Fox: Recession May Bottom Out This Year, But Pain Likely to Linger

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Bill FoxAs Tennessee officials struggle with the severe economic downturn affecting the nation and many parts of the world, many are wondering if the worst is over.

For some perspective, Tennessee Today sat down with Bill Fox, a professor of economics and the director of the UT Center for Business and Economic Research (CBER). Fox is an internationally known expert on taxation, finance and economic development.

Dr. Fox, how bad is the economic situation in Tennessee as compared to other low points in our history?

This is the worst fiscal crisis in the modern history of Tennessee.

It’s the first time where we’ve had an actual decline in tax collections. We’ve had numerous recessions, but never one that was severe enough to cause us to have a decline in the amount of dollars collected. At this point we’re at -7 percent, so it’s not even just a little bit down. So that’s the best evidence of how serious this is. The unemployment rate has already exceeded what we experienced in the last recession, and we’re still early in this recession. So from an economic perspective, we’re in a very serious environment.

How does this affect UT Knoxville and the UT system?

The university is sensitive to tax revenue collections in Tennessee, but we’re also sensitive to national conditions that impact universities as compared with other state agencies. That’s because universities are seen as being able to replace some of that lost funding with tuition increases, while other agencies simply cannot replace revenue as we can. So higher education experiences relatively larger cuts.

State leaders have to look at what’s important, and what’s essential, even in a downturn. Higher education is highly valued in Tennessee, but when you absolutely don’t have enough money and have to make cuts, then in choosing among K-12, health care for low-income residents, prisons and higher ed… then among the tough choices, higher education tends not to fare well in the short term.

But this reevaluation isn’t just happening in Tennessee, is it?

Universities around the nation are going through the same thing. There have already been furloughs, pay cuts and layoffs at universities.

And there are political limits to raising tuition in Tennessee. I think there’s a recognition among politicians that it’s a difficult economic environment for everyone, and they’re expecting universities to share in some of the cutbacks and not simply pass it forward to students by increasing tuition to make up for lost revenues from the state.

So what’s the outlook for this year?

The CBER released its annual Economic Report to the Governor, and the forecast is for Tennessee’s economy to continue deteriorating throughout 2009. I think it’s important to keep in mind that tax revenues don’t immediately respond as soon as the economy bottoms out, particularly keeping in mind the tax structure we have in Tennessee. Historically, Tennessee has made up for these times of slow revenue growth with sales tax rate increases. I don’t believe that’s going to happen here, so revenue recovery will be very slow, and as a result, 2010 and 2011 will also be rough for Tennessee.

Fox has held appointments as a visiting scholar for the Federal Reserve Bank of Kansas City, as a visiting professor at the University of Hawaii, and as Distinguished Fulbright Chair for American Studies at the University of Frankfurt, Germany. Fox also has served as a consultant on finance, taxation and economic development in a number of states and developing countries. He is a member of the American Economics Association and a past president of the National Tax Association.

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