This week, Oregon’s new state economist, Carl Riccadonna, gave his first quarterly economic and revenue forecast. It projected Oregon getting nearly $950 million more in the current two-year period than previously estimated, and an extra $1.3 billion in the 2025-2027 budget cycle. Riccadonna, who was hired in September, based his forecast on an economic model that’s less pessimistic than the one his predecessor, Mark McMullen, relied on. It not only projects higher revenues from personal income and corporate taxes, it also aims to reduce the errors in forecasting that led to large kicker tax refunds, including a record $5.6 billion paid out to taxpayers this year. Riccadonna talks to us about Oregon’s economic outlook.
Note: The following transcript was transcribed digitally and validated for accuracy, readability and formatting by an OPB volunteer.
Dave Miller: This is Think Out Loud on OPB. I’m Dave Miller. Earlier this week, Oregon’s new state economist gave his first quarterly economic and revenue forecast. Carl Riccadonna said that Oregon will take in nearly a billion dollars more in taxes in the current two-year budget cycle than previously estimated, and an extra $1.3 billion in the next cycle. Riccadonna, who was hired in September after a career as a Wall Street economist, based his forecast on an economic model that is less pessimistic than the one his predecessor, Mark McMullen, relied on. McMullen’s model led to five kickers in a row with another one likely on the way.
Carl Riccadonna joins us now to talk about forecasting, risk and a lot more. Welcome to Think Out Loud.
Carl Riccadonna: Good afternoon, Dave.
Miller: What went through your mind when you first heard about Oregon’s kicker?
Riccadonna: Well, the kicker is a very uniquely Oregon development of fiscal treatment. So there’s unique challenges around that, obviously, as we’ve seen with the kickers triggered and some of the political discourse around that. Oregon likes to do things its own way in a lot of instances and this is a great example of that.
Miller: You’ve answered diplomatically. But what went through your mind when you heard about it?
Riccadonna: My first impression was, oh, that’s different. I haven’t seen that sort of treatment before. So there’s pros and cons to it, but it stood out as something that is not done in other states.
Miller: Before you started, when you found out that the Office of Economic Analysis has been off by more than 2% – underestimating for five biennium in a row, going on a sixth – did you say to yourself, I can do better?
Riccadonna: Well, I said there’s a problem that needs to be investigated. Of course, any economist, including my predecessor, in any forecasting exercise, you’re always saying I can do better next time. So what changes, what would I have done differently knowing what I know now? That was part of the mandate of the job, trying to fix a persistent forecast error – a forecast error that was actually compounding over time, getting bigger over time.
So adjustments were made. But what I and the team did was pull the engine apart and put it back together and say, have the adjustments been enough? And our findings were that, no, that was not the case. Further tweaks needed to be made.
Miller: I want to hear about those tweaks, but let’s take a step back for a second. I imagine there’s a lot to this. But can you just give us the thumbnail version of what goes into an economic forecast like this? How [do] you look at the totality of economic possibilities and ins and outs in the two years to come, and boil it down to a single number that tells lawmakers how much you think they’re going to have to spend, and then that they use to create a two year budget? What are the various things that go into that model?
Riccadonna: Well, as Yogi Berra said, forecasts are very difficult, especially when they’re about the future. So it certainly is challenging. But the way we approach this: first, we take a national economic forecast, the state of the U.S. economy, whether we’re talking about gross domestic product, unemployment, inflation trends, all things that have been very top of mind heading into the elections in the fall and whatnot … take those major economic themes, including what the Federal Reserve is doing with interest rate policy.
We then take that assessment, look at a projection over even a 10 year horizon, but especially we’re focused on that two year horizon which triggers the next kicker if that happens. We take that national forecast, make our own subjective assessments about it and then translate that into an Oregon forecast – what does that mean for the state? And of course, that’s always changing because the Oregon economy is always evolving. We have population growth, different industries become more or less relevant, lumber, tech and microprocessors. These things are always changing the waiting factors, if you will. And then of course, unique, the West Coast behaves differently than the East Coast in terms of inflation data, employment trends and whatnot.
We take that national forecast, translate it into a state forecast, a state economic forecast. And then the next layer is translating that state economic forecast into a revenue forecast. For instance, how do things like employment trends or stock market returns impact capital gain taxes? And we then create a revenue forecast for the state. Of course, that’s at the heart of this whole kicker debate.
Miller: So, as you said, the first thing you did when you came in just a couple of months ago was pull apart and then reconstruct the forecast models to figure out what was happening. How did you end up changing the model?
Riccadonna: Well, as we pulled the engine apart to see what was potentially not working as well as it could be, we really identified two potential sources of distortion in the model. One was that translation from the national forecast to the state forecast. There were some pessimistic choices made within the model, and there’s always a forecaster’s discretion in any economic model. In my prior capacity on Wall Street and in finance, you don’t just build a model and let it run. There’s always elements of shades of gray, adjustments that have to be made in the model.
