Opinion: Daily Journal

Flashback: Dear Mister Fantasy

During last week’s episode of “NC Spin,” the other panelists reacted with surprise and irritation at my assertion that North Carolina is not a particularly high-tech state. I had planned to write a column explaining the point, until it occurred to me that I had already done so a few months ago.

Oh, well. Repetition is an indispensable element of any successful communication strategy.

RALEIGH – I’m all for perfecting one’s sales pitch – and obviously I would be among the first to defend the value of marketing and advertising to the success of an organization. But when it comes to selling North Carolina as a place to do or start a business, North Carolina’s political class seems to have a hard time distinguishing between fact and fantasy.

Can you?

Fact or Fantasy: North Carolina has a larger, more expensive government than its neighbors and peers.

Fact. The difference isn’t huge, particularly when measured as state and local government costs as a share of state personal income. All other things being equal, however, entrepreneurs, investors, highly productive professionals, and other drivers of economic dynamism must be willing to pay a bit more to live, work, or do business in North Carolina.

Fact or Fantasy: North Carolina may spend more on its government than many of its competitors, but its government services are better as a result.

Fantasy. When JLF and other research organizations have sought to evaluate the productivity of state and local government, by comparing costs and measurable outputs such as educational attainment, crime rates, traffic congestion, and health status, they have not usually found any demonstrable gains from higher spending.

Fact or Fantasy: Okay, well perhaps it’s hard to measure the benefits of North Carolina’s higher governmental costs, but the North Carolina model has proven itself to be a more successful strategy of promoting state economic growth than models based on lower taxes and smaller government budgets.

Fantasy. In general, states with lower taxes and smaller governments have posted stronger economic growth than states with higher taxes and larger governments. Economic models that attempt to account for all the variables affecting state growth have typically found either 1) no statistically significant relationship between state policies and economic performance at all or 2) inverse relationships between economic performance and state taxes and spending, particularly when the spending is light on infrastructure and heavy on “transfer” programs such as Medicaid.

The most recent paper I’ve seen on the subject was published in April by the National Bureau of Economic Research. Its authors sought to evaluate the various business-climate indexes published in recent years. They found that factors largely or completely outside the control of politicians, such as weather and preexisting industry mix, exhibited the strongest relationship to state economic growth.

Among business-climate indexes, the ones focused primarily on business costs – taxes, energy, labor costs, etc. – were often predictive of economic performance. Indexes focused primarily on the potential value of government services to business were not predictive. It is likely that whatever service differences exist are either not large enough to matter much or not as relevant to business decisions as politicians imagine.

By the way, the two policies with the clearest effects on state economic growth were government spending on transfers (e.g. Medicaid and cash welfare), which was negative, and a simple, uniform system of corporate taxation, which was positive. Thus, if you want to boost state economic growth, budget cuts and tax reform are among your best tools.

Fact or Fantasy: All this research mumbo-jumbo must be wrong, because North Carolina is one of the nation’s leading high-tech economies.

Epic fantasy. North Carolina’s economy has been a laggard for many years, not a leader. And while the Research Triangle Park offers an unmistakable concentration of technology businesses, that doesn’t mean that North Carolina as a whole has an especially high-tech economy. In other states, high-tech firms simply aren’t as concentrated. North Carolina tech firms employ about 4.6 percent of the private workforce, which puts us 25th in the country and close to the national average. Let’s not get carried away here.

With persistently high unemployment, rising gas prices, yawning public-sector deficits, and serious deficiencies in the productivity of our education and health care sectors, North Carolina faces many daunting challenges.

We’re not going to be able to happy-talk our way through them. Dear Mr. Fantasy, play us no more tunes, please.

Hood is president of the John Locke Foundation.