Clouds have covered the North Carolina economy for most of the past two years. However, the national economy has been in a recession, or slowdown, so it’s expected the North Carolina economy would struggle along with the economies of other states.
But recessions are the exception, rather than the rule, in our economy. Before the recent recession hit, North Carolina’s economy was prospering by any reasonable standard. Let me chronicle some key prerecessionary trends in the state.
Economic Growth : From the late 1980s to 2000, North Carolina’s economy was the 10th fastest growing in the nation. Our output of goods and services increased 72 percent. Even production from manufacturing rose 34 percent. But because service output jumped 88 percent, the share of our economy based on manufacturing fell from 30 percent in 1987 to 23 percent in 2000.
Although the state’s factories, in aggregate, produced more in the years before the recession, the composition of this production dramatically changed. Traditional manufacturing (tobacco products, textiles and apparel, and furniture) output dropped, but output from nontraditional manufacturing rose.
Work: Certainly a trend in our state, and the nation, has been the growth of jobs in service industries and the reduction of employment in manufacturing. During the decade of the 1990s in North Carolina, service industry jobs increased 30 percent while 13 percent of manufacturing jobs were lost. Factory output still went up because output per worker rose through the use of better machinery and technology.
Income: What have all these economic trends meant for average personal income in North Carolina? On this count, there have been two positive developments. First, average personal income in North Carolina has been rising faster than the cost of living in each of the past three decades. In the 1970s the increase was 18 percent, in the ‘80s it was 33 percent, and another 18 percent gain was registered in the '90s.
Also noteworthy is the fact these rapid income gains have moved the state’s average personal income closer to the national average. In 1970, average personal income in North Carolina was only 80 percent of the national average. By 1990, we had moved to 88 percent of the national average, and in 2000, we stood at 91 percent of the national average.
These income changes have created one disturbing trend in North Carolina — increasing income inequality. Because many of the factors affecting the North Carolina economy in the recent decades have favored workers with education and skills, income has become less equally distributed over the past 20 years.
Challenges: This documentation of favorable economic trends in North Carolina is not to ignore the economic challenges facing the state. I see these challenges in three categories. First is successfully moving workers displaced by the decline in traditional manufacturing into other fruitful employment. This will take a combination of individual motivation as well as educational opportunities. However, the state should resist targeting or directing individuals to specific occupational categories.
Second is putting North Carolina’ budget and tax systems on sound footing for the future. To accomplish this, I recommend limiting annual increases in state spending to some factor accounting for inflation and population growth. This would allow accumulation of a “business cycle reserve,” or “rainy day fund,” during years of strong economic growth.
The reserve or fund could then be drawn on during recessionary years in or to avoid spending cuts or tax increases.
For the tax system, I suggest state policymakers consider a simple, easily understood “flat” income tax to replace the current taxes in the General Fund. In an earlier issue of Carolina Journal, I estimated a flat rate of 9 percent on household and business taxable income could supply the same revenue as the current individual and corporate income taxes, the sales tax, and other smaller taxes. Then, the state could leave the sales tax for exclusive use by counties.
Third, North Carolina needs a sound way of funding public infrastructure (roads, schools, etc.) that keeps pace with growth. Indeed, there is no reason why this can’t be done. What is required, however, is reserving earmarked funds, like the highway funds, specifically for those functions. There have been many examples of highway funds being transferred for nonhighway spending. Also, as a result of the long periods between revaluations, local property tax revenues will not necessarily keep pace with economic growth without constant tax rate increases. The state and counties should consider revamping the property tax or replacing it with a broader based tax, such as the sales tax.
North Carolina’s economy has experienced remarkable progress over recent decades, and this progress will likely continue in the years ahead. Yet economies never grow in a straight line. There will be periodic dips, or recessions. Also, all industries do not grow at the same rate. In fact, aggregate economic growth is generally associated with some industries declining while others expand. But, in total, the good news usually trumps the bad news, and we do move forward.