John Hood: Low Debt Burden Aids North Carolina
RALEIGH — Because I’m a fiscal conservative, you might think I reflexively oppose government borrowing. You’d be mistaken. I believe that public finance and toxicology share a common rule: the dose makes the poison.
That phrase is traditionally attributed to Paracelsus, a physician and philosopher of the German Renaissance, but the underlying notion, that something can be good in small amounts but dangerous in large amounts, is an ancient one, its truth written into our very biology. Our taste buds, for example, deem foods with some salt content as delicious — our bodies need salt to regulate our nerve impulses, muscle contractions, and fluid balance — but also flag foods with potentially toxic levels as too salty to eat.
Sensible environmental regulation rests on this distinction. Many substances have been identified as potentially carcinogenic by laboratory experiments in which animals are force-fed high dosages. Not all are controlled or banned by law, however, because they don’t endanger our health at the exposure levels human experience in the real world.
In the case of public debt, it can make fiscal sense for governments to borrow rather than pay cash when constructing high-demand infrastructure or fighting wars. Assets such as roads, wastewater treatment plants, and warships can be used for decades. Building them now, with principal and interest spread over generations of taxpaying beneficiaries, can confer immediate benefits while decreasing the share of future income consumed (because infrastructure fosters economic growth, and a victorious country tends to have stronger finances than a conquered one).
Alas, with government borrowing it has proven exceedingly difficult to keep the dosage limited. Today’s politicians get the credit for new projects while future politicians and taxpayers must grapple with the consequences, including the future public or private goods that can’t be purchased because money must be set aside to pay back creditors.
That’s why states and localities impose constraints on public borrowing (and why our national leaders are foolish not to impose the same on federal borrowing). General-obligation debt, for example, must be approved by voters in a referendum. Other debt issuances must be clearly identified and consistently reported.
North Carolina has a relatively low debt burden. According to a comprehensive new Reason Foundation analysis, total state and local liabilities come to about $10,039 per North Carolinian. Only 14 states have lower debt burdens by that metric. We also have the 10th-lowest level of net pension liability per capita — that’s obligations to pay benefits minus pension assets — and the 12th-lowest level of bonded indebtedness per capita.
In one area, North Carolina doesn’t compare as well: net liability for benefits other than pensions. This refers mainly to health benefits for retired public employees. By Reason’s calculation, that net liability is about $22.5 billion, or $2,159 per North Carolinian. We’re not nearly as bad off here as New York ($15,017 per person) or New Jersey ($10,599) but most American states have much-smaller unfunded liabilities for health plans, if any, including the likes of Virginia ($544), Florida ($689), and Tennessee ($979).
Some Tar Heel policymakers, primarily but not exclusively Democrats, believe we have too little debt. They think North Carolina would prosper by issuing more bonds to build transportation infrastructure, public housing, “clean energy” generation, or other projects.
I’ve supported some such bonds in the past. I don’t now, though. Current economic conditions are too unsettled, I submit, and there’s already a robust debate between the North Carolina Senate and House over fiscal priorities.
Another relevant principle, related to “the dose makes the poison,” is the law of diminishing returns. When North Carolina took on significant debt in the 1920s and 1930s to build out our first highway system, the returns on that investment were enormous. Later, during infrastructure-expansion periods in the 1950s and the 1980s, it still made sense to borrow. The returns remain large.
There are still new projects likely to yield a healthy return on investment — but not as many. Prudent policymakers can, for now, fund them with cash.
John Hood is a John Locke Foundation board member. His books Mountain Folk, Forest Folk, and Water Folk combine epic fantasy with American history (FolkloreCycle.com).
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