Opinion: Daily Journal

Economic Stat Explains Political Debate

In state politics, most people cite the unemployment rate as a proxy for the performance of North Carolina’s economy. They also tend to describe a reduction in unemployment as their goal when arguing for changes in economic policy. I’m one of those people, as are advocates of the tax-reform bill now moving through the North Carolina House.

Even in the midst of severe recession or depression, however, most workers who want jobs end up finding jobs. In the depths of the Great Recession, for example, more than 80 percent of North Carolinians who wanted full-time employment could still find it. Still, the fact that fewer than one-fifth of job seekers were unsuccessful was considered proof of a failing economy — including, once again, by yours truly.

Why? Because no other changes in economic indicators, such as wages or consumer prices, are as radical as unemployment. Paying more to fill your gas tank or grocery cart is a bother. Going without a raise, or even experiencing a pay cut, is worse than a bother.

But nothing beats the bother of a 100 percent pay cut.

While a focus on unemployment is understandable, it ought not to become a fixation. Government and private agencies produce various economic indicators that deserve our attention. Take gross domestic product. At the national level, changes in GDP make the news and show up in political argument. The Bureau of Economic Analysis, which produces national GDP figures on a quarterly basis, also produces GDP data for states and regions.

My nominee for the most-illustrative statistic here is called real GDP per capita. It starts with the total value of goods and services produced each year and then adjusts for inflation and population. Few question the value of adjusting for inflation. But some economists and policy analysts argue that total GDP, not GDP per person, is the correct measure of economic growth.

I agree with their point in some circumstances. But if you want to measure and explore economic change over time, adjusting for population is useful. After all, if your economy is growing only because your population is growing, that’s probably an indication that something is wrong. You aren’t seeing sufficient gains in productivity — in value generated per unit of input — to boost real incomes and living standards. Here’s another way to think about the issue: If attracting more people to your state doesn’t result in higher per-capita GDP or income, does it really benefit existing residents?

For my 2012 book on North Carolina’s economy, I used real per-capita GDP to depict our state’s changing economic fortunes. From the 1960s until the mid-1990s, North Carolina’s economic growth usually outpaced the national average after adjusting for inflation and population. Our growth rate was particularly strong from the mid-1980s to the mid-1990s. From 1987 to 1997, for example, North Carolina’s real per-capita GDP grew by an average of 2.3 percent a year, or about 19 percent faster than the national average. From 1997 to 2010, however, North Carolina’s real per-capita GDP grew by an average of only 0.9 percent a year, or about 21 percent slower than the national average.

The only good news I can report on this front is that since I wrote my book, the GDP data for 2011 have been published. They show that North Carolina’s real per-capita GDP grew slightly faster (0.8 percent) than the national average (0.7 percent) in 2011. Whether that is a statistical aberration or something else will require more years of data to determine. Even during the 1997-2010 period, there were a few years in which North Carolina’s economic growth matched or exceeded the national average (which was itself lackluster compared to previous decades).

In order to have a meaningful conversation about how to address the state’s economic woes, there must be a shared set of facts. If you think that North Carolina’s problems only began with the onset of the Great Recession in 2007, then you probably don’t favor major changes to the state’s long-established fiscal, regulatory, education, and transportation policies. Much of what the General Assembly is doing this year, then, will strike you as puzzling, unwise, or counterproductive.

On the other hand, if you know that North Carolina’s economic underperformance began in the mid-1990s, has persisted through both national booms and busts, and compares particularly unfavorably to pacesetting Sunbelt economies such as Texas and Virginia, then you probably do favor major changes to the state’s long-established fiscal, regulatory, education, and transportation policies – because you have come to see North Carolina’s policies as unwise and counterproductive.

Real per-capita GDP is an economic measurement. But it is also a tool for understanding North Carolina politics.

Hood is president of the John Locke Foundation.