Carolina needs capital ideas

By John Hood | Jun 02, 2013

 

RALEIGH — Just about every political cause in Raleigh is being pitched as a spur to economic growth. It’s easy to see why. North Carolina continues to post one of the worst unemployment rates in the country. Poll respondents continue to list job creation as the top priority for their elected leaders.

 

No matter what the cause, then, advocates promise the effect will be economic growth. The phenomenon goes far beyond the usual claims about the stimulating effects of tax relief, regulatory reform, infrastructure, and public education. According to some lobbyists, North Carolina’s economy would really cut loose if taxpayers will just subsidize a few more modern-art exhibits, Hollywood productions, heritage-tourism sites, and preservation projects.

 

Let’s get real. There are many fine things that North Carolinians can appreciate and enjoy with their own time and money. But when it comes to building the fundamentals for economic success, the main contributions state government can make are 1) establishing rule of law and the security of private contracts, 2) ensuring the existence of high-quality roads and schools at an economical price, and 3) keeping tax and regulatory burdens as low as is consistent with the first two items.

 

These insights come from decades of empirical research. They also come from the realization that economic success flows from productive capacity — from the supply side of the economy, in other words, not the demand side. If companies become more productive, they will survive, grow, hire, and buy services. They tend to become more productive by acquiring more and better capital. That includes physical capital such as plants and equipment, intellectual capital such as inventions and innovations, and human capital such as better-trained employees and vendors.

 

Sustained economic growth doesn’t come from short-term gimmicks that pass money from one hand to the other via magical multipliers. Government shouldn’t try to manipulate demand. But it can play a role in encouraging, or at least accommodating, a greater supply of capital.

 

North Carolina did this fairly well until the 1990s, when a combination of internal and external factors began to make our state a less attractive place to invest in new private capital. The state legislature pushed up our marginal tax rates on personal and corporate income. Politically favored companies cut incentive deals to offset the effects, but most firms didn’t or couldn’t. At the same time, our competitors reduced their marginal tax rates and streamlined their regulatory procedures — European countries were surprisingly active on both issues — and made smarter decisions about public capital such as roads that facilitate private investment.

 

You can see the results in a recent study of state-by-state trends in capital formation. Published in the journal Contemporary Economic Policy, it examined the period from 1990 to 2007. While North Carolina’s capital stock was still rising a bit faster than the national average during the first half of the period, from 2000 to 2007 its rate of inflation-adjusted capital growth (11.6 percent) fell behind the average for Southern states (16.2 percent) and the nation as a whole (14.9 percent), and way behind the likes of Virginia (19.8 percent), Florida (21.1 percent), and Texas (27.7 percent).

 

Recognizing that North Carolina can’t recover its economic momentum as long as many companies, investors, and entrepreneurs prefer to put their capital to work elsewhere, legislative leaders and the McCrory administration have made reforming taxes and regulations high priorities in the 2013 session. This is the right decision, regardless of how much they may be excoriated by liberal lawmakers and commentators.

 

If the fiscal and regulatory policies of the Hunt, Easley, and Perdue eras had been accompanied by robust economic growth, the liberal pushback might be more logical and persuasive. But reality intrudes. Their strategy was ineffective. North Carolina’s economy has lagged the national average since the mid-1990s.

 

What our economy needs now is more capitalism — by which I mean more risk-takers willing to invest their private capital in new and existing enterprises in North Carolina. That’s how we all win.

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.

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