State Economy Getting More Private | Eastern North Carolina Now

    Publisher's note: This article appeared on John Hood's daily column in the Carolina Journal, which, because of Author / Publisher Hood, is linked to the John Locke Foundation.

    RALEIGH     If we want North Carolina to grow and develop robustly, we have to raise taxes and use the money to "invest" in education, Medicaid, infrastructure, and other public services.

    That's what left-wing politicians and activists have been insisting ever since Republicans won majorities in the North Carolina legislature in 2010 and then won the governor's mansion in 2012. Give liberals credit for consistency. But as a guide to formulating wise public policy, their advice has been thoroughly discredited.

    I don't just mean that the real economy hasn't been tracking with the Left's imaginary world, although that much is certainly true. North Carolina has beaten the national and regional averages in gross domestic product (GDP), job creation, and per-capita income growth since the adoption of conservative budgets in 2013. But I suppose one could insist that, in theory, North Carolina would have grown even faster if we'd kept budgets bigger and taxes higher.

    A more serious blow to the Left is that even carefully designed empirical studies - structured to model the very "what if?" scenarios liberals cling to - do not find that states with bigger governments have healthier economies. In fact, most state governments apparently spend more than they should, if the purpose of such spending is to make the economy as a whole better off.

    Over the past quarter-century, scholars have published hundreds of peer-reviewed studies examining this question in whole or in part. The most recent one, by Wisconsin economist Jerome Segura in the journal Papers in Regional Science, looked at revenues, expenditures, and GDP for every state from 1977 to 2012. Using a sophisticated model that included regional spillovers and lag times - the economic effects of both taxes and expenditures can take many years to fully manifest themselves - Segura found that raising taxes to fund more government spending is a "growth deterrent," not a growth enhancer.

    His findings are consistent with the idea that "few public services are underfunded," Segura wrote, "and further that, in terms of economic growth, most public services fail to justify the taxes needed to finance them." His point is not that state and local governments provide no value. In the past, adding core public services likely created more economic value than was destroyed by the necessary taxes. But as governments got larger, they approached and then exceeded their optimal size - measured, as Segura did, by government expenditures as a share of GDP.

    As it happens, state government in North Carolina is headed in the opposite direction. Although General Fund spending has gone up every year since 2011 in dollar terms, this does not account for increases in population, prices, and the overall economy. I recently pulled quarterly GDP data for North Carolina over the past 10 years, used them to make predictions of GDP for 2015-16 and 2016-17, and then compared these figures against authorized or proposed General Fund spending.

    The state budget now working its way through the state legislature would authorize $22.2 billion in General Fund spending. By my admittedly rough projection, that would come to about 4 percent of GDP. At its peak, in 2008-09, North Carolina's General Fund budget was just over 5 percent of GDP.

    Some conservatives in our state say they are disappointed that Gov. Pat McCrory and the General Assembly have allowed state spending to grow at all in nominal terms. But that's never been a reasonable way to think about the issue. If inflation is running at 3 percent and your employer gives you a 1 percent raise, you don't conclude that you've come out ahead. If tax rates stay the same but you get a big raise at work, leading to higher taxes paid the next year, you don't accuse politicians of raising your taxes.

    By setting firm priorities, policymakers have funded core services, created fiscal space for a series of growth-enhancing tax cuts, and reduced state spending as a share of the state's economy. In other words, North Carolina's private sector is growing as a share of the overall economy. That's fiscal conservatism - and wise policy.