by Joseph Coletti
Senior Fellow, Fiscal Studies, John Locke Foundation
Sometimes things happen slowly and then all at once, like love or bankruptcy. Sometimes they just happen suddenly, like a car accident or hitting the jackpot on a slot machine. A big win can mask small failures, and a big loss can wipe out years of steady gains. Casinos and insurance companies are built on earning enough small gains to offset large payouts. Nicholas Nassim Taleb first described this in his book Fooled by Randomness and the rest of his Incerto series.
Our modern world in some ways is the result of a series of bets with some significant changes in fortune, but enough good over the past 500 years to produce standards of living unimagined in human history. What we consider extreme poverty ($1.90 per day) was the average income for our ancestors. The order that made this progress possible is fragile and rare in the universe. Disorder, chaos, and entropy are the norm. Civilization is fragile. Michael J. Totten attributed part of the popularity of The Walking Dead and other zombie fiction to the common understanding of this fragility.
Social movements of the past decade, from the Tea Party and Occupy to Black Lives Matter, #MeToo, and the 2016 election have been the political manifestation of popular responses to this fragility. Each threatened group has gathered in response to challenge the unfairly obtained power of its persecutors. Elite responses have spanned the range from confusion to contempt. Neither the Republican nor Democratic establishment could find a way to contain Donald Trump, and so he is a year and a half into his presidency. Academics and experts still tend to see Trump as an aberration instead of the sudden culmination of gradually accumulating grievances.
Nowhere is the gradual nature of Trump’s rise clearer than in the sphere of international relations. The post-World War II order began to unravel in 1971 when the United States abandoned the gold standard. Despite the Reagan reversal of American malaise, Paul Kennedy’s Rise and Fall of the Great Powers became the touchstone for America’s imperial overreach that made a case for taking a peace dividend after the Soviet Union collapsed in 1991. Even the “Washington consensus” of the value of free markets and free trade was accompanied by bailouts of developing countries and American bankers at the expense of assembly line workers. Given the scale of time international scholars consider, it is not surprising that they are more attuned to the tectonic shifts that erupted in the emergence of Bernie Sanders and Donald Trump. Brookings Institution scholars Robert Kagan and Thomas Wright recently discussed the crumbling foundations of that world order.
The gradual erosion of solid ground is also noticeable at the state level. North Carolina’s past brushes with fiscal disaster led to the creation of the Local Government Commission, the Savings Reserve, and an obsessive pride in being one of only a dozen states with Triple-A ratings from all three credit rating agencies. The 2007 financial crisis, still recent enough for many in government but ancient history to a growing number of voters and financial professionals, provided a stark lesson in how quickly markets can contradict rating agency assurances of safety.
The Pew Charitable Trusts pointed to the Local Government Commission’s successful history of keeping North Carolina’s counties, cities, and towns solvent, but State Auditor Beth Wood and Revenue Secretary Ronald Penny recently warned their fellow commissioners about the increasing financial risks smaller municipalities are taking. Similarly, the state pension system is among the five healthiest in any state, but State Treasurer Dale Folwell has repeatedly warned that the pension liability is understated, that retiree health care costs exceed $30 billion, and that failure to get both of these debts under control could harm the state’s credit rating and the government services citizens depend upon.
The good work of the General Assembly since 2011 ensured that government grew at a sustainable rate, but it is also a tenuous proposition. Their work has been aided by a good institutional structure with a single committee in charge of spending that is separate from the committee on taxes and a strong, balanced budget requirement. They have added strong institutions such as eliminating the threat of government shutdown if there is no budget by July 1 and setting baseline budgets set to the previous year’s spending instead of its programs and activities.
Good habits and good institutions can disappear overnight. Nassim Taleb has explained that is no good to say all swans are white once you see a black swan. It is not pessimistic or doomsaying to point out cracks in the foundation, but instead, it is a necessary diagnostic step. It takes work and luck to keep something good going. We in North Carolina have it very good and have been very lucky. We have work to do if we are to remain as lucky.