Start with the right measures

by John Hood, John Locke Foundation and NC SPIN panelist, June 18, 2014.

Fiscal conservatives think government is too large, costs too much, and tries to do too much. Fiscal liberals think government is too small, spends too little, and doesn’t try to do enough.

This is a yawning gap in philosophy. I won’t try to bridge it today. But even if we stipulate that the two sides disagree about basic principles of fiscal policy — indeed, about the very definition of government itself — there ought to be at least a common frame of reference for debating government’s proper size and scope.

There isn’t. The two sides aren’t just divided by philosophy. They also use different measures of government cost, reflecting their respective assumptions and motivations. For example, did budget cuts during the Great Recession leave state government in North Carolina smaller and less costly than it has been in decades?

Fiscal liberals say yes. They point to the fact that state spending from the General Fund — which includes most of the revenue from state taxes on income, sales, and corporations — peaked in 2009 at $21.4 billion and then declined to below $19 billion in 2011. Despite some increase in the nominal figure since then (the budget for 2014-15 will once again exceed $21 billion), liberals argue that if you take into consideration the higher funding needs created by rising prices and population, North Carolina’s state budget is smaller in real terms than it has been in decades.

Fiscal conservatives observe, however, that the General Fund finances only part of the state budget. While many legislators, reporters, and activists describe the $21 billion General Fund as “the budget,” that leaves out highway funds, federal funds, and other receipts. North Carolina’s state budget is actually about $50 billion, nearly half of it funded by revenues routed through Washington (although they mostly originate in North Carolina) rather than by General Fund spending.

It is entirely legitimate to question whether federal money, for instance, ought to play such a outsized role. But if you want to know how much state agencies actually spend delivering public services, you have to include spending from all revenue sources. As my colleague Sarah Curry observed in a study published last fall, doing so changes the story dramatically.

Total state spending adjusted for inflation and population growth reached its highest point in 2011-12, at about $5,350 per person. It has declined slightly since then, primarily because of lower recession-related federal funding, but remains well over $5,000. That’s higher than any year before 2012, and about double what North Carolina spent as recently as the late 1980s.

Some fiscal liberals argue that the adequacy of government spending should be measured not by adjusting for inflation and population but instead by adjusting for growth in personal income or gross domestic product. Over time, they say, government ought to consume the same share of economic resources. Most fiscal conservatives disagree. They argue that public services are necessities, not luxuries, so we ought to be able to spend a smaller share of our incomes on government over time. Why can’t rising standards of living reduce the need for government to deliver some services? And why can’t rising productivity reduce the cost of delivering other services?

Even if we use a share-of-income measure, however, state spending is still relatively high. During the 1980s, North Carolina’s total budget stayed below 10 percent. During the 1990s, it fluctuated between 10.5 percent and 11.3 percent. Then, during the 2000s, it steadily rose, pushing past 12 percent during the onset of the Great Recession before reaching its peak of 14 percent in 2012.

Something similar happened at the national level. During the Great Recession, total federal, state, and local expenditures reached 36 percent of America’s GDP. Only in wartime 1945 had government consumed so large a share. As of 2013, it was still about 34 percent.

For starters, I’d like to see that number pushed below 30 percent of GDP, which would roughly match total government revenue. North Carolina leaders can do their part by maintaining pro-growth policies and fiscal restraint — and by using properly broad measures of the state budget.

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