Guest post by John Hood
Do governors and state legislators really have much to do with the performance of state economies? If governors and state legislators are to be believed, their policies are responsible for all good economic news — and rarely responsible for the bad news.
It’s easy to ridicule the self-importance of politicians. But the position on the opposite extreme, that state government has little effect on the economy, is also unwarranted. While everyone agrees that state policies can influence the growth of population, jobs, and incomes in the long run, many analysts believe that state decisions don’t have much to do with economic fluctuations in the short run.
That’s mistaken. North Carolina’s experience during the Great Recession suggests otherwise. And a new academic study demonstrates that North Carolina’s experience was hardly a fluke.
The story begins back in early 2006, when then-Gov. Mike Easley and the General Assembly then controlled by Democrats were greeted with the news that North Carolina had a budget surplus of about $2.4 billion. After years of deficits or tight budgets during the early 2000s, it was a welcome relief.
But what should policymakers do with the surplus? Phil Berger, then minority leader of the state senate, argued that the legislature shouldn’t go on a spending spree but should instead shore up the state’s reserves, pay down some debts, and roll back the Democratic tax increases that were partially responsible for the higher revenues. Other conservatives made similar arguments.
They were largely ignored. Although Easley and Democratic leaders did edge down the state’s sales and income tax rates, most of the surplus funded new expenditures. In fact, they increased state spending by 10 percent. Making matters worse, the 2006-07 budget contained hundreds of millions of dollars of recurring spending funded by one-time money.
This became a recipe for disaster when the Great Recession hit. By the 2009-11 budget biennium, new Gov. Bev Perdue and Democratic legislators faced billions of dollars in deficits. They were forced to cut back the very areas that got gigantic spending hikes in 2006-07. They also resorted to a new round of economically destructive tax increases.