John Hood: Federal bailout would punish our state

Published 12:00 am Tuesday, January 26, 2021

By John Hood

RALEIGH — Now that Democrats control the White House and both chambers of Congress (however narrowly), they will probably approve a new round of federal borrowing to bail out state and local governments with shaky finances.

In other words, Washington will punish North Carolina and other prudently governed states by saddling us with the cost of other states’ mistakes.

This is an old story. Shortly after the American Revolution, some of the newly created states made great sacrifices to pay down their war-related debts, North Carolina among them. Other states didn’t.

Then Alexander Hamilton concocted a plan for the federal government to nationalize the debts of the profligate states. That angered voters in places such as North Carolina. Many switched their allegiances, joining Thomas Jefferson’s new political faction. Party competition was born.

Will this same old story have the same political effect today? I’m not sure. Voters don’t seem up-in-arms about the federal government’s irresponsible, debt-financed spending spree during the Obama and Trump administrations. And I can understand the need to prioritize combating COVID-19 and reopening the economy during the current pandemic.

But facts are facts. Math is math. Federal debt held by the public is now around 100% of gross domestic product. Only during World War II has the federal government been so much in debt. If present trends continue, we’ll surpass even that previous peak. And if we counted as debt the trillions of dollars in unfunded liabilities for Social Security, Medicare, and other entitlements — and we should — the wartime debt of the 1940s would already be an increasingly distant second.

States and localities have debts of their own, albeit much smaller because of constraints on their ability to borrow for operating expenses. Most of them have promised pension and health benefits to retirees that they can’t finance without large tax increases or cuts in current services. Some have issued bonds to finance poorly planned and underutilized transportation assets.

North Carolina shares some of these woes, to be sure, but compares favorably to most states. While our pension fund needs strengthening, it is better funded than most. Our unfunded liability for retiree health benefits, while large, is shrinking because of legislation and administrative reforms. Our on-the-books debt load is low by national standards.

When the pandemic struck, North Carolina was better prepared for the fiscal consequences. Since 2010, the Republican-led General Assembly had made it a priority to build up savings reserves and keep annual spending increases moderate rather than budgeting too narrow a margin between expected revenues and expected spending.

As of December, the state has about $1.1 billion in its Rainy-Day Fund, $700 million in other reserves, and $4.2 billion in unspent money sitting in its General Fund. Some of this money will be spent this year, and should be, on needs related to the COVID crisis and its consequences. That will still leave plenty of capacity to fund core public services while protecting North Carolinians from economically destructive tax hikes.

Other jurisdictions could have prepared themselves for this emergency, too. They didn’t. They spent virtually every dollar they collected. They created new programs and expanded existing ones so much that even a normal rate of revenue growth would have proved inadequate to finance them over time. When COVID slammed their tax collections, small structural deficits became immediate, enormous deficits.

For the federal government to swoop in and bail these governments out — using current or future revenue collected from Americans as a whole — is essentially to tell all other governments not to be responsible. It is to tell North Carolinians that they’ve been suckers all along, that their politicians should have spent with reckless abandon to buy votes, secure in the knowledge that if things went awry they’d get a bailout.

In the aftermath of the Great Recession, we learned it was both unfair and dangerous to let bankers take big risks backed by explicit or implicit promises of bailouts. That same lesson ought to apply to state and local politicians.

John Hood is chairman of the John Locke Foundation and author of the forthcoming novel Mountain Folk, a historical fantasy set during the American Revolution (