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Opinion

Left, Right, & Center on Incentives

Mar. 13th, 2012
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RALEIGH – In a past column I described the political debate about North Carolina’s economy as a disagreement among three schools of thought about how best to stimulate growth. For the sake of convenience, I employed the familiar terms of Left, Center, and Right to label the schools.

The Left believes that weak economic performance is primarily a consequence of weak consumer spending. Recessions happen because people aren’t buying enough stuff, say leftists, and one reason that happens is that too much money is flowing to rich people, who tend to save it, rather than poor people, who tend to spend it. The Left’s solution is to raise income taxes on the rich and redistribute the proceeds to the poor, in the form of cash or in-kind benefits, or to government employees and vendors.

The Center believes that weak economic performance is primarily a consequence of inadequate supply, not inadequate demand. Centrists believe that a lack of investment in the problem, and they see government’s job as one of developing and implementing a plan to invest in infrastructure, education, and critical business sectors or regions. If necessary, they favor raising sales taxes to pay for the new investment, as such taxes hit consumption rather than investment and are the least-unpopular taxes to raise.

The Right agrees with the Center that investment is the cure for weak economic performance, but conservatives see private investment as the lever and government interference as a key reason the lever can be hard to move. That’s why they focus on reducing the cost of investing and doing business in the state, through such means as reducing marginal tax rates and reforming regulations that either inhibit entrepreneurship or raise the cost of key business inputs such as energy and labor.

It might be easier to distinguish these very different arguments by considering a particular example: retail. When liberals sees retail sales fail to meet expectations or even drop year-to-year, they cite it as evidence of inadequate demand in the economy as a whole and argue that redistributing income and propping up government spending will boost consumer spending and thus keep people employed.

When the Center and Right see retail sales drop, they look past the aggregate number and look at the details. For example, they may notice that the sale of books, CDs, and DVDs by big-box retailers is down, but not because consumers are reading, listening, or watching less. Instead, consumers are buying these things less expensively online. Rather than assuming government must step in to boost aggregate demand, the Center and Right recognize the implications for new investment. Stores need to drop unprofitable lines and locations, investing instead in products that consumers still want to see and feel before buying. Online retailers need to invest in expanded capacity and offerings. And other firms need to invest in new products or services to capture some of the dollars that consumers previously spent on higher-priced books, CDs, and DVDs.

Where the Center and Right part company is not what to do – invest in new supply – but how to do it. Centrists believe that government should take an active role, either by spending tax dollars on infrastructure and worker retraining or by giving subsidies to private companies that invest in the industries and locations public officials deem to be the wave of the future.

Conservatives don’t think government should take an active role in deciding where new investment should go. Instead, they seek to increase the real rate of return on all private investment and then let the market sort it all out, rather than having government officials attempt to guess at which firms or ideas will best satisfy ever-shifting consumer demands.

Can you see now why the Left and Right, coming at the issue from very different starting points, tend to be against corporate subsidies while the Center favors them? The Left sees government intervention in the form of bailouts or targeted tax incentives as the right solution to the wrong problem. The Right sees such government intervention as the wrong solution to the right problem.

Hood is president of the John Locke Foundation.