RALEIGH — According to the Easley administration, I am acting like “Chicken Little” in stating my concerns about North Carolina’s languid and tax-shackled economy. Responding to a syndicated column of mine that ran in a few dozen newspapers in June, Commerce Department general counsel Don Hobart sent out his own column that challenged the evidence for my pessimism and questioned my argument that North Carolina’s relatively high spending on public universities wasn’t the right way to improve our competitive position.
Feel free to read or re-read Hobart’s piece before continuing, as I’m devoting this Daily Journal to refuting it. As I see it, he is making three groups of arguments: 1) contrary to the impression I gave in my column, North Carolina is not trailing its neighbors in economic growth and development; 2) government subsidies on higher education and research are the key to economic growth, and to North Carolina’s growth in particular; and 3) a “balanced” approach to fiscal policy is better for the economy than striving to be a low-tax jurisdiction.
Ranking North Carolina
The first set of arguments essentially revolves around economics statistics and rankings by national media or organizations. In my column and previous ones, I have used both kinds of information to illustrate North Carolina’s economic woes. For example, I have noted that North Carolina’s job losses since the onset of recession in 2001 have been among the worst in the United States, and are certainly the most severe (in proportional terms) in the Southeast. As I revealed in Monday’s Daily Journal, nearly one-third of all the private-sector jobs lost in 10 Southeastern states (the old Confederacy minus Texas) since March 2001 were lost right here in North Carolina. On the other hand, government employment in North Carolina has grown by nearly 6 percent since 2001, far faster than the 3.4 percent regional average. Almost a quarter of all new public-sector jobs in the Southeast have been created in our state.
Other data are similarly depressing. From the passage of North Carolina’s 2001 tax hikes until the most recent quarter of data (4th quarter 2002), the state’s personal income growth (3.98 percent) has legged its neighbors (5.03 percent) and the national average (4.23 percent). And while our official unemployment rate is down from its high in 2002, this reflects in part the aforementioned growth in government jobs (not a recipe for long-term economic health, as I’ll get to in a minute) and the fact that some discouraged job-seekers have dropped out of the workforce altogether.
On the less rigorous category of national ranking by magazines and the like, I offered up the fact that the latest Business Week list of 100 “hot growth companies” didn’t include a single North Carolina company. I also noted that the Small Business Survival Committee has ranked North Carolina quite low for public policies fostering – or in our case blocking – entrepreneurial opportunity.
Hobart responds with several, more favorable rankings of his own. He points out that the latest Forbes magazine list of “200 best small companies” in America included three North Carolina firms, which was more than most other Southern states could claim. (He also noted that the philosophy of Forbes should be congenial to the John Locke Foundation, which is true). But a closer look at the Forbes study illustrates why it is unresponsive to my point. First, it was an examination of profitable small companies, not fast-growing companies in general as in the Business Week case. Second, when you adjust the number of companies listed in the Forbes report by state population, North Carolina’s doesn’t look so good. Texas, Florida, Arkansas, Tennessee, Georgia, and Virginia all outdid North Carolina on this calculation, in some cases by large margins. On the other hand, we did look better than Mississippi and Louisiana, if that cheers you.
Hobart then brings up the hardy perennial of North Carolina’s high ranking by Site Selection magazine. We do tend to do well by this metric. Keep in mind that half the score in the magazine’s ranking comes from surveys of economic-developer professionals rather than from actual economic performance. The subjectivity involved may skew the results, or at least reflect a time lag (North Carolina’s past economic performance may be lingering in many folks’ minds). Also keep in mind that these folks work with big companies on big projects. They are not often involved in, or knowledgeable about, entrepreneurs and the growth or lack of growth more generally in an economy. As I noted in my original column, North Carolina has expanded (unwisely, I think) its specialized incentive programs for big businesses, so the job recruiters who court them (and are often compensated on the basis of incentive packages negotiated) might well have reason to smile.
Next, let’s discuss the Milken Institute’s recent study of the ‘best-performing cities” in America in economic growth. It is true that the 2003 version of the Milken report put three North Carolina metros in the top 50: Raleigh-Durham (12), Charlotte (46), and Wilmington (49). Unfortunately for us, this is less meaningful than it may appear at first glance.
