If the GOP is going to renew itself, Republican governors will need to play a major role. Fortunately, we have some good ones. Several of us from RedState participated in a blogger call with one of the best, South Carolina's Mark Sanford.
Gov. Sanford, best known as a critic of excessive government spending, is leaving office in 2010 due to term limits, and there is plenty of speculation that the two-term Governor and former three-term Congressman will run for the presidency in 2012. Like all potential candidates, he's been coy about the speculation. For now, he has his hands full governing; all eyes are on a budget battle that will come to a head with a vote in the legislature next week on his plan to use federal stimulus funds to pay down state debt (Newsweek has a look at Sanford's view of this battle here).
My summary of the call, along with the views of other RS participants, below the fold.
First of all, if you haven't watched Gov. Sanford in action, I'd recommend you go back to this post from last summer, where I collected video clips of his appearances. On the call he was much the same as you'll see him there: he exudes a sort of relaxed maturity, he knows his stuff (he endured a lengthy grilling by Francis about the state's debt structure), he's a great believer in frugal financial management and an apostle of competitiveness, and he's unwavering on his conservative principles. He made specific reference to this Daniel Henninger piece and Dick Cheney's comment that rebranding the GOP should not involve repositioning our principles. That said, he expressed interest in using calls like this as part of the process of outreach to new media and finding better ways to communicate our message.
Gov. Sanford has been facing serious opposition back home to his debt-service plan, and he's realistic about the possibility that he may lose the initial vote in the legislature, but takes the view that it's "inconceivable that somebody isn't going to blink" - and the implicit message is, it won't be him. He's insistent that if the state doesn't pay down debt, if it accepts the stimulus money and spends it, South Carolina will be in a $740 million hole two years from now. In his view, paying down debt and cutting back expenses is the responsible thing to do in tough times - he recounted a conversation with an editorial writer who assured him that the economy would be fine in two years, but admitted that if it isn't "we're toast." He was incredulous that anybody with responsibility for the state's finances could accept a plan that leaves that as an option. As he noted, quoting a book of the same title, "hope is not a method."
Which of course is a wonderful line to describe flaws in the current President's approach. (Interesting side note: Gov. Sanford's wife used to work for Obama car czar Steve Rattner at Wall Street investment banking firm Lazard Freres.) Gov. Sanford's take on President Obama's first 100 days noted what he termed "some real missed opportunities," and focused on how the promise of a post-partisan "new tone" had given way to "rough knuckle Chicago-style politics," his chief example of this from personal experience being the DNC cranking out ads to run against him in South Carolina the day after he filed his waiver seeking to use the stimulus money for debt service. More broadly, he noted that his job has been complicated by DNC ads run in the state misrepresenting the budget impact of his plan. I asked him whether he thought the White House and DNC reactions and strategies in the stimulus fight were driven by fear that he, or Gov. Palin or Gov. Jindal or other GOP governors might challenge Obama in 2012. Are the White House and the DNC trying to salt the ground in advance against them? Gov. Sanford said that was "a reasonable hypothesis" in light of the speed and ferocity of the DNC's attacks.
But while he recognizes that "advertising works and matters," he's not backing down; he draws inspiration from the energy of the tea party movement, noting that he's seeing energy out there he hasn't seen in 15 years in politics. As he put it, sometimes you wonder if you are a "lonely island" - "Am I on my own? Am I a crazy man?" - and then you go to an event (he's been to four) with 8,000 people in Greenville and see you are not alone, even if the taxpayer groups are "not as plaintive before government as some of the other advocacy groups out there."
Gov. Sanford has some real challenges ahead. As he noted, South Carolina is unique among the 50 states in having many of the executive's usual budgetary prerogatives in the hands of a legislative council, the Budget Control Board, a fact that explains a lot about the state's debt burden and is why Sanford has had to resort to occasional publicity stunts like the famous one pictured above, where he brought pigs to the statehouse to protest pork-barrel spending. He explained to us that he's faced legislative opposition to easy cost-cutting moves like trying to privatize a state golf course that loses $500,000 a year in a state overflowing with profitable golf courses. He noted rather ruefully that he'd had success getting the state to privatize a bait and tackle business, but that only "saved peanuts."
We had a very interesting conversation with Governor Sanford, and touched on a variety of subjects. The headline issue, on which he's taking a very important stand, is whether to use Federal stimulus (porkulus) funds to improve the balance sheet of South Carolina, or instead to just spend on whatever the legislature desires. Sanford made it clear that South Carolina's management is dominated by the legislature rather than the executive, so the dynamic in which he operates is all about persuasion.
What I understood from the Governor is that SC has the prospect of receiving $2.8 billion. If every penny of that were applied to reducing the state's outstanding debt, then the result would be a structural saving of $168 million per year. That backs out to about a 6% interest rate, which is not bad as municipal finance goes these days. I tried to get some color from Mr. Sanford on the term structure of the state's debt, which he said was the fourth largest in the country on a per capita basis. This is one highly-leveraged state!
Evidently, the state's effective interest rate has not increased much over the past two years, which suggests a fairly extended overall duration, and a reasonably sustainable overall debt burden. That must be why the state legislature would prefer to keep the leverage in place, and spend the incoming revenue on candy and bubble gum. On a strictly financial basis, that can indeed be a reasonable thing to do, and as a businessman, I'd prefer not to pay down the debt, given that it's relatively inexpensive.