So we saw some pessimistic elements, which are not surprising given that a year ago or a year-and-a-half ago, lots of people were thinking that we were going to end this cycle in a recession. The economy ran very hot post-pandemic, whether we’re talking about job creation, a record low unemployment rate, very hot inflation pressures, an aggressive federal reserve policy to that flareup in inflation. And most cycles end in tears, as monetary policy becomes too restrictive for too long and it pushes the economy into a recession.
Miller: Let me make sure you’re saying because what you’re describing now doesn’t strike me as something systemic built into the model, biennium after biennium. But it seems like you’re saying that, in very recent years, the model was too pessimistic about the near term future. Am I right about that? This isn’t something structural?
Riccadonna: Right. This is not a persistent … this is more of a cyclical development where you’re saying, what is the outlook? Are we going to have a soft landing [or] a hard landing in the economy? There were some hard landing assumptions within the model, and that was a perfectly fine assumption because most cycles do end in a hard landing. If we talk about a soft landing, a kind of fixing the inflation imbalances without driving the economy into recession, the last time we saw this was 1994, ‘95. And I would argue the last time we saw before that, we’d have to go all the way back to the 1960s.
Miller: So the Fed did something that few smart economists thought was possible or at least was not likely, based on previous history.
Riccadonna: Right. This is the holy grail. The nirvana of monetary policy is pulling off the soft landing. Now, we can’t say “mission accomplished” just yet because inflation still is elevated. It’s come down a lot, but it still is somewhat elevated. So we’ve got further room to run, but the signs sure look encouraging. Corporate profits are healthy, the pace of hiring is still holding up well, inflation has come down materially. So it looks like Jerome Powell may just be pulling off the very unlikely.
Miller: And that accounts for something like half of the issues that you tried to address with this model or that you think you have addressed. The other half has to do with the effects of a kicker on the way the state assessed future revenue. So explain this to us if you can … [in a way] hopefully the rest of us who are not economists can understand, is what I meant.
Riccadonna: Sure. They should put on their accounting hats now, because that’s the direction this leads. And this is not a judgment on those who built the model before I stepped in. But back in 2011, the state changed the way kickers were handled, in terms of changing it from a rebate check that showed up in your mailbox to a tax credit that then shows up as you’re filing your tax return the following year. This created a distortionary signal in the model, which created a perception of weakness in tax revenue trends, that then compounded the error in the model.
An example of that is if I’m looking, Dave, at your tax return and looking at your tax payments, I would have one assessment of, well, how’s Dave doing financially? In the next year, if you get a rebate credit, then your tax payments would be less. So, I think, well, Dave’s having a worse year now because his tax payments are down compared to the prior year. That in a very simplistic fashion is kind of what was happening in the model and the adjustment we made to make that liability treatment more intrinsic to the model.
Miller: Do you consider this change you’re talking about to be a sophisticated tweak to the economic model or a change that should have been obvious?
Riccadonna: It definitely shouldn’t have been obvious in the past. I think, as forecasters, we always have hindsight, so it’s easy to play Monday morning quarterback and say, oh, well, yes, this or that should have been done. I don’t think it was obvious at the time that this would create this kind of distortion.
Miller: I’m not talking about 2011, because we’re talking about five cycles in a row. I think we can actually say six cycles in a row because the kicker that’s coming in two years, it’s based on the same model. So, I mean, at what point do you think this should have been obvious?
Riccadonna: Well, I think you look at the behavior of something over time and as you see the error term in the model increasing, then you understand, OK, something’s going wrong here. We need to address this and they were making adjustments and methodological changes to the model to try to account for this. But as we can see, as more data rolled in, the problem persisted. So this is a more aggressive treatment of what we’ve diagnosed to be.
Miller: I imagine that there are some broad similarities between the kind of economic analysis you’re doing here at this new job for the state, and the kind you’ve done for years at Deutsche Bank or BNP Paribas. What are the differences?
Riccadonna: The focus I would say … I mean, certainly in my capacity as a chief economist in the private sector, there was a lot of focus on fiscal policy. But there’s a lot more focus on the kind of high frequency economic indicators, things like the monthly jobs report or the monthly CPI print. So there’s a very granular, near term focus when you’re working in the private sector. That jobs report is going to impact what the stock market does within seconds of the data being released, or what the bond market reaction will be, or foreign currencies, those sorts of things.
So there’s a very granular near term focus and I would say, less prioritization of that longer term. Whereas, here at the state, it’s very fiscally-focused. So the monthly jobs report is not as relevant as thinking about a six or 24 month horizon for the labor market, and then much more focus on the fiscal side, the fiscal mechanics of things.