First, this is a ranking of metro areas, not states. Some states have populations that are more concentrated in a few big cities, while others (like North Carolina) have a larger number of smaller metros. To count the number of metros that show up in a particular segment of a ranking is to invite confusion if not to mislead. For example, in a July 8 press release the Easley administration trumpeted the fact that only one other state in the Southeast, Florida, had more metros in the top 50 than North Carolina did. I noticed that they didn’t trumpet the fact that North Carolina had more metros in the bottom 50 of the Milken Institute rankings (three: the Triad, Fayetteville, and Hickory-Morganton) than did any other state in the Southeast. One reason is that, statewide, North Carolina has some serious economic challenges, as I originally argued. Another is that North Carolina has proportionally more metros, due to our historic pattern of settlement and growth. Out of the 200 metros ranked by Milken, North Carolina had seven while Tennessee had six and Virginia and Georgia had five. That means we were always likely to have “more metros” in any given segment of the list than other, similarly situated states.
Another problem here is that “metros” don’t precisely conform to state boundaries. Part of the Charlotte metro is in South Carolina, for example. Many other metros straddle state lines. Because the Milken Institute didn’t break the data out by counties or cities (and I’m not sure that was possible) it is hard to draw useful conclusions about state-to-state comparisons from the study.
Still another issue is that the Milken Institute study was, well, kind of screwy. It may seem to be a ranking of metros on the basis of growth in jobs and income, but actually four of the nine factors that went into the computation, representing more than a quarter of the weighting, are specific to “high-tech” industries and jobs. Look, a dollar is a dollar, and a job is a job. High-technology companies are great things to have around, but it isn’t obvious to me why their presence should be treated as a kind of Holy Grail for a state economy, particularly given the recent boom-and-bust cycle in tech. For North Carolina, the inclusion of tech as a disproportionate weight in the Milken index helped to explain why the Triangle ranked 12th out of the 200 metros (as did the fact that the Triangle is home to state government and to large state institutions such as universities, which haven’t shed jobs the way many private companies have).
Finally, and most importantly, the Milken Institute data actually confirm my thesis, contrary to the Easley administration’s reckless assertion. Remember that I was focusing on the period since 2001 to show that North Carolina’s economy was underperforming in part because of unfortunate policy choices. The Milken index put significant weight on five-year averages in job and income growth, which for North Carolina included some good years in the late 1990s. For the variables reflecting more recent experience, even the Milken Institute study had bad news for North Carolina: out of the 200 metros, only Charlotte (49) made the top 50 in job growth since Dec. 2001, with Raleigh-Durham (96), Fayetteville (123), Hickory-Morganton (124), Wilmington (125), the Triad (132), and Asheville (171) looking pretty bad by national standards. Recent wage and salary growth looks at least as bad with only Wilmington (29) making the top 50, followed by Raleigh-Durham (86), Asheville (105), Charlotte (125), Fayetteville (139), the Triad (171), and Hickory-Morganton (197).
Does Government Generate Growth?
The second set of arguments Hobart employs has to do with what makes state economies grow. He asserts in his response that “the best theories of economic growth highlight the vital role that education and public research funding play in growing many of America's key industries,” and specifically highlights the notion that government funding is the key to scientific discovery and research outcomes.
You know, once you get used to it, a briar patch can be a surprisingly comfortable place to relax.
It so happens that I spent a good portion of my recent book, Investor Politics, discussing the lack of evidence for the proposition Hobart advances here. The facts lead to a different conclusion. First, among the scholarly studies that have attempted to find statistically significant correlations between government education spending and economic growth, one will find only occasional successes, and these mostly involve K-12 education spending or outcomes. For the most part, research on state economies does not show such a link. For example, some years ago I discussed a major 1999 study by Harold Brumm, a former top official at the General Accounting Office, looked at variables affecting growth rates for states. He found that the starting size of an economy, the tax burden, and the number of “rent-seekers” (government employees, lobbyists, and lawyers) had statistically significant links to growth. Neither educational outcomes nor state spending did. More recently, a 2002 follow-up study found that government spending on fixed capital (highways, etc.) mattered a little bit, and public services such as law enforcement mattered a lot. And on the specific issue at hand, my colleague Jon Sanders constructed a model for us and for a similar think tank in Arizona that found, again, no positive correlation between college funding and the economy.
