JOHN HOOD COLUMN: Effect of state policy isn’t huge

Published 1:36 pm Friday, July 23, 2021

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For years, North Carolina conservatives and progressives argued incessantly about the effects of the state’s rightward turn. Conservatives said lower taxes and less regulation tend to boost entrepreneurship, job creation, and economic growth. Rejecting that position, progressives argued that spending more money on education and other public programs and making greater use of health, safety, and labor regulations would have net-positive results for the economy.

John Hood

I’ve been an active participant in these spirited debates. But what if (gulp) it was much ado about not very much?

It was in 2013 that the Republican-led General Assembly and newly elected Republican Gov. Pat McCrory enacted many of policies in question — from sweeping tax cuts and spending restraint to unemployment insurance and regulatory reforms. Conservatives predicted higher growth. Progressives predicted lower growth.

Well, from mid-2013 to the first quarter of 2021, North Carolina’s gross domestic product grew by a compound annual rate of 2.1 percent, adjusted for inflation. The national average growth rate was 2 percent. For the Southeastern region, it was 1.9 percent. For per-capita income, the three averages — state, regional, national — were identical.

The growth-rate differentials were larger when it comes to jobs. From June 2013 to May 2021, total employment grew 10.4 percent in North Carolina, vs. a regional average of 8 percent and a national average of 6.3 percent. Still, some “bluer” states posted comparable rates of job creation during the same period.

When it comes to economic growth, I’ve cautioned politicians of both parties and activists of all stripes not to overstate their respective cases. Regardless of what you think government ought to do, you should keep your expectations reasonable.

Most of the time, GDP growth rates of American states are closely correlated. This is especially true for nearby jurisdictions. If South Carolina’s economy is growing robustly, North Carolina’s economy probably is, too. If Tennessee’s economy takes a nose dive, don’t expect North Carolina’s to soar into the clouds.

Moreover, whatever theory of public finance or regulation you buy, you should grant that policy effects are likely to be gradual and relatively modest. For instance, if you think cutting the corporate income tax will produce more investment, job creation, and income gains for state residents, you should grant that most corporations do not frequently move large-scale operations from state to state based on two-, three-, or four-point differences in marginal tax rates. Companies produce their goods or services where they do for a host of reasons, and may incur substantial costs in relocation that wouldn’t be made up for from annual tax savings for a long time.

Similarly, if you believe that businesses would be more likely to come to North Carolina if our educational attainment and achievement were higher, you should grant that even large funding increases would take a very long time to manifest themselves in more and highly performing workers — even if we assume, rather precariously, that increased funding would boost attainment or achievement more than a modest amount.

Simply eyeballing economic statistics, as I did earlier in this column, can’t really answer the underlying questions. You have to construct econometric models that account for multiple variables. Having read hundreds of such studies over the years, I conclude that lower taxes and less regulation tend to boost state economic growth when all other things are held equal.

That’s a more modest claim that saying either that North Carolina’s economy will shoot off like a rocket or that it will crash and burn based on what the governor or state legislature may decide to do. Neither outcome is likely. We should acknowledge that factors entirely outside the control of state leaders — national policies, international trade flows, technological innovations, or emergencies such as storms or diseases — will often have such large and lumpy effects that the effects of state policy become hard to discern.

We ought to keep debating these issues, of course. But we should also practice humility and keep things in perspective. Not the current fashion, I know. Don’t care.

John Hood is a John Locke Foundation board member and author.