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John Hood's Syndicated Weekly Column

NC's Not on the List

Jun. 13th, 2003
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RALEIGH – Amid all the evidence of North Carolina’s lackluster economic performance – the lowest growth rate in the region, the highest rate of job loss in the region and one of the worst in the U.S., etc. – comes another indicator that speaks directly to the state’s bias against investment and enterprise.

Business Week magazine publishes an annual ranking of the top 100 “hot growth companies” in America. Selected from a national database of 10,000 publicly traded corporations, these firms exhibit strong growth in sales, earnings, and return on capital. They form the dynamic core of a changing economy – the enterprises that are at the forefront in replacing the job and investment opportunities being lost in older industries.

Not a single North Carolina company made the list in 2003.

Ours is the 11th most-populous state in the union. In recent decades, our economy has outperformed the average. North Carolinians have gotten used to thinking of themselves as progressive, as a leading force for new ideas and endeavors in the South. But in the Business Week survey, out of 23 “hot growth companies” in the region, none was a North Carolina enterprise. Florida and Tennessee boasted five apiece; Texas four; Alabama, Virginia, and Maryland two each; and South Carolina, Georgia, and even lowly Louisiana one each.

Was this just a fluke? I don’t think so. While North Carolina’s record in attracting “big fish” facilities from elsewhere has been spotty, its record in cultivating start-ups and entrepreneurs has gotten downright appalling. For example, Gov. Mike Easley, former Gov. Jim Hunt, and the General Assembly have worked together to expand the state’s previously modest offerings of targeted tax breaks, government grants, and other “incentives” to mostly large corporations. A recent survey by the Fluor Corporation ranked North Carolina’s incentives as the most generous among 12 Southern states for manufacturers and number two for “super projects.”

But another recent study, this one by the Washington-based Small Business Survival Committee, ranked North Carolina dead last in the region for fiscal and other policies affecting small businesses and entrepreneurs.

This is more than just a political or legislative struggle between large and small companies, or between those on the inside of the political process and the majority on the outside. It reflects a difference in philosophy about how and why economies prosper.

One notion, deeply embedded in the minds of many politicians because of their faulty education in economics and history, is that free enterprise is inherently unstable and incapable of fostering good, long-run decisions. Its adherents believe that the main impediments to growth can and should be “fixed” by government. They want the state to “invest” public dollars into new ventures, into research centers, into various ways of subsidizing what they believe to be the “industries of the future.” They acknowledge that raising taxes has some economic cost, but they believe that spending the proceeds on public education, public construction, and even public services like Medicaid can more than offset the deleterious effects of taxes. More than one politician I’ve talked to about this contends that a state can be “progressive,” and its economy prosperous, only to the extent that its leaders are willing to “pay for it” through raising taxes.

This is the ruling philosophy of the political class in Raleigh, reflecting not only near-unanimous Democratic belief but a goodly number of Republican believers, as well. And to put it generously, it is contradicted by sound theory and real-world experience.

The alternative view – and the one currently in vogue in most of our neighboring and competing states – is that high tax rates discourage entrepreneurs and investors from building new growth industries. Core public services do help economies grow, but their value isn’t infinite. If throwing government dollars at education, research, planning, and the public-sector equivalent of stock-picking was a viable strategy for economic growth, then the history of the world during the past half-century would have been dramatically different.

With the some of the highest marginal income tax rates in the country and a growing and costly regulatory burden, North Carolina is poorly positioned for the dynamic changes now working their way through the economy. Protecting old industries and paying a few big companies to site their plants in our state (for a few years) aren’t viable options for long-term economic development. Nor is subsidizing more students to obtain more degrees or researchers to publish more papers.

North Carolina should be where the investors and entrepreneurs of the future want to live, work, and build new businesses. It isn’t. Let’s do something about that before it’s too late.

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Hood is president of the John Locke Foundation and publisher of Carolina Journal, in print and on the web at www.CarolinaJournal.com.