction must be made when carefully scrutinizing an economy as admittedly diverse as Illinois'." By ignoring the most important "uncontrollables," Fox says that Heins has apparently contradicted himself: "While the study does much to criticize Illinois' policymakers' handling of the state economy, Heins recently co-authored a report published by the Bureau of Economic Research at the University of Illinois that apparently supports the argument that forces beyond the control of those policymakers have hurt the economy." Fox also points out that Heins concludes, in his report (Volume I) for the chamber, that Illinois remains a "superb" state in which to do business.

Fox says Heins' other finding — that states appear to grow more slowly when they spend liberally for unemployment and welfare, heavily tax business and are unionized — is also contrived. He argues that Heins relies too heavily on some controllables and fails to account for others. Fox points out that in states like Minnesota, Wisconsin and Michigan, which have spent just as liberally as Illinois for unemployment and welfare, and tax just as heavily on business, the economies have grown faster than Illinois'. Far more damning, Fox says, is the case of states like California and New York, which spend more conservatively than Illinois and yet have grown slower than Illinois.

It is impossible, in this space, to completely analyze the dispute over the premises, conclusions and methodology employed in either the Heins report or the Fox critique. Indeed, Thompson does not ask that Fox' critique be taken for granted; he challenges corporate economists and other academic economists to make up their own minds. Heins also defers to a review by his peers.

The not-so-subtle message to Thompson in the Heins/chamber report seems clear: Had state government spent more conservatively on unemployment and welfare, and taxed less heavily on business, the state economy would have grown faster. If the state's personal income had grown faster, no increase in the state's income tax rate would be necessary now.

Thompson, in turn, gave his message to the chamber: If the chamber expects state government to spend more money on transportation, education and other chamber priorities, it ought to support the governor's tax increase.□

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