Opinion: Daily Journal

More Than You Pay For

RALEIGH – A few days ago I wrote that the state spending plan just approved by the North Carolina General Assembly was the right and responsible thing to do given current fiscal and economic realities. I believe that because I don’t equate the amount of government spending with the value of government services. Rather than raising taxes to fund more government, I think North Carolina ought to be raising the productivity of the government we already have.

Others do tend to equate the amount of spending with the value of services, however. “You get what you pay for,” they insist. That’s quite wrong, actually. If we always and only got “what we paid for,” productivity would never rise and overall increases in the standard of living would never be possible. That is, if goods or services always exchanged for goods or services of exactly the same value, there would be no such thing as economic progress.

In the real world, there is no objective value to any good or service. There is no terrestrial force, no magical inquisitor who can read our minds, inhabit our senses, and come up with a universal measurement of value. Instead, we all place our own value on the goods and services we want. Economic value is subjective, in other words – which offers the prospect of mutually beneficial deals.

If I am willing to pay you $50 to mow my lawn, that does not mean that I equate the two. I actually value having my lawn mowed more than the $50 in my pocket. If you take the deal, that means that you value the $50 more than your cost to do the job in sweat, equipment, and lost free time. The transaction makes us both better off. In effect, I am letting you mow my lawn because my time would be more productively spent on some other task.

Productivity comes from figuring out how to produce more value to consumers for any given level of input. It usually stems from investments in plant and equipment (physical capital), better work skills (human capital), or some creative rearrangement of inputs to increase efficiency or consumer satisfaction.

In the private sector, there are strong incentives for both owners and users of capital to pursue higher productivity. When workers are more productive, they tend to earn more income. When entrepreneurs improve the productivity of their firms, they either get higher wages or better investment returns.

In government, however, the incentive to pursue productivity isn’t as strong. State agencies and departments can’t lose market share to competitors if they fail to innovate. Even in cases where state-assisted institutions do compete with the private sector – public universities, for example – the large share of their budgets derived from direct appropriations rather than user fees gives them an artificial advantage and weakens their incentives to promote productivity.

That’s one reason why formal fiscal constraints such as balanced-budget rules, referendum requirements, and spending caps are essential to achieving better returns on taxpayer investment. In the absence of true market competition, they force public-sector managers to find new ways to deliver services at a lower unit cost.

Let’s stick with the higher education example. Since the start of the Great Recession, the UNC system has had its state appropriation reduced several times. While it remains one of the most generously subsidized university systems in the country, UNC’s budgets are certainly tighter than they used to be. Managers have had to respond by becoming more productive.

As the Triangle Business Journal reports, one response has been to require tenured and tenure-track professors to teach more courses. At N.C. State, credit hours taught by such faculty rose more than 15 percent from 2008 to 2011. There was a 22 percent increase at N.C. Central. At UNC-Chapel Hill, credit hours per professor stayed about the same but the number of separate classes taught has gone up.

Productivity is the name of the game. North Carolina governments need to continue improving how well they play it.

Hood is president of the John Locke Foundation and author of Our Best Foot Forward: An Investment Plan for North Carolina’s Economic Recovery.