RALEIGH – There aren’t many places in the United States where the unemployment rate is modest and people are happy about the economy. Most of America is hurting.
Still, the degree of pain varies. North Carolina’s unemployment rate of 10.4 percent is higher than the national average. California’s economy is even worse, posting a 12.1 percent jobless rate in August. On the other hand, Texas is doing a bit better with 8.5 percent unemployment and better recent performance on job creation and income growth.
Given Texas Gov. Rick Perry’s entrance into the GOP presidential field, we’re going to hear a great deal about the Texas model and how it compares to, say, the California model. Partisan sniping aside, there are important lessons to be found in the comparison – although some North Carolina politicians and activists may not want to hear them.
Now, you can’t draw those lessons from scattered anecdotes, fleeting snapshots, or the press releases of headline-hungry politicians. Nor can you prove that low-tax, low-spending, low-regulation states are better at job creation just by pointing to Texas, or prove that high-tax, high-spending, high-regulation states are poison for economic growth just by pointing at California.
And you certainly can’t prove the economic value of your favorite government program simply by insisting, loudly and frequently, that it must be working. Unfortunately, all too many liberal North Carolinians of my acquaintance tend to do exactly that. They can’t imagine why anyone might doubt, for example, that North Carolina’s relatively high spending on higher education boosts state economic growth. Yet they also can’t supply any solid evidence that it does.
Economic decisions reflect a host of factors, many having little or nothing to do with public policy. Weather, geology, and the availability of natural resources matter, as do proximity to markets and the existence of valuable geographic features such as good natural harbors.
To determine what policymakers can do to improve a state’s economic performance, you have to adjust for these variables. You also have to examine a longer-enough time period to allow for valid conclusions. It takes time for even salutary changes in public policy to exhibit an influence on the real economy.
The best study I’ve seen on state economic growth came out in April. Published by the National Bureau of Economic Research, it looked at 11 different indexes that purport to rank state business climates.
Some of the indexes are published by right-leaning institutions such as the National Center for Policy Analysis and the Tax Foundation. They tend to focus on cost-of-doing-business measures such as taxes, regulations, and energy prices. Other indexes are published by left-leaning outfits such as the Progressive Policy Institute and the Corporation for Enterprise Development. They tend to focus on productivity-related measures such as education level, infrastructure, and lifestyle factors.
After carefully adjusting for non-policy factors, the NBER researchers found that the productivity indexes preferred by the Left exhibit no relationship to state performance in employment, wages, or economic growth. It is the cost-of-doing-business indexes favored by the Right that mattered, particularly in the areas of corporate taxation and welfare spending.
That is, states with simpler tax codes – fewer targeted exemptions and credits, flat rates, etc. – posted better economic performance. So did states that kept spending on Medicaid and other public assistance spending below the national average.
Dismayed liberals should remember that we are talking about marginal differences across states. No one is suggesting that a modern American state without interstate-quality highways or an educated workforce would still prosper as long as it kept its tax rates low. The point is that on the margin, the modest economic benefits that states derive from spending more tax dollars on roads and schools do not offset the economic cost of the required taxes.
Similarly, the modest benefits that states might receive from tight health and safety regulations do not attract enough people or jobs to compensate for the economic cost of those regulations.
Not surprisingly, Texas performs well in the cost-of-doing-business indexes. California ranks well in the productivity indexes. Texas has made the better choice. It’s clear which way North Carolina should lean.
Hood is president of the John Locke Foundation.