The problem is, again, budgetary. Recent headlines point to another rough fiscal year for North Carolina government. From July to October, state revenues fell 1.5 percent short of the already dreary forecast lawmakers had assumed when crafting their 2009-10 budget. By itself, that doesn’t constitute another crisis, given a budget cushion the governor put in place back in July
But when you add to that the fact that North Carolina’s unemployment rate is likely to remain sky-high and our Medicaid program is spending money faster than expected, it’s not hard to conclude that when the legislature reconvenes in 2010, it is likely to face another round of difficult decisions.
In 2009, Perdue and the Democratic legislative majority decided to finance most of the state’s operating deficit through borrowing and tax increases. Because 2010 is an election year, there probably won’t be another big tax hike. But more borrowing? That’s the ticket, some say.
The immediate problem is Medicaid. North Carolina went into the Great Recession with a relatively expensive Medicaid program, built up over the years by irresponsible politicians and incompetent administrators. Thanks to the economy, both enrollment and costs then soared. By November, Medicaid had spent $160 million more than projected, reflecting a 9 percent increase in expenditure.
State officials hope to flatten out the cost spike by the first of the year. But that will still leave a hole. Gov. Perdue says she’d like to fill it by asking Washington for another Medicaid bailout. “We have consistently asked them to continue to help hold the states harmless for Medicaid and to help us as we get through this time, when our budget is stressed and the budgets of all the states around in the country are stressed,” Perdue told the Associated Press.
Of course, “all the states” constitute, uh, the United States. And since the federal budget is already massively out of balance, another bailout would mean another round of federal debt, much of it purchased with new money created out of thin air by the Federal Reserve. In other words, the governor thinks it would be a good idea to finance Medicaid overspending in North Carolina and other states by further debasing the dollar.
This isn’t just Perdue’s preference, or the prevailing philosophy of banana republics. Sen. Martin Nesbitt, the new majority leader, gave a recent speech in Asheville in which he credited the 2009 federal bailout as the only way to protect jobs and personal income in North Carolina. The alternative to the bailout, he said, would have been an economic meltdown.
Let me see if I have this straight. America has entered a Great Recession because households and businesses, in response to perverse subsidy and tax incentives, took on excessive debt to invest in real estate and other speculative ventures lacking any connection to underlying economic reality. So, in response to this costly borrowing binge, our public officials truly think the right policy is to borrow still more to finance the daily operations of bloated bureaucracies and expansive entitlements?
This isn’t a rational theory of political economy. It’s a trip to Cloud Cuckoo Land.
Recessions have complex causes but a simple definition. A recession occurs when there is a widespread mismatch between what consumers are willing to buy and what producers are offering for sale. The goods in question could be electronics, homes, cars, capital goods, or labor. The only real way to exit a recession is to eliminate this mismatch – to go through the painful but necessary process of liquidating bad investments and adjusting one’s finances and efforts accordingly.
The same logic applies to government. North Carolina is producing more government than taxpayers are willing or able to finance. The solution is to eliminate low-priority programs and focus scarce tax dollars on core functions.
The solution is not to put North Carolina taxpayers – all of whom are also federal taxpayers – further into debt.
John Hood is president of the John Locke Foundation and publisher of CarolinaJournal.com.