RALEIGH – With its tentative approval today of a 2002-03 state budget that raises our taxes again, by hundreds of millions of dollars, the North Carolina General Assembly is carving out its place in economic history.
You see, until recently it was assumed that every major school of economics taught policymakers not to raise taxes in the midst of a recession. Classical economics, associated with the likes of Adam Smith and John Stuart Mill, concluded that tax increases took more money out of the hands of the private individuals who earned it, thus reducing the ability of the market efficiently to produce and distribute goods and services. Karl Marx, responding to the classical economists, argued that high taxes imposed on workers and consumers were part of a repression regime designed to maintain the exploitation of labor and create artificial scarcity.
In the 1870s, three strains of a new, more sophisticated form of classical market economics began to develop separately in England, Southern Europe, and Austria. All the resulting schools – the Marshallian neoclassical economists in England, the subjectivist Austrian school, the econometric school of Switzerland’s Walraus and Italy’s Pareto, America’s Chicago school and supply-siders – considered tax increases to be detrimental to economic growth because they distorted incentives to work, save, invest, and satisfy consumer demands.
Even John Maynard Keynes, otherwise noxious, argued that the government should act to stabilize an inherently unstable business cycle by raising taxes and running budget surpluses during economic booms and then cutting taxes and running budget deficits during recessions.
Now, we have the Jones Street school of economics. It contends that large tax increases imposed during an economic downturn are good for a state’s economy because they a) help to fund improvements in education that will produce a better-trained workforce 10 to 20 years later, b) keep the state from laying off significant number of government employees (apparently private-sector layoffs, caused by higher taxes and a prolonged slump, are not as damaging), and c) help the state retain a high bond rating.
OK, so we already have some problematic data on that last point, since the legislature raised taxes by $700 million last year and Wall Street still downgraded North Carolina’s bond rating. That could be a fluke. And it doesn’t matter, anyway. One of the advantages enjoyed by the Jones Street school of economics is that its tenets are not subject to empirical testing.
As the Associated Press reports (see http://www.heraldsun.com/state/6-268402.html), the new state budget increases General Fund spending over the previous year by $600 million, mostly to cover costs associated with school enrollment and Medicaid growth. It contains an unfunded hole of around $41 million, to be covered through unspecified “savings,” thus making it an unconstitutional budget. Lawmakers left hundreds of millions of dollars in documented budget savings on the table (check out our alternative budget for a list of some of these ideas, found at http://www.johnlocke.org/issues/Spotlights/217_changing_course_V.pdf). And the budget swipes $334 million in local tax reimbursements, likely leading to another round of costly property-tax increases at the county level.
Still, our lawmakers in Raleigh can claim to have invented a new discipline, a school of economics based on the previously unthinkable idea that you can tax your way out of a recession if only you are willing to exercise “leadership.” Their inventiveness surely deserves some congratulations.