RALEIGH -- Senate President Pro Tem Marc Basnight has been representing Northeastern North Carolina long enough in the state legislature to have hatched or helped to hatch some pretty bad "economic development" projects. State taxpayers have been spent millions on the Global TransPark, for example, and the Wanchese Seafood Industrial Park and Dare County tourist attractions. Taxpayers have also lost millions of their own dollars to the higher taxes Basnight supported.
Perhaps as penance, Basnight has actually been the source of some praiseworthy ideas recently. He's been urging Gov. Mike Easley and fellow lawmakers to reduce North Carolina's marginal tax rate on corporate income, which would do more to improve the economic climate of the state than dozens of additional make-work schemes. Another idea of Basnight's rated front-page treatment Sunday by The News & Observer of Raleigh: privatizing the state's job-recruitment efforts contained in the NC Department of Commerce.
The privatization option isn't unprecedented. Florida and Virginia are two states that have already set up private contracts to identify and solicit industrial prospects. Moreover, it is certainly conceivable that privatizing a large swath of the Department of Commerce could result in cost savings and the leveraging of additional private dollars and assistance. If North Carolina is going to spend tax dollars on this function, I'm all for pursuing a different and more private-centered approach.
But contracting out a government service is a policy option you undertake after first determining that the service should truly be financed by the government. Given that, as evidenced by the N&O exposition of the idea, privatizing Commerce seems to invite the notion of tossing additional grants or tax subsidies for industrial prospects into the mix, I'm worried that state policymakers have yet to find the courage of their convictions on the issue of economic development.
Spend any time at all in Raleigh political circles and you will discover that virtually anything championed by a politician, a lobbyist, or a self-appointed "advocate" for a cause is predicted to result in an economic bonanza. The connection can often be obviously tenuous -- such as the fatuous nonsense you will hear about how spending a dollar on the arts will return six or seven or eight dollars in "spinoffs" and "economic multipliers." With regard to incentives, lawmakers are treated to a parade of contract players -- lobbyists, developers, salesmen, brokers -- all proclaiming the inevitability of competing for business through bribes and all, no doubt coincidentally, sticking out their hands to get some for themselves or their clients.
Plenty of longtime politicians I know are tired of hearing this pitch. But they also exhibit little willingness to say no. They say that if North Carolina doesn't play the game, it can't possibly win it. But some of them know that such a rigged game isn't worth playing in the first place, and that it isn't the game that most North Carolinians want them to play.
As it happens, the available empirical evidence is firmly on the side of incentive opponents, though you'd never know it if all you read was the aforementioned, poorly sourced N&O piece. The reporters apparently took at face value the notion that special giveaways and governmental powers to "assemble parcels" and the like constitute the reason why other states' economies have outperformed North Carolina's over the past couple of years. Careful investigation suggests otherwise.
Here are some research findings to keep in mind:
* Business executives themselves don't rate the importance of incentive policies very highly. In a John Locke Foundation survey last year, factors such as state and local taxes, regulations, and the skill level of available workers were ranked far above incentives in determining the economic competitiveness of North Carolina.
* These survey results comport with the best available econometric models of what makes state economies grow. Taxes do matter. When a state's marginal tax rates are measured (careful, it's a PDF), they do bear a statistically significant relationship to economic growth, though often the overall tax burden per capita does not (the latter is affected not only by tax rates but by population and growth factors, and is thus the wrong variable to measure). Other factors under the control of public authorities that seem to matter, at least in some models, are investment in public infrastructure (another PDF), primarily highways, and the level of spending on police and fire protection. Education spending, by the way, is usually found to have only a small affect, or none at all. This is not to suggest that better-educated and better-trained workers aren't an economic asset, but instead that there isn't necessarily a relationship between a state's education spending and such an outcome -- either because of poor performance by schools or because the labor force is mobile, large, and hard to affect in the short run by government education expenditures.
* Lastly, there is little evidence as far as I can determine that suggests states with more-generous incentive policies grow more rapidly, have lower unemployment rates, or otherwise enjoy an economic advantage over states with less-generous incentives. Sure, individual projects may be influenced by incentive grants -- though even this possibility is often exaggerated or even actually denied by executives of recipient corporations. But the policy as a whole, considering all the costs imposed on small businesses and those without political pull, is a failed one, with one recent study concluding that the vast majority of jobs for which state tax credits have been awarded would have been created in the state without them. Actually, it's worse than that, in that for every rare "success" in the incentives game there are many more failed bids, many more examples of states and localities going all out to subsidize a business enterprise that turns out to be underwhelming or a complete dud. Just a few days ago I was visiting the Alleghany County town of Sparta, where a high-profile Bristol Compressors project was to employ hundreds and receive millions in state and local incentives. The project never amounted to much and is now gone, leving local governments trying to recover some of their funds in court. A New York Times article Monday detailed other examples of how high, incentive-stoked hopes have frequently been dashed by economic realities.
Here's where politicians realy miss the boat on the incentives issue: the best econometric models do show a set of government variables to have an even stronger effect on state economic growth than marginal tax rates. These consist of measures of government "rent-seeking," such as lobbying expenditures, the ranks of lawyers, and the size of the government bureaucracy.
All three are connected closely with state "industrial policy" initiatives such as incentives. I am all for contracting out governmental functions, but the best form of privatization is "load-shedding": simply getting the government out of businesses where it has no legitimate role. If privatizing the Commerce Department is nothing more than an excuse to blur further the lines between the responsibilities of the public sector and those of the private sector, then here's one form of privatization I must wholeheartedly oppose.
Hood is president of the John Locke Foundation and publisher of Carolina Journal.