So why, contrary to the expectation of many, would government spending on higher education not show up as a major factor in state economic performance? Several possibilities present themselves. First, a college degree doesn’t necessarily signify that a person has learned something of economic value (which is not to say that there aren’t other values being pursued in college). Some make the spurious argument that those with college degrees earn dramatically more than those without them, but the gap falls away when you factor out of the average those people who go on to graduate degrees in lucrative fields such as medicine or law (obviously an undergraduate degree is valuable to them) and after you adjust for skills learned. Second, unlike highways and other public infrastructure, or services related to suppressing crime or fire, government education programs don’t generate geographically contained benefits. Plenty of people get educated in one place and get a job in another place. The relationships are murkier and more complex than the press releases of university lobbyists, greedy for more tax money, make them out to be.
Sorry for being so verbose. The bottom line is that there are probably too many people going off to four-year colleges right now, not too few, with the result being a watering-down of academic standards, a lot of wasted parental and taxpayer dollars, and shockingly low graduation rates. If college degrees were the key to economic growth, many countries in the Soviet bloc would have outpaced their Western peers during the 20th century. Of course, some silly Western professors actually thought this was true for much of the 20th century, illustrating another reason why funding their silliness doesn’t always have a real-world payoff.
On government funding of science, again the data don’t support the conventional wisdom. Just in the past 30 years or so, government funding through the National Science Foundation and other means has grown relatively slowly, and in real terms has often declined, while technological innovation and the resulting economic growth have soared. Most research is privately funded now. And I don’t just mean the obvious examples of pharmaceuticals, biotechnology, or software. The chemical industry spends twice as much money on R&D as NASA does. Electrical equipment firms spend twice as much as does the Department of Energy. Rubber and paper ,manufacturers, together, have a research budget larger than the National Science Foundation. Government funding does, of course, continue to dominate R&D in such fields as aeronautics and aerospace, but for the perfectly understandable reason that government is the primary consumer for these industries (in the form of contracts for planes, weapons, and spacecraft) rather than just an investor.
Most new technological discoveries come not from cloistered academics or government research labs but from engineers and inventors in the private sector working directly on industrial machinery and processes. As British biochemist Terence Kealey documents in his invaluable 1996 book The Economic Laws of Scientific Research, during the past two centuries the industrialized world ran a kind of practical experiment to test whether government spending on science and technology created more economic growth than a private sector-led effort. Countries such as France and Germany, and later the Soviet Union and China, invested lots of government money in science and technology. England and the United States, and later Switzerland and Japan, left most of the responsibility in the hands of industry, philanthropists, and so-called "hobby" scientists working on their own. It was the latter group of countries that hosted the most prolific and celebrated scientists, and the most dynamic and technologically advanced economies.
Should We Aim for Balance?
The third broad argument Hobart makes is that North Carolina has discovered the best economic development strategy: balance. While some states might seek to be among the lowest-cost economies in terms of taxes or regulations, North Carolina is in the middle and is thus able to finance needed government programs, he says.
This is baloney – that thick-cut kind with the red sheath encircling it. In our region, at least, the economic dynamos are states such as Florida and Texas that have low marginal tax rates, particularly on income (zero, in both cases), and regulatory systems that aren’t as burdensome as North Carolina’s. Neither spends nearly as much money on government, on education subsidies, on Medicaid and welfare, or most other services as does North Carolina.
In sum, I don’t accept the nickname “Chicken Little.” I’m an optimist at heart, not a pessimist. But when you keep stumbling over the pieces of sky that litter the ground, you start to think that maybe they’ve fallen from somewhere.
Hood is president of the John Locke Foundation and publisher of Carolina Journal.