John Hood: Progress in North Carolina requires growth

Mar. 11, 2013 @ 09:25 PM

RALEIGH — 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 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 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.
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. 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.
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.

John Hood is president of the John Locke Foundation and author of “Our Best Foot Forward,” a book on North Carolina’s economy. It is available at JohnLockeStore.com. Representations of fact and opinions are solely those of the author.