States Are Proving in Spades That Small Government Works
Between $1.9 trillion in pandemic relief, an extra half trillion in the infrastructure bill, and just under atrillion in the Inflation Reduction Act, President Joe Biden has signed into law unprecedented increases in federal spending. All this has blown out amassive budget deficit and caused debt to climb as ashare of the economy. Fortunately, there’s an alternative to big government. It’s found at the state level and, critically, it’s working for regular people.
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Red states are putting alid on spending and debt while expanding economic freedom — and enjoying marked gains in prosperity. Even many blue states aren’t going as far as the Biden administration in growing government. Acomprehensive index just releasedby the Cato Institute shows as much.
First, look at the numbers right before the pandemic. The average state and local debt burden stood at 17% of income in fiscal 2019. According to the latest figures, it is already down to 15%. The state and local government sector’s share of the economy in 2019 averaged 10.1%, but it has ticked down since then.
Given that state and local governments spend almost as much money as the federal government does, it is remarkable that their debt burden is asmall fraction in comparison. That’s because they can’t make the Federal Reserve buy their debt, so they have to be more careful.
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Experiments in big government and small government have been run side by side for decades, and the results are clearer than they’ve ever been.
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States also have to compete for business and taxpayers, so they need to keep their tax burdens lower and more proportional than the federal government. Even states such as Massachusetts that have raised taxes on high earners have often tried to offset these hikes with cuts elsewhere. States such as Vermont and Washington that have passed legislation authorizing single‐payer healthcare have declined to implement it in the face of the daunting tax hikes that would be required.
According to the Cato study, the most significant gainers of economic freedom since the turn of the century include Florida, Wisconsin, South Dakota, Idaho, and Georgia.
Florida’s gains have been the largest in the country, concentrated in the last 13years. When Rick Scott took over as governor in 2011, Florida’s economic freedom level was about where it stood in 2001, and the state was fifth in the country on that score. Florida’s economic freedom immediately began to grow rapidly, and by 2017, it was ranked No. 1.
Over that time, Florida’s state and local tax burdens both fell, the government sector shrank from 10.2% of the economy to just 6.7%, government employment went down, and state and local debt was cut by more than half. Florida reformed its homeowners’ insurance market and rid taxpayers of the huge liabilities incurred by the government insurer of last resort: Citizens Property Insurance Corporation. It has also expanded opportunities for workers by reducing occupational licensing barriers.
Additionally, in the early 2000s, Florida struggled with big‐spending ballot initiatives that amended the state constitution, tying legislators’ hands and creating budget headaches. In 2006, voters agreed to tie their own hands by amending the constitution to require ahigher threshold for future ballot‐initiated amendments — the same type of reform that failed this year in Ohio.
New Hampshire is another state leading the way in economic freedom, especially relative to its neighbors. It has cut the size of both its government sector and debt burden, allowing it to slash taxes repeatedly since 2015. Its growth rate has shot ahead of its closely connected neighbor, Massachusetts. Even New Hampshire’s famously high local‐property tax burden has come down. This year, Gov. Chris Sununu (R‑NH) signed abill enacting universal licensing reciprocity, and the state has started freeing up landowners to develop homes and solve New England’s housing crisis.
How to attain growth and prosperity is not amystery. Experiments in big government and small government have been run side by side for decades, and the results (backed by qualitative impressions as well as mountains of data) are clearer than they’ve ever been.