Miller: We’ve heard in the past that one of the challenges for state economists in Oregon is that two years is a long time for these kinds of projections. Is that a longer time frame than you’re used to working with, thinking about, being right or wrong about?
Riccadonna: Well, it’s certainly a change, right? In the private sector, there’s that … where are we tomorrow, three months, six months and maybe a one year horizon, less focus on the longer run. Not to say we’re not looking at it, but we kind of think about it a little differently. Here, it’s a little bit of a different approach. It’s certainly hard to be forecasting something like a recession, two years out. That’s something that the brightest minds on Wall Street or at the Federal Reserve have difficulty achieving as well. You often don’t see those downturns coming.
Nonetheless, in either capacity, it is very important to have a long term view. What is happening to the population, productivity trends, inflation – all these factor into the longer term economic outlook. So they are hard questions to answer. If it was easy, it would be a totally different job. They are hard questions to answer, but they are important questions to be thinking about.
Miller: The sense I’ve gotten in the past is that a state economist in Oregon or anywhere would rather be slightly underestimating revenue than slightly overestimating it, because an overestimation means a budget shortfall. Do you share that bias? If you have to be wrong in one direction or another, would you rather underestimate?
Riccadonna: I can see the dark clouds of having an emergency legislative session with your name attached to it as being a factor that can get inside your brain, and impact how you’re thinking about things. But the mission of my office and my team, the Office of Economic Analysis at the State of Oregon, is to have the most accurate forecast possible. So we are not padding it to say, well, I’d rather miss on the side of being too conservative than too aggressive. That’s not how it operates, right? It is up to the legislature and the governor to decide what they do with the money, and how much they have in a rainy day fund to deal with any shortfalls or whatnot. Our job is to get the number as accurate as possible. Not putting the finger on the scale in one direction to try to have a more conservative result.
Miller: How do you factor in, reckon with something like the uncertainty right now over tariffs? Something that could have a huge impact on the global economy, certainly the U.S. economy, if anything close to what President-elect Trump has talked about were enacted, but something for which there is a ton of uncertainty for whether or not anything close to what he’s talking about will ever actually happen. How do you approach something like that? And we could probably come up with other examples, maybe less dramatic ones.
Riccadonna: Oh, I think there’s a lot of examples of things that have come up on the campaign trail, which are campaign priorities in the next administration, but we don’t know exactly how they will play out. So trade wars, a big one …
Miller: Immigration is another huge one.
Riccadonna: Immigration, also a big one. A significant share of the Oregon workforce is undocumented immigrants, something about 3% to 4%.
Miller: Can you ignore all that and say their campaign promises, there’s a good chance they’re not gonna happen, but there’s so much uncertainty, let’s just ignore it or …
Riccadonna: Well, we absolutely can’t ignore it. So we have to treat it, first of all, apolitically and agnostically. So whatever your view is on immigration reforms, or deportations, or whatnot, we don’t treat it as good or bad. We treat it as a matter of fact. So we don’t cast judgment on it, we just think of how it impacts the Oregon economy. Same thing with tariffs, retaliatory tariffs, trade wars, geopolitics, changes to the tax code … the Tax Cut and Jobs Act will likely be extended if not sweetened in the incoming administration. Changes to the SALT – the state and local tax deduction cap – that could potentially be changed.
So these are all moving factors we have to be thinking about as we’re putting this forecast together. You’re starting to understand why it’s so hard to forecast two years into the future now. We have to think about these, we have to make the best assessment possible. So for something like the Tax Cut and Jobs Act, I think we can assume that current policy extends into the new administration. But something like the trade war, we don’t know exactly what the parameters of that will look like. So, in forecaster speak, we talk about tail risks. The tails or the outside risks of the distribution of outcomes has become wider and fatter. And so that baseline scenario, you have less confidence in going forward.
Miller: After a career as a Wall Street analyst or economist, why did you want this public sector job? Why come 3,000 miles away to our beloved backwater, as far as a lot of East Coasters think about where we live, and take a job with state government?
Riccadonna: Well, I think that there’s a call to service in the public sector. So I think that that’s an important priority for me, not to just be in the private sector all my life. I did want to, at some point, be able to move into the public sector and have that opportunity. And maybe recent weather aside, the bomb cyclone, Oregon is a great place to live. It’s got great schools, great quality of life. And I think that’s why we have seen such in-state immigration to the state of Oregon. There was a little blip during the pandemic, but even just last week, Portland State updated the demographics. Portland is growing again. The state is rebounding in terms of in-migration. So it’s not just me that likes the state, I think that there’s a lot of good things going for the state.
Miller: Carl Riccadonna, I look forward to talking again. Thanks very much.
Riccadonna: Thank you, Dave.
Miller: That’s Carl Riccadonna. He is the state’s new state economist as of about two months ago.
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