RALEIGH – To get North Carolina’s ailing economy back on track, policymakers must first come to grips with this little-recognized truth: our problems didn’t start in 2007.
Yes, the financial bubble that popped in 2007, triggering the Great Recession, had its roots in the Federal Reserve’s loose monetary policy of the early 2000s, government intervention in the housing market, and other fiscal and regulatory miscues. But even that analysis doesn’t go back far enough.
To attempt to diagnose what turned a pacesetting North Carolina economy into a lagging North Carolina economy, you can’t focus on the onset of the Great Recession – because that’s not when North Carolina’s relative decline began. It actually started during the 1990s.
There are many different ways to measure economic performance. But if you read through the academic literature on comparative growth rates among American states, the statistic most researchers prefer is real gross domestic product per capita. That is, they take the annual estimate of all goods and services produced for market in each state and adjust for changes in inflation and population.
The per-capita GDP series from the U.S. Bureau of Economic Analysis begins in 1987. Before that date, the best-available measurement appears to be per-capita income. I have written about this statistic before – the income trend since 1929 reveals a lot about North Carolina’s economic performance, not all of it laudatory – so today I will focus on the broader GDP measure.
From 1987 to 1997, North Carolina’s per-capita GDP rose by 26 percent, significantly faster than the national average of 21 percent. But from 1997 to 2010, North Carolina’s economic growth lagged the national average, 13 percent vs. 17 percent.
Is the state’s poor performance over this period merely a consequence of a particularly deep 2007-08 recession and subsequently weak recovery? No. For just the period from 1997 to 2007, which includes the dot-bomb recession of 2000-01 and the recovery from it, North Carolina underperformed the rest of the nation with 18 percent growth in per-capita GDP vs. the national average of 21 percent.
I know I’ve just jammed a bunch of numbers into two short paragraphs. Here’s my point in simple prose: according to the standard measure, North Carolina’s economic performance has been substandard since the late 1990s. Forget all the boosterism. Discount all the fanciful claims about North Carolina being one of the best places in the country to do business. Ignore those who claim that until 2011, North Carolina’s public policy environment was just fine when it came to economic growth, so there was no need for the new Republican majority in the General Assembly to make substantial changes.
It’s all bunk.
What really happened over the past decade and a half is that North Carolina’s economy failed to keep pace in innovation, investment, entrepreneurial activity, and job creation. Sure, the state continued to experience significant population growth – driven not just by Northern and Midwestern job seekers but also by retirees and illegal immigration – but this population growth was not accompanied by commensurate growth in production and employment.
Some industries have experienced productivity gains. That’s why some North Carolina manufacturers and other employers are holding their own in sales while hiring few new workers. But in general, we’re seeing low growth in economic production per person (not necessarily per worker). That’s a marker of a weak economy, not a strong one.
I’m not going to suggest that there is any single explanation. Some of North Carolina’s traditional and emerging industries have taken big hits in recent years, both from changes in consumer preferences and from adverse regulatory and fiscal policy. Our state is also not as attractive a place to start a new business as it used to be, for a variety of reasons.
There’s much more to say on the topic. For starters, however, it’s important that state leaders shed their preconceived notions and cherished myths. Although a couple of metro areas buck the trend, North Carolina as a whole has had a relatively weak economy for a long time. Restoring the state’s economic competitiveness won’t be a quick or easy job.
Hood is president of the John Locke Foundation.