North Carolina should abandon economic development policy and completely refocus on economic growth. These are distinctly different goals that more often than not conflict with each other. Most policies meant to promote economic development create economic inefficiencies and therefore hinder economic growth.
For decades North Carolina has been pursuing “economic development policy.” Indeed, the N.C. Department of Commerce is completely dedicated to this concept. As is emphasized on the department website, “The N.C. Department of Commerce is the state’s leading economic-development agency, working with local, regional, national, and international companies.”
The department claims it accomplishes this by “giving companies the assistance and resources necessary to meet their unique business needs.” But government agencies, as nonparticipants in the market process, have no way of determining a company’s unique business needs.
The department has no market incentive — profit and loss — nor the necessary market knowledge to get these decisions right. In attempting to implement such policies, it is invoking what Nobel Laureate F.A. Hayek referred to as a “pretense of knowledge.”
Since the money used to implement these policies is not manna from heaven, the department must use the state’s taxing authority to transfer resources from the majority of North Carolina taxpayers to businesses that the agency determines are worthy of its largess.
It necessarily entails an effort by the state to pick marketplace winners and losers by using tax breaks and direct subsidies to promote targeted businesses and industries. This, in fact, is what “crony capitalism” is all about.
On its website, the agency boasts about targeting specific industries for special consideration. They include tourism, film, sports development, telecommunications, biotechnologies, health care, and financial services. In reality, economic development is a disguised form of state central planning of the economy, and it should be abandoned.
Policy that focuses on economic growth rather than economic development starts from a different premise than that taken by the Commerce Department and programs the state has supported over the years, like the One North Carolina Fund, Golden LEAF Foundation, and Job Development Investment Grants. All of these channel resources into government-determined uses and away from market allocation based on free choice.
The starting premise behind policies to promote economic growth is that private entrepreneurs, using their own money or money from voluntary investors, know best how resources should be allocated. Policymakers should see to it that property rights are secure, entrepreneurs can use their property rights in any way they believe will be most productive, and tax and regulatory policies do not get in the way of this process.
Economic development policies divert resources from this process, thereby moving resources to less efficient uses, hindering economic growth.
Over the past several years, North Carolina lawmakers have begun to craft policies with an eye toward enhancing economic growth. They have done this primarily by implementing pro-growth tax and regulatory reform and cutting taxes overall. And economic growth rates in North Carolina relative to the rest of the country attest to the success of this approach.
Unfortunately, policymakers have continued to pursue anti-growth and counterproductive economic development policies. During the 2015 legislative session, every proposal to implement new or to expand existing economic development programs became law.
This schizophrenic approach to economic policy is like trying to increase a boat’s speed by investing in a bigger and more powerful motor while simultaneously tossing a heavy anchor over the side. Sure, the boat may continue to move forward, and indeed it may increase its speed if the force of the new engine is greater than the drag of the anchor.
But clearly the new engine would work even better if the anchor were lifted completely.
Dr. Roy Cordato is vice president for research and resident scholar at the John Locke Foundation.