RALEIGH – Just in time for a worldwide economic crisis, there’s new evidence that North Carolina politicians have spent the past several years steadily weakening the economic freedom that once helped the state grow and prosper.
Researchers with the Pacific Research Institute and Forbes have just released the third edition of their U.S. Economic Freedom Index. The project ranks all the 50 states according to five sets of public-policy data: fiscal, judicial, regulatory, government size, and welfare (or transfer) spending. Since the PRI/Forbes report was first issued in 1999, North Carolina has posted one of the steepest declines in economic freedom in the nation, going from 17th best in 1999 to 36th in 2008.
During roughly the same period, as I have previously observed, North Carolina’s economic performance lagged the rest of our region and nation. Perhaps some commentators and apologists for the status quo would deny a connection between the two. I don’t.
Neither do the PRI/Forbes authors, who include two well-respected economists, a political scientist, and an historian. Rather than just pluck a measurement system for economic freedom among the states, the authors assembled extensive data sets on just about every facet of state and local policy and then constructed 35 alternative indexes, each differing from the others in the inclusion and weighting of relevant data. They then picked the index that best explained variations in state economic performance.
Econometric research included in the report found that the PRI/Forbes index explained 60 percent of the variation in local personal-income growth and 48 percent of the variation in employment growth.
In other words, economic freedom and economic performance are strongly related to each other. More generally, public policies matter. Rates of taxation, regulation, educational quality, and infrastructure investment influence business decisions, consumer behavior, and the incentives to work, save, and invest. By no means are they the only important variables – natural resources, location, climate, demography, and other factors play an important role in shaping local economic competitiveness and performance. But government policies count for a lot. And North Carolina’s government policies appear to be a net drag on our economic growth.
Specifically, while North Carolina ranks 36th overall in economic freedom according to the new report, the biggest problem areas are size of government (41st) and judicial policies on tort reform and the security of contracts (39th). In the area of spending on transfers – programs that simply redistribute income from one group to another, rather than build broad public assets such as infrastructure – North Carolina ranks a little better at 21.
Which states rank highly in economic freedom? The Mountain West and Great Plains states often score well in the index, as do New Hampshire (8th) and Virginia (9th). Our other neighbors and regional peers also have freer economies, including Georgia (11th), South Carolina (17th), Florida (28th), Tennessee (29th), and Texas (31st).
With a new administration and General Assembly about to take office, there’ll be lots of talk about projected fiscal deficits for state government and localities next year in the billions of dollars. Pressure will mount, particularly among spending lobbies and the political establishment, to impose another round of costly tax increases to close budget gaps. But North Carolina leaders would be well advised to consider another yawning gap facing the state: our Freedom Deficit. It is measured in fewer jobs, lower incomes, and diminished freedom.
It’s time to start closing North Carolina’s Freedom Deficit.
Hood is president of the John Locke Foundation