Effect of state policy isn’t huge

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RALEIGH — 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.

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%, adjusted for inflation. The national average growth rate was 2%. For the Southeastern region, it was 1.9%.

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

Whatever theory of public finance 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 boost growth, you should grant that most corporations do not frequently move large-scale operations from state to state — and that tax burdens are hardly the only factor under consideration.

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 better-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, can’t 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 of the forthcoming novel “Mountain Folk,” a historical fantasy set during the American Revolution (MountainFolkBook.com).

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