Opinion: Daily Journal

Center-Right Paths to Recovery

RALEIGH – Almost everyone in the North Carolina political debate agrees that the state’s stagnant economy is the number one issue. But that’s where the agreement ends.

What should be done about it? There are hundreds of different answers to this question – about as many answers as there are politicians and experts to whom the question might be posed – but some common themes are evident.

In fact, I think there are three distinct schools of thought about how best to promote economic growth in the state. For the sake of convenience, I’ll give them the familiar political labels of Left, Center, and Right.

The Left, steeped in Keynesian demand-side economics and the politics of envy, believes that the recent recession and weak recovery were caused by inadequate consumer spending. They favor taxes and government transfer programs to redistribute income from the wealthy to the poor and unemployed, who are most likely to spend it and thus prop up “aggregate demand.”

The Center believes that North Carolina’s economic woes are primarily the result of inadequate investment in public capital such as government schools, colleges, and infrastructure. They point to overcrowded classrooms, congested roads, and ailing water and sewer systems as major impediments to business creation and growth, much as a body with a poor circulatory system has difficultly operating at peak efficiency.

The Right believes that North Carolina’s economic woes are primarily the result of inadequate investment in private capital such as plants, equipment, technology, innovation, and new business enterprises. They point to the state’s relatively high marginal tax rates on savings and investment, an adverse regulatory climate, and other factors that reduce the projected rate of return on investment in North Carolina, thus chasing private capital elsewhere.

Over the past several decades, these three groups have pulled and tugged on leaders of both major political parties. Past governors and legislators have embraced the Center by approving major capital campaigns to build roads, schools, power lines, and other infrastructure, sometimes with new, dedicated revenue streams. They have acceded to the demands of the Left by expanding Medicaid and extending unemployment insurance benefits. And occasionally, they have turned Rightward to reduce tax rates and regulatory costs, most recently during the 2011 legislative session.

But the days of trying to mollify everyone are over. The taxpayers simply can’t afford it. Faced with scarce resources and an increasingly competitive national and international market, North Carolina’s leaders are going to have to make some tough decisions. They are going to have to choose the strategies with the greatest likelihood of creating jobs and economic opportunities.

My guess – and, let’s face it, my preference – is that policymakers eschew the backward, counterproductive policies of the Left and opt for a blend of the Center-Right.

The Left’s fascination with manipulating consumer demand to tame the business cycle is about 50 years out of date. Its model doesn’t account for the role of incentives in encouraging or discouraging the work, savings, and investment that create real wealth. The model assumes that raising taxes won’t change the behavior of investors, entrepreneurs, and highly productive professionals, and it assumes that increasing the value of government cash and non-cash benefits won’t change the behavior of recipients.

In other words, the Left lives in Fantasyland. Must be fun, but someone has to actually leave the amusement park and get back to work.

The good news is that the Center and the Right together vastly outnumber the Left. Here’s a common agenda for their consideration:

• Lighten North Carolina’s tax and regulatory burdens to increase the profitability – and thus the likelihood – of investment in North Carolina businesses.

• Reduce unwise government subsidies of immediate consumption (Medicaid and unemployment insurance, for example) to free up resources for valuable, job-creating investment in both public and private capital.

• Use consumer choice, competitive contracting, and other innovative mechanisms to increase the payoff from government spending on education and infrastructure. Invite private investment in physical and human capital, as well.

North Carolina’s economic problems aren’t temporary. Their solutions lie in permanent policy changes that raise the productivity of capital invested in North Carolina, not more Keynesian manipulations and quick-fix stimulus schemes.

Tomorrow: Applying the Center-Right consensus to North Carolina’s unemployment-insurance mess.

Hood is president of the John Locke Foundation.