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Tough to read the tea leaves of budget

Chief economist: Revenue hard to forecast, but rosy estimates are solid

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State Treasury's chief economist Charles Steindel says he's used to having more data to work with in forecasting from his Fed days.
State Treasury's chief economist Charles Steindel says he's used to having more data to work with in forecasting from his Fed days.

Economic forecasting has been compared to reading tea leaves, and for Charles Steindel, the state government's top forecaster, the leaves are scanter than he is used to.

For 25 years, Steindel worked at the New York Federal Reserve Bank, at one point serving as its top forecaster of the national economy. In that role, he worked with reams of data produced by federal agencies. Now, as the state Treasury's chief economist, he's limited to employment reports and a few other data points.

"Compared with what we have in the state, it's very different — the Census Bureau, the Bureau of Labor Statistics — we don't have things like that here," Steindel said.

Despite these limitations, Steindel's contribution to a bold state revenue forecast has thrust him into the public eye. It's an unfamiliar position for the unassuming Steindel, 60, who compares his demeanor to that of the character played by actor Ben Stein in the movie "Ferris Bueller's Day Off."

Chris Christie singled out Steindel — calling him "an economist who's actually willing to take a position" — when the governor expressed confidence that his much-touted "New Jersey Comeback" will continue over the next year.

Christie said last month that he used aggressive revenue projections "because our economic forecasters, Professor Steindel and the people in his department inside Treasury, have told me that this is what's going to happen."

They'd better be right: Christie included a 7.3 percent revenue increase in his budget proposal for the fiscal year starting July 1. The budget also includes $346.8 million in tax cuts, including the first phase of a 10 percent cut in income taxes, as well as the second phase of a five-year plan for business tax cuts.

Assembly Budget Committee Chairman Vincent Prieto (D-Secaucus) noted that the revenue projections were much higher than those for other states. He has taken a cautious stance toward the budget.

"I never like to argue when somebody gives me more money to spend on the residents," Prieto said, though added, "You see it and you wonder about the basis for it."

But Steindel points to positive data that support the numbers. The state gained 17,400 private-sector jobs in the first two months of the year, and has gained 74,500 over the past two years. That's offset by a state unemployment rate that remains at an elevated 9 percent, Steindel said, but he noted that recent gains have kept pace with the national recovery.

Joseph Seneca, an economist with Rutgers University's Bloustein School of Planning and Public Policy, said Steindel and the state face a challenge in forecasting revenue, since New Jersey depends more than most states on income taxes. In particular, it has a steeply progressive tax rate structure in which capital gains are treated as ordinary income.

"I think both the administration and OLS are putting good-faith efforts in making inherently difficult forecasts," said Seneca, who added that Steindel has a good track record since joining the state government, in line with his "impeccable credentials." OLS, the nonpartisan Office of Legislative Services, has said the budget projections will fall more than $500 million short of actual revenue, counting a shortfall in the current fiscal year.

Steindel agreed that the steep tax rate structure leaves that state vulnerable to revenue swings, as wealthier residents' capital gains fall and rise with the market.

"That, of course, gives us an enormous cyclical sensitivity," he said. But while this contributed to the state's fiscal challenges during the recession, it leaves it poised to rise at the crest of the national recovery.

"We don't think it's too much of a stretch to think that we can get extremely rapid — pretty rapid growth in the gross income tax," Steindel said, adding that other taxes should rise and that the state will benefit from one-time revenue infusions from the clean energy and affordable housing funds.

Baseball background

Steindel became interested in economics due in part to his childhood interest in baseball statistics, though he's quick to admit, with a laugh, that it hardly qualifies him as unique.

"The more I read about it, there were so many people in my generation that it was the same thing: I knew math, I liked history and I loved baseball statistics," said Steindel, a Brooklyn, N.Y., native who became an Atlanta Braves fan after spending his teenage years there. "There were so many economists who had that influence, including one Ben Shalom Bernanke."

Steindel attended Emory University before earning his Ph.D. at the Massachusetts Institute of Technology, in the same class as Nobel Memorial Prize winner Paul Krugman and two years ahead of Bernanke. He worked at the First National Bank of Chicago and the Federal Reserve Board before joining the New York Fed.

As a senior vice president of the reserve bank, Steindel worked with some of the top economists in the country. He met with former Fed Chairman Alan Greenspan, who left a strong impression — "his mastery of group dynamics is just amazing," Steindel said.

Steindel receives high marks from those who worked with him, like Rensselaer Polytechnic Institute economist Arturo Estrella, a former New York Fed colleague, who said Steindel has a remarkable ability to use data.

"He was familiar with almost every piece of data that had significance for economic analysis," Estrella said. "He's also familiar with the statistical techniques and the theory behind them. He had a great combination of the theoretical and empirical economics, and the applied analysis and forecasting."

Richard Peach, who worked with Steindel in the New York Fed research group for 19 years, said Steindel's knowledge extends beyond economics to business, policy — and, of course, baseball statistics.

"We used to have a game in the New York Fed where we would sit down at a table, called 'Stump Charlie,'" which involved throwing questions at Steindel, Peach said. "He reads a lot of books, especially biographies."

The administration's revenue forecasts for each of the last two years have come in for criticism from legislative Democrats. However, both Estrella and Peach expressed confidence that Steindel would produce impartial forecasts, with Peach noting Steindel is a contributor in the nationally influential Survey of Professional Forecasters.

While Christie's revenue projections recently came in for some criticism when OLS released its estimates, Steindel said the difference between his numbers and the agency's is overblown, noting the OLS projection of 6.3 percent growth is similar to that of the administration.

"When you look at the actual percentage terms, their forecast isn't much shy of ours," Steindel said. "It's just when you translate it to dollars and you compare it to the ending surplus, it looks big. Even they agree that this is high relative to other states — they understand the features of our tax system, as well."

E-mail to: akitchenman@njbiz.com
On Twitter: @Kitchenman

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