I’ve been spending a lot of time recently in conversation with right-leaning leaders, policy experts, donors and activists. My purpose is to assess the health and trajectory of American conservatism at this critical moment.

A common refrain from disgruntled conservatives is that for all the talk of reducing the size and scope of government, their movement has made little progress. Federal deficits are massive. There’s been no substantial reforms of the entitlements that now account for most of the federal budget — of Social Security, Medicare and Medicaid — and past administrations of both parties have mostly added rather than subtracted to the government’s powers and expenses.

I share their disdain for the utter lack of fiscal responsibility in Washington. It’s a bipartisan problem. But the federal government isn’t the whole story. Here in North Carolina, conservative governance has actually reduced the size of state government and significantly improved its fiscal condition.

Left-leaning politicians and organizations agree with my observation here — although they don’t, of course, consider it to be good news. According to the latest calculation by the North Carolina Justice Center, the budget deal that leaders of the state house and senate have struck will set General Fund spending for the 2021-22 fiscal year at just over 4.5% of North Carolina’s gross domestic product.

As a share of the economy, state spending has averaged about 5.8% over the past 45 years. It was well over 6% as recently as 2009. Since fiscally conservative Republicans won control of the General Assembly in 2010, however, budgets have gone up every year in dollar terms but have gone down almost every year when expressed as a share of GDP.

That’s because legislative leaders have stuck to their commitment to keep annual spending growth at or below the combined rates of inflation and population growth. Since GDP usually grows faster than that, the result has been to shrink the size and scope of state government. That has, in turn, allowed legislators to rebuild the state’s savings reserves, pay off state debt, and finance several rounds of growth-enhancing tax cuts.

There’s no “voodoo economics” here. Our tax cuts have likely boosted economic growth, to be sure, but not fast enough to produce a net revenue gain. The reason the state budget remains in surplus is that lawmakers have maintained spending discipline. There is every reason to believe they’ll continue to do so.

When the General Assembly changed hands in 2010, the state had accumulated state debts totaling about $8,000 per North Carolinian, according to a watchdog organization called Truth in Accounting. Some of that debt was on-the-books debt, the result of past bond issuances or of borrowing from Washington to fund unemployment-insurance benefits. And some of that debt represented an unfunded liability for state benefits owed to public employees upon retirement.

By 2020, North Carolina’s debt burden had tumbled to $1,400 per person — a dramatic improvement. While we still need to shore up the health plan for state employees and retirees, our state now ranks 14th on Truth in Accounting’s fiscal health index. If present trends continue, we’ll soon reach the top 10.

Are conservatives in state government more principled and committed than their counterparts in Congress and the executive branch? Quite possibly, but I don’t think that’s the main reason Raleigh (and some other state capitals) have gotten it right and Washington has gotten it so very wrong.

The divergence reflects the critical importance of rules and institutions. In North Carolina and nearly all other states, legislators and governors are required by their constitutions to enacted balanced budgets. While borrowing for capital needs is permissible and sometimes prudent, states generally aren’t allowed to finance operating expenses with debt. The federal government, of course, has no such rule.

It ought to. In all future elections for Congress or the White House, I plan to vote only for candidates who pledge to support a balanced-budget amendment to the United States Constitution. Will you join me?

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(1) comment

Branch

Let’s get the obvious out of the way: “small government” is really just a euphemism for “fewer social benefits.” Hood may be surprised to find that most people actually want to keep their Medicaid/Medicare, state pensions, unemployment and disability benefits, and social security. Hood’s small government, no deficit spending goals are deeply unpopular, totally unworkable, and would be an absolute disaster if ever fully embraced by congress. 

This part is pretty funny:

“That has, in turn, allowed legislators to rebuild the state’s savings reserves, pay off state debt, and finance several rounds of growth-enhancing tax cuts.

There’s no ‘voodoo economics’ here. Our tax cuts have likely boosted economic growth, to be sure, but not fast enough to produce a net revenue gain.” 

In other words: “Our tax cuts enhanced growth…maybe…also Neoliberal economics are a sham…but I still fully embrace them…” This is one of my favorite things about reading John Hood’s incomprehensible weekly ramblings—the way he undermines his own points (in this case casting doubt on his entire economic ideology), sometimes even in contiguous sentences. He hardly ever says anything at all.

When he does clearly state a point, it’s a total dumpster fire. Hood leaves us this week with a call to “vote only for candidates who pledge to support a balanced-budget amendment to the United States Constitution.” This is the most insane thing I think I’ve ever heard proposed. Hood is either ignorant of—or pretends to be ignorant of—the way the federal budget and deficit spending differs from the states. This should be obvious but, the Federal Government creates (issues) our currency, while states can only spend or save (use) it.

The Reserve and Treasury have a monopoly over our sovereign fiat currency. Our currency isn’t pegged to gold or any other currency. The Reserve and Treasury can create as many U.S. dollars and spend in a deficit as much as they need to as long as inflation is kept in check (often through taxation). For overspending and mass inflation to actually become an issue, our economy would have to basically be at full production and full employment. This is empirically not the case.

Lastly, let’s walk through Hood’s own logic to find where his proposals ultimately lead. He tells us he believes the following: 1) Government should be small. 2) Government should not engage in deficit spending at any level. 3) Tax cuts are good economic policy. 4) Tax cuts do not create enough supply-side growth to produce a net revenue gain.

How would this play out? We would embrace a Reagan/Thatcher (TAB)S model where even the Federal Government would have to (T)ax (A)nd (B)orrow before it can (S)pend. So before we spend trillions on the military, infrastructure, and social benefits, we have to first find the money for those projects. But we shouldn’t raise taxes according to Hood, so our only recourse is to start cutting these projects and programs. Instead of the government shelling out cash, it’s now individuals and private industry that foot the bill for wahtever programs remain…industry that cannot produce a net economic revenue gain—even with beneficial taxation policy—by Hood’s own admission. So industry and individuals have to spend in a deficit to support the nation instead; unlike the Federal Government, we can (and will) quickly go broke spending more than we earn. So our buildings, bridges, roads, electricity infrastructure, rural internet, healthcare, military, law enforcement, and fire departments become anemic or entirely crumble without the necessary funding. Furthermore, without subsidies and welfare programs for food, housing, fuel, etc. people cannot afford to eat, have shelter, or even go to their jobs for the starvation wages that won’t keep up with out-of-control rising costs of living.

Sounds like an enticing future, right? Mad Max level dystopian Anarcho-Capitalism. The inconvenient truth is this: private industry doesn’t just benefit from government spending, it actually requires it for a healthy economy. If you ever hear a candidate pledging to amend our US Constitution to prevent deficit spending, run away from that person. They are clearly insane.

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