RALEIGH — If you think government is too large and wields too much power, then you have plenty of reasons to be dismayed by recent national developments. But if you live in North Carolina, there is some good news mixed in with the bad.
Since the onset of the Great Recession in 2007, the federal government has vastly expanded its fiscal and regulatory role. Politicians of both parties bailed out banks and other big businesses. President Obama and his Democratic allies then engineered a federal takeover of the health insurance market, imposed costly new rules on medical providers and the financial system, and pursued many other regulatory initiatives, often without explicit congressional approval.
Although federal spending peaked in 2011 at 23.4 percent of the gross domestic product (GDP) and has declined a bit since then — thanks in part to the expiration of stimulus programs and in part to Republican gains in Congress — it remains elevated. In the 10 years before the Great Recession, federal spending averaged 18.6 percent. During the current 2015-16 fiscal year, the Obama administration estimates it will be 21.5 percent.
Here in North Carolina, the Republican takeover of the state legislature in 2010 and the election of Gov. Pat McCrory in 2012 have led to a different result. The state’s General Fund expenditures — the portion of the state budget funded through generally applied taxes and fees, rather than from federal funds or highway taxes — have risen 10 percent since 2010. But the state’s economy has grown at a faster rate.
As a share of GDP, in other words, the state’s General Fund budget has been going down. During the current 2015-16 fiscal year, I estimate that it will be approximately 4.1 percent of North Carolina’s GDP. By comparison, state General Fund spending was 5 percent of GDP in 2007-08, the last state budget enacted before the Great Recession. That 5 percent of GDP was also the average for North Carolina budgets from 1997 to 2007.
So when liberals complain that Republicans in Raleigh have significantly changed the state’s fiscal policies, they are quite correct — about the underlying numbers, I mean, not the complaint. States with smaller government and lower taxes tend to have higher rates of job and income growth over time, according to most of the empirical research on the question. Most North Carolina Republicans agree with this insight, and have acted on it.
In Washington, the next president and Congress should follow a similar course. They should eliminate low-priority spending such as corporate welfare, reform entitlement programs such as Social Security and Medicare to lower their annual growth rates, and devolve programs such as Medicaid and transportation to the states. If federal spending could be brought back down to the average of 18.6 percent of GDP that prevailed before the Great Recession, that would likely balance the budget, as federal revenues are projected at 19.2 percent of GDP for the current fiscal year.
On-budget spending is only part of the puzzle, however. Regulation is harder to measure but no less burdensome to households and businesses. In North Carolina, the legislature has enacted major regulatory reforms each year since 2011. In Washington, new rules imposed on health care, finance, manufacturing, and other sectors since 2009 help to explain why the nation’s economic recovery has been so anemic by historical standards.
Washington’s excesses trouble North Carolina conservatives just as much as they trouble conservatives in the rest of the country. But here in the Tar Heel State, we’re a bit more hopeful. We’ve seen firsthand that fiscal restraint and regulatory reform are politically possible and economically beneficial. As North Carolina and other states continue to pursue these objectives, they make it more likely that national politicians will follow our lead.
There are no guarantees. The special-interest lobbies that obstruct reform in Washington are more powerful than those in state capitals. But at least North Carolinians are doing their part to win the broader argument for economic freedom — and for a better future for our nation.
John Locke Foundation chairman John Hood is the author of Catalyst: Jim Martin and the Rise of North Carolina Republicans.