But on balance, I applaud the Governor's plan, for several reasons. The state of South Carolina is not a business. They should NOT be looking for opportunities to increase leverage. That's something you do when you have favorable opportunities to grow. But state governments aren't profit-making enterprises, they're profit-destroying enterprises. They shouldn't be looking to grow. I didn't get a clear answer from the Governor on whether he actually is at liberty to pay down debt directly, and it would surprise me if he can (they don't call them fixed-income securities for nothing). But they can finesse that issue by selling swaps or some other derivative to cut their debt-service bill.
Of course, the Federal government doesn't want South Carolina paying off their debts with federal money for the same reason they didn't want to give you a tax cut: because in orthodox Keynesianism, a penny saved is a penny wasted. The Federal government, which is at liberty to print money, can go off and deficit-spend all they want. But individuals and state governments are NOT at liberty to print money, and are forced to live within their means.
It's entirely prudent for Governor Sanford to arrange the spending targets and the capital structure of his state's government so as to minimize their exposure to running out of money in the future. That's because the economy might not actually get better. The whole Federal stimulus approach is an exercise in begging the question. The theory is that spending money that doesn't exist will ipso facto make the economy all better again. If it doesn't, the Feds can simply print more. But a state government would, in the shocking words of one of Governor Sanford's media interlocutors, be "toast."
On to what the Governor would like to do by way of actually improving South Carolina's finances. He spoke about eliminating redundant and wasteful spending programs. The state sold their private jet when he took office, replacing it with a smaller leased plane, but hasn't yet managed to get rid of the pilots and support staff for a now-nonexistent aircraft. When his Commerce Secretary proposed replacing them with contract employees, the budget board tried to remove the plane from his department. That's how states work: one man's wasteful spending is another man's salary.
What Sanford has to do is to apply all of his persuasive power to induce the SC legislature and associated governmental entities to start eliminating wasteful spending from the bottom up. It's a task comparable to one of the labors of Hercules (you know which one). To the extent he manages to do this, we'll publicize and celebrate his successes, and hopefully they'll become models for other states to follow.
I have not followed South Carolina's internal debate over 'stimulus' funds all that closely.
I will say that I was impressed at how easy Governor Sanford was to talk to, and how much he seemed to enjoy a back-and-forth discussion with several bloggers. To borrow a phrase, Sanford seemed very comfortable in his own skin.
Sanford's handling of the stimulus debate is interesting to watch. He received a lot of positive attention initially for opposing the stimulus and suggesting that he'd reject the money. Then he attempted to use it solely for debt reduction. Either was a position that would have earned him significant conservative support. Now the White House insists that debt reduction is not a permissible use of the money. Sanford notes that because dollars are fungible, the state can use a small percentage of this money for debt reduction, while spending the bulk of it on necessary long-term reforms.
Politically, none of this really matters - unless Sanford runs for President in 2012. If he does, he may find himself engaged in a frustrating and unwinnable debate over whether he did 'the right thing' as far as fiscal conservatives are concerned. Some presidential rival who never faced this situation - Mike Huckabee, or Mitt Romney, or whoever - might try to neuter Sanford's otherwise unblemished record on fiscal matters by forcing him to defend his actions. His rivals will suggest that in a general election, Barack Obama will taunt him with lines like 'You remember Governor Sanford; he was against the stimulus bill before he was for it.' That could be a tough attack.
To me, this suggests that Sanford needs to choose his next move carefully. His heart is clearly in the right place. Listening to him talk about tea parties and limited government makes that clear. But he needs an exit to this debate that protects his viability down the road. He mentioned the possibility of a lawsuit to challenge federal limits on how the state spends this money; that may be the best next move.
I had never met Gov. Sanford at all before today's call, so I wasn't quite sure what to expect. But he was very relaxed, and what we had for the c. 45 minutes of the call was more of a good conversation than a rote Q&A.
One thing worth mentioning from the Governor's opening remarks is that South Carolina carries one of the higher levels of state indebtedness among the states; according to the Governor, 11% of South Carolina's state budget goes toward debt service (ranking S.C. fourth-highest among the states in that regard). That's a big tithing to be paying out of the budget every year.
The main focus of my questions related to the emerging topic of the bad-and-worsening competitive taxation situation of the United States as compared with other jurisdictions. South Carolina is a state that has had to confront this problem, as it was devastated by the disappearance of the textile industry. But with some good economic management, it has become, among other things, a preferred location for the U.S. manufacturing facilities of German automakers.
I basically referenced the thoughts I disbursed in this post from a couple days ago. I was glad to hear that the Governor is aware of this problem, and has already been hearing rumblings around the country from a few large corporations that bolting for other jurisdictions is certainly no longer unthinkable.
I'm still trying to find some way to turn this increasingly ugly business reality into a useful political message. As surely as spring follows winter, the overall global economy will recover and begin to grow again. The question is, will uncompetitive jurisdictions be left stuck in their own mud? When job growth returns, will there thus be none in the United States? The Governor seems to be aware that this isn't a trivial matter, but a major emerging problem - I hope he can help us craft a message that resonates on this topic.