As the 2016 election cycle approaches, North Carolina voters will witness a spirited political debate about how best to promote economic growth. Democrats will argue for larger government and higher taxes. Republicans will argue for smaller government and lower taxes. (Libertarians will argue for smaller government and lower taxes, too, and insist that they actually mean it.)
Why is there such disagreement? Each side accuses the other of being uninformed or blinded by ideology. That’s not quite it, in my view. To begin to grasp the problem, one must first recognize that the ties between government and the economy are not drawn in straight lines. They are curved.
That is to say, the economic effect of raising or lowering the level of government spending — and the taxing or borrowing required to finance it — depends on the starting point. Societies without organized governments are chaotic, dangerous basket cases. Societies where governments are totalitarian are corrupt, miserable basket cases.
Successful, dynamic economies require the provision of law, safety, and other true public goods. Governments provide or finance them. But as they grow bigger, levying more taxes or issuing more regulations, governments reach a point at which the costs they impose are greater than the benefits their programs confer on households and businesses.
The real issue, then, is whether North Carolina or the nation as a whole has reached and exceeded that point — the apex of the government/growth curve. Liberals tend to think not. Conservatives tend to think so. This is an empirical question, not an ideological one.
Over the past two decades, economists have produced hundreds of academic studies on the subject. Many have confirmed that government policies have “non-linear” effects on the economy. Fiscal-policy reality is, indeed, curved. Some scholars have attempted to identify specific tipping points for taxes, expenditures, and regulations. This is a difficult task. But nearly all scholars agree that such tipping points exist.
For example, a new study by two Australian economists confirmed the effect for state indebtedness. They found that while a small amount of debt, measured as a share of the economy, correlated with faster economic growth among American states — probably because it signified investment in infrastructure — the effect declines and then turns negative as the debt level rises.
In the modern era, the available evidence suggests that most state governments have become too large and intrusive to justify the economic value they deliver. Last year, I began assembling a database of all studies published in academic journals since 1990 on the subject of state policy and economic growth. After issuing an initial report on the findings in 2015, I’ve continued to add newly issued or discovered papers to the list, which now contains some 740 studies.
Most of them show that state expenditures are either a net drag on their economies or have no discernible economic effects. This is true for state spending as a whole — only 14 percent of studies find a positive association with economic performance — as well as for most specific categories of spending. Transfer programs such as cash welfare or Medicaid have clearly negative effects on the economy. Spending on education and transportation is most often a wash. There is an interesting exception: of the 36 studies that examined spending on law enforcement or the courts, 21 found positive effects on job growth, income growth, or some other economic indicator.
Do these findings mean that education and infrastructure lack economic value? Of course not. In fact, studies that examine not government expenditures but actual measurements of educational attainment or road conditions confirm that they are, indeed, correlated with economic performance. The real problem is that states that spend more on these services don’t get results large enough to offset the economic costs imposed by taxing more or going further into debt.
So North Carolina has been making the right decisions lately — by cutting taxes, restraining the budget, and reforming state programs to get more bang for the buck. I know liberals don’t agree. But their case is exceedingly weak.
John Locke Foundation chairman John Hood is the author of Catalyst: Jim Martin and the Rise of North Carolina Republicans.