During the years that North Carolina was riding high, particularly the 1980s and 1990s, state policymakers wrung their hands about the problems associated with a fast-growing economy.
Rapid economic growth meant greater demand for public services such as infrastructure and education, they argued. It posed risks to the state’s air and water. And because economic growth wasn’t equally distributed, it exacerbated longstanding differences between metropolitan areas and rural counties.
I suspect that many of these fretful policymakers would welcome a return to the days of rapid growth, as it has become evident that the problems associated with a lackluster economy are much worse.
North Carolina’s relatively weak job and income growth, for example, is making it much harder for governments to finance public investment. On the revenue side, it means less money coming into state and local coffers per North Carolina resident. At the same time, a weak economy boosts demand for consumption subsidies such as unemployment insurance and Medicaid that trade off with long-term investment.
So if you think North Carolina spends too little on public infrastructure or education, your goal can’t realistically be met without stronger economic growth. And if you think that I’ve got the causality wrong – that spending more on infrastructure or education would make the economy stronger – your quarrel is with the time-space continuum, not with me.
If spending more tax dollars on education boosts the economy, it does so in the long run, by improving the skill level of future workers, professionals, and entrepreneurs. Government is not a magical income-generation machine. It involves taxing money out of households and businesses, money that would otherwise be spent or invested privately. In the short run, if you think it wise to set aside more money for public investment, you will find it much easier to accomplish when the economy is growing, more people are employed, households are receiving real (inflation-adjusted) increases in income, and public assistance isn’t taking as big a bite out of state revenues.
The main levers that state and local policymakers can operate to boost economic growth in the short run involve the cost of doing business in the private sector. If by reforming taxes and regulations they increase the real rate of return on investing in new sites, equipment, and personnel in North Carolina, more businesses will expand or set up shop here.
I’m not saying that average economic growth is the only thing politicians should care about. Even during North Carolina’s boom years, there were some boats in dry dock that didn’t float with the rising tide. Factors such as out-of-wedlock births, drug and alcohol abuse, the poverty cycle, educational mediocrity, insufficient work experience, and inadequate training in personal finance limit upward mobility. Government is not the only institution for addressing these issues, and in many cases does more harm than good when it tries. But to the extent public policy can influence decisions about matters of personal behavior or morality, it is more likely to be successful in a climate of robust growth rather than in the current economic malaise.
Can measures such as tax reform and regulatory reform really affect North Carolina’s rate of economic growth? Empirical evidence and recent experience give us good reasons to be optimistic. There are now dozens of academic studies demonstrating links between state taxes, regulations, and rates of job creation, entrepreneurship, and income growth. A 2011 study released by the National Bureau of Economic Research, for example, found that state spending on Medicaid and other public assistance was linked to slower economic growth while lower, simpler taxes were associated with faster growth, after adjusting for other factors. On regulation, most studies show a negative effect on economic growth, with the strongest effects for manufacturing industries, new firms, and small businesses.
Economic growth is not, strictly speaking, a panacea. It is necessary but not sufficient. Without it, progress on North Carolina’s other challenges is unlikely. With it, progress becomes possible.
Hood is president of the John Locke Foundation, which has just published First In Freedom: Transforming Ideas into Consequences for North Carolina. It is available at JohnLockeStore.com.