Opinion: Daily Journal

The State Remains a Laggard

RALEIGH – Is North Carolina paying an economic price for wrongheaded fiscal, educational, and regulatory policies? Or is North Carolina receiving an economic bonanza for wise policies in these areas?

Such questions lie at the heart of the public policy debate in the state, a debate among elected officials, rival political candidates, and the growing array of think tanks, policy groups, media, and commentators in Raleigh and across the state. Before one can assess the relative contribution of taxes, regulations, schools, roads, and other public programs to the state’s economic progress, there has to be some agreement as to the extent of the state’s economic progress. That must start with the data, and the data don’t show what so many participants in the debate claim they show – that North Carolina is an economic leader.

I admit right off the bat that I bring a set of assumptions and principles to the debate. I see a persuasive and growing (pdf) body of research and experience backing up the proposition that taxes matter — that, yes, basic state services can enhance prospects for growth, but there are sharply diminishing returns past a fiscal point that North Carolina and most states reached long ago.

That’s why state and local tax rates usually demonstrate a negative correlation with state economic growth, though most studies don’t show the effect to be massive. If government were far smaller, and we were making an economic-development choice of whether to tax to fund basic services such as courts, schools, and roads in the first place, the evidence would be in favor of raising taxes to enhance growth. (Enhancing growth is not the only possible justification for a government program, of course, nor is it necessarily a sufficient justification.)

That’s not the current dilemma, however. Today’s choice is whether higher taxes to pay for more spending on existing government programs are likely to be growth-enhancing. When the answer is no, which it usually is, the explanation is that whatever benefits may be derived from the spending – a more safe and secure business climate, a better-educated workforce, less traffic congestion, etc. – they are too small to justify the cost to entrepreneurs, workers, and consumers of losing the ability to spend their own dollars. The benefits may be too small to justify the cost because the level of service is already adequate, because additional spending does not significantly improve the level of service (as is often true in education, unfortunately), or because the additional spending is actually harmful to economic decisions or incentives (as is often true in welfare programs, be they for individuals or corporations).

More about these tradeoffs in a future column (or, if you like, past ones). The point today is that those who seek to justify North Carolina’s current mix of policies have oddly latched onto the notion that North Carolina’s recent economic performance supports their argument. Here are the facts, as gleaned from statistics obtained from the U.S. Bureau of Labor Statistics and the Bureau of Economic Analysis:

• From 1995 to 2005, North Carolina lagged behind the rest of the Southeast and the nation in private-sector job growth (11 percent in NC, 20 percent in the Southeast, and 14 percent nationally during the decade) and behind the Southeast in nominal wage growth (48 percent compared to 50 percent). The more recent trend, 2000 to 2005, is more depressing. North Carolina’s performance on average annual employment (a 1.4 percent loss) was far worse than the regional average (a 3.3 percent gain) and again lower than the national gain of 0.5 percent.

• In per-capita income, North Carolina posted a 15 percent nominal gain from 2000 to 2005, compared to a regional gain of 18 percent and a national gain of 16 percent. That’s not panic-button time, but it is lackluster. In 2000, North Carolina ranked 32nd in per-capita income among the 50 states. In 2005, we were 35th.

This was during a time when 1) North Carolina was supposedly setting the national pace for educational improvement, 2) North Carolina’s tax burden was growing relative to our competitors, and 3) North Carolina got heavily invested in the business of offering selective tax breaks and subsidies to big and politically favored corporations. Now, there are potential responses. Perhaps things would have been worse in the North Carolina economy without these new programs, taxes, and incentives. Perhaps it will just take longer for them to pay off in measurable economic terms (this is particularly a reasonable, though still debatable, take on new education spending).

But to the assertion that North Carolina’s recent policies have produced clearly measurable economic gains, I’d have to reply: show me.

Hood is president of the John Locke Foundation.