The following editorial was published in the May 2014 print edition of Carolina Journal.
What’s the best formula for enhancing economic growth and opportunity in North Carolina? The debate largely falls into three categories, philosophically speaking.
The Left says spending on consumption is the way to increase demand, leading to more employment and higher wages. Raising taxes on wealthy people and redistributing it down the income scale through government entitlements or earned income tax credits will boost consumer spending and economic growth.
The Center instead blames inadequate investment in government infrastructure — primarily transportation (highways) and education. Increasing broad-based taxes, such as sales taxes, and investing the proceeds into roads, schools, and other forms of physical and human capital will make businesses and workers more productive, leading to higher wages and a growing economy.
The Right says inadequate investment is a problem, but the solution primarily depends on the ability of entrepreneurs and workers to build private capital. Reducing tax rates on incomes and investments will leave individuals more money to seek the most productive returns. The money government must spend should be directed to the public assets that deliver the highest payback — to highways where new lanes of traffic would reduce congestion, or toward education policies that consistently produce the best-prepared graduates, for instance.
Who has the best argument? John Locke Foundation John Hood surveyed 25 years of scholarly, peer-reviewed studies — he found 681 studies published in academic or professional journals — and concluded that the Right has the upper hand. “The policy preferences of fiscal conservatives have strong empirical support,” he said. “Most studies find that lower levels of taxes and spending, less-intrusive regulation, and lower energy prices correlate with stronger economic performance.”
Among the 115 studies that focused on state and local tax burdens, 63 percent showed “tax burdens were negatively associated with economic performance,” Hood said.
The news was not as good for fiscal centrists who believe government can promote economic growth by offering tax credits or other targeted tax incentives, Hood said. “More than two-thirds of the studies found no link between tax incentives and economic performance.”
And while the Center is correct to raise concerns over investment in public assets, most studies show that simply throwing more money at transportation and education without regard to quality or productivity has a negligible or even negative effect on economic growth.
The data also cast doubt on the well-worn liberal argument that cutting taxes leads to spending cuts on public services that can boost economic growth.
The preponderance of research concludes public assistance programs, Hood says, “are strongly and negatively associated with economic performance.”
While federal policy and overall market conditions play the largest role in influencing economic growth, the choices of state policymakers are important as well. Hood’s review of recent academic literature concludes that reforms from the McCrory administration and the Republican-led General Assembly have placed North Carolina on the right path. You can look it up.