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Business and Regulations,K-12 Education,Opinion,Taxes and Budget,Transportation

Carolina Wins, Losses, and Ties

Nov. 1st, 2011
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RALEIGH – North Carolina continues to have one of the weakest economies in the United States. Why?

There is substantial disagreement. Liberals argue that state and local budget cuts have resulted in mass layoffs in the public sector, worsening the overall unemployment rate. Conservatives argue that excessive taxes and government spending have hurt the private sector, so reductions in government spending and tax rates will boost private spending and hiring in the coming months.

Not surprisingly, I think the conservative position is correct. But this is a disagreement about recent history – about the past few months, or at most the past couple of years. Notice how I framed the original question: why does North Carolina continue to have one of the weakest economies in the nation?

Our state’s economic woes didn’t begin in 2009, or in late 2007 with the onset of the financial crisis. North Carolina had a worse-than-average performance during the previous economic recession in the early 2000s, and posted an underwhelming recovery from it over the past decade. Growth in personal income and per-capita GDP, in particular, has been weak for many years.

Modern economies are complex, ever-changing sets of bilateral and multilateral contracts among households, businesses, and governments. Politicians and activists may dearly wish to convert all this complexity into a simple sound bite – but if wishes were reality, we wouldn’t be having this conversation in the first place.

In the real world, North Carolina policymakers have only partial control over the factors that may explain North Carolina’s recent economic performance. Changes in technology, international competition, and consumer tastes would have put severe stress on some of the state’s traditional manufacturing industries over the past three decades regardless of what politicians in Raleigh did.

During that period, North Carolina’s Big Three industries of tobacco, furniture, and textiles gave way to a new Big Five of finance, food processing, information technology, vehicle manufacturing, and pharmaceutical/chemical manufacturing. More recently, national and international factors have thrown several of these sectors for a loop.

What North Carolina policymakers can influence are the costs and benefits of doing business in the state. Such factors as tax rates, regulatory compliance, and infrastructure are under their direct control. Other factors such as energy costs, land-development costs, workforce preparedness, and labor productivity may not be under the direct control of politicians, but they can obviously affect them through public policy.

I’ve recently begun a comprehensive look at these and other economic-growth factors as part of a short book to be published early next year. As I proceed, I’ll be assessing these general propositions:

• North Carolina’s tax burden is somewhat higher than the national average. On the tax rates with the greatest effect on economic performance, North Carolina ranks poorly.

• There is no comprehensive state-by-state analysis of regulatory costs, but based upon what information is available, it is likely that North Carolina businesses have higher regulatory-compliance costs than their peers in other states.

• While there are clear deficiencies in our infrastructure that deserve attention, North Carolina does not rank poorly in this regard. According to the most-recent Report Card for America’s Infrastructure published by the American Society of Civil Engineers, North Carolina’s infrastructure gets a C-, compared to a D for the nation as a whole. Our state’s airports, water systems, railroads, and educational facilities are in better shape than those of the average state. Our roads and dams are about average. Our bridges are below average.

• Although educational attainment and performance are not quite the same thing as workforce preparedness, they are related. North Carolina’s spends less than the national average on K-12 education and more than the national average on higher education. These levels of spending aren’t predictive of outcomes, however. On independent national tests of 8th graders, North Carolina is above average in math proficiency, about average in writing, and below average in reading and science. In higher education, North Carolina is below average in college attainment.

Energy prices in North Carolina are about 12 percent below the national average. Labor and land costs are also tend to be lower than average. That’s why cost-of-doing-business surveys often show North Carolina to be competitive, despite higher governmental costs.

Presumably, few would dispute that North Carolina’s economy would be better off if our taxes and regulations were lower, our infrastructure and workforce preparedness were better, and we kept energy, labor, and land costs low. But are these compatible goals?

Yes. More to come.

Hood is president of the John Locke Foundation.