RALEIGH — It seems that Dan Gerlach, a fiscal policy advisor to Gov. Mike Easley, didn't much care for a column I wrote recently about how North Carolina's weak economy is beginning to invite an old nickname: the "Rip van Winkle state." I'm sorry to disappoint my old friend, but the slumber-inducing policies of the Easley administration deserve a loud and long wake-up call.
In Gerlach's defensive response, which was published by at least two of the three dozen or so newspapers that ran my original column, he made several points concerning either my general argument about the impact of Easley's tax increases on the state's economy or about specific factual assertions I made. Here are his punches, followed by counter-punches:
1. Gerlach wrote that I "exaggerated" the state's economy problems and that they preceded, rather than followed, the governor's and legislature's decisions to raise taxes in 2001 and 2002.
First, there is no disagreement here about the fact that North Carolina's economic slowdown preceded the 2001 tax increases, which amounted to an annual fiscal impact of about $700 million. The state budget began to dip into deficit during the 2000-01 fiscal year, just weeks after Easley's inauguration (thank you, Gov. Hunt!). More generally, I never suggested that our economic problems were solely related to state tax increases. That would be a preposterous assertion. Gerlach is creating a straw man here that bears no relationship to me or my argument.
A paragraph of my original column is worth quoting here in full:
"I’m not going to pretend that state and local tax policies alone can determine the fate of the economy. But they have undeniably played a significant role in hampering North Carolina’s economic recovery. Evidence for this insight can be found in neighboring states, such as South Carolina and Georgia, which have faced many of the some macro-problems that North Carolina has – such as intensified foreign competition – without taking nearly as large an economic hit."
Notice I was specific to talk about North Carolina's "recovery" from the recession being adversely affected by the tax increases. I never suggested that the recession itself was caused by Easley or his policies.
2. In proving his assertion that I exaggerated North Carolina's economic problems, Gerlach argued that "North Carolina's income growth outpaced the nation between 2001 and 2002, and outpaced all of our neighboring states in the last quarter of available data."
Here's a case of selective data reporting, as far as I can tell. I stand by my original computation that from the passage of the 2001 tax hikes until the most recent quarter of data (4th quarter 2002), North Carolina's personal income growth (3.98 percent) has legged its neighbors (5.03 percent) and the national average (4.23 percent). Within this span of time, there may be shorter periods Gerlach can select out that make North Carolina look better, but I was talking about our economic performance since the policy change in question.
3. Gerlach suggested that North Carolina, as a manufacturing state, was actually performing better than some other manufacturing-dependent states on unemployment rates, and noted that our jobless rate had actually fallen by 1 percent over the past year, showing extraordinary improvement.
Here's where the data can get tricky. As Gerlach knows well, unemployment rates have to be interpreted carefully. A drop in the jobless rate can reflect increased employment prospects — or they can reflect that the labor market is so weak some unemployed individiduals give up and leave the workforce, thus making the rate look better. Many analysts have noted the strong possibility that this may have been occurring in North Carolina over the last few months. That's why in my column I chose to look at employment statistics, rather than unemployment statistics, as they capture more directly whether we have been adding or subtracting jobs in North Carolina (particularly in the context of a state population that is continuing to grow).
What I found, and reported in my original column, was that North Carolina had shed 119,000 jobs since the passage of the 2001 tax increases – or more than one-third of all the net losses of the Southern states. Even this miserable record is worse than it appears, because North Carolina actually saw more growth in government employment – about 31,000 positions, or 5 percent – than any other of our neighbors, where the average growth rate was only 3.2 percent. So North Carolina’s private employers shed 150,000 jobs during the past two years, dwarfing the losses of any comparable state.
The fact that some of these workers have since become discouraged and dropped out of the labor force is not good news for North Carolina, though it may have made our jobless rate look a little better in recent months.
4. Gerlach suggested that North Carolina's economic problems were related to increased foreign competition, to economic change, and to military deployments.
As noted previously, these factors have also been present in many of neighboring states, which have nonetheless performed much better than North Carolina in economic recovery. Only on military deployments is there a sliver of a legitimate point here, and it lacks proof. Indeed, I have talked to knowledgeable observers in both Fayetteville and Jacksonville in the past two weeks who have told me that, contrary to expectations, the Iraq and Afghanistan deployments have not impacted retail spending in those areas nearly as much as was experienced during the 1991 Gulf War.
5. Gerlach argued that taxes couldn't be hurting North Carolina's economy as much as I suggested because our state's ranking in taxes hasn't worsened very much since 2001 and per-capita tax collections had actually fallen 2 percent from 2000 to 2002. He also implied the "billions" in state budget cuts could be to blame for any economic woes we are experiencing.
Weakest part of his piece. Gerlach seems not to have grasped my key point, which is that he and other folks in the Easley administration have failed to account for how higher tax rates affect economic decisions. No, per-capita tax collections haven't grown as the administration's static projections of the tax increases had led us to believe they would. Entrepreneurs, investors, and high-value professionals now have strong financial incentives not to earn income in North Carolina, where they will pay one of the highest marginal tax rates (8.25 percent) in the United States. Something similar is going on, at least along our border counties, with North Carolina's relatively high sales tax. Easley's tax increases have restrained the growth of our state's tax base, thus reducing the actual revenue gains from those tax increases.
Yes, other states collect a similar amount of tax revenue per person and as a percentage of income — despite the fact that they impose lower marginal tax rates. Precisely. The amount of economic production their governments are confiscating may be similar to North Carolina's, but in their case it's because they are baking bigger economic pies. In our case, it's because Easley and other politicians have been cutting themselves more generous slices of a relatively smaller pie.
As far as the "billions" in state budget cuts are concerned, where are they? Spending hasn't grown at the breakneck speed of the 1990s in North Carolina, but the state budget has continued to grow for the most part, not shrink. The budget now being debated in the legislature would increase spending by about 5 percent. The fact that the politicians would really have liked to boost spending by 10 percent next year, but can't manage it, does not transform a budget increase into a budget cut.
Besides, much of the state spending growth avoided in the past couple of years due to slackened revenues would have damaged free markets in North Carolina, so no great economic loss.
6. Gerlach asserts that Easley's North Carolina is better positioned for growth, due to higher levels of government "investment" in education, and that other states are coming around to Easley's position on this.
Wrong again. Even if other Southeastern states end up passing significant tax increases this year, this will for the most be the first such year of tax hikes. North Carolina has been raising taxes each year since 2001, at both the state and local levels. Nor is there any credible evidence to support the contention that Easley's decision to reduce average class sizes in grades other than kindergarten, build new university buildings, protect wasteful and duplicative state programs, and create new preschool programs with questionable demand for their services will boost long-term economic growth.
So, was my Rip van Winkle analogy fair? I think so. North Carolina's politicians may appear to be positively hyperactive, but I'd argue that this is more akin to fitful sleepwalking than real work. Meanwhile, the state's economy remains, not so blissfully, asleep.
Hood is president of the John Locke Foundation and publisher of Carolina Journal.