View in your browser.

1. Asking the right questions about economic incentives

In an article from lamenting the fact that economic development grants made by the state of North Carolina did not "create" as many jobs as originally intended, John Skvarla, North Carolina’s Commerce Secretary and number 1 cheerleader for taxpayer funded business incentives, stated that:

"There’s no bad news here…We should be absolutely on our knees thanking God that we have 19,000-some jobs that we didn’t have before but for the utilization of this program…That’s the key message that needs to continue to be sent and transmitted, because people don’t get it."

The reason why Secretary Skavarla sees "no bad news here" is that his premise precludes the possibility of there being any. In order to know if there was any "bad news," one would have to examine what the opportunity costs were and continue to be of these newly created jobs. Here are some questions that would have to be answered and have not been:

  1. Were the 19,000 people hired for these positions already employed elsewhere by unsubsidized local businesses in the state, or did they come off of the unemployment rolls?
  2. If they were employed elsewhere, was the value to the people of North Carolina of  what they were producing in their previous employment greater or less than the value of what they are producing in their subsidized positions?
  3. If they were employed elsewhere, were the positions that they held lost or were others hired in their places? In other words, were there job losses that to some extent offset the jobs created? If this is the case, are we simply looking at job shifting rather than job creating?
  4. If the positions that they previously were holding were filled by others, was the wage that had to paid to the new employees greater than these companies were paying previously because of increases in overall demand for labor brought about by the subsidies?
  5. If the overall cost of labor was increased due to the new subsidized demand what is the impact on the cost of labor generally and the cost of doing business in the state?
  6. What would the land and capital that the subsidized companies are using otherwise be used for? For example, is a subsidized plant being built on farmland? Are crops not being planted? Are farmers losing usable land and employment as has been the case with solar subsidies? The point is that labor is not the only resource that the subsidized companies are using. Questions regarding possible alternative uses and the effects of increased demand on the cost of these resources would need to be investigated.

All of these questions, and many others, would have to be asked and answered before we can know whether there is a net benefit to the state from business incentives, whether or not the number of jobs actually "created" are equal to the number of jobs that were expected to be created. This question, which was the focus of the WRAL article, is actually irrelevant to whether or not the policies make sense.

The questions outlined here go to a completely different and more economically relevant issue: what exactly are the opportunity costs of programs like JDIG (now North Carolina Competes) or The One North Carolina Fund?

For the commerce secretary to say that "there is no bad news here" suggests that he believes that these programs have no opportunity costs, that there is a free lunch and he’s learned how to serve it up. But this completely ignores the first and most basic principle of economics, a principle that is explained in the first chapter of every introductory economics textbook. Any production or consumption activity that uses scarce resources — that is land, labor, or capital — will have opportunity costs, i.e. some "bad news" associated with it.  If state government is going to put its thumb on the scales for some businesses in accessing those resources, rather than letting a free bidding process occur based on actual market driven profit opportunities, then it needs to justify doing so with rigorous cost/benefit analysis. Needless to say, it has not done so.

2. Ozone Report

The 2015 ozone season began on April 1 and, as I have been doing since this newsletter was started, each week during the ozone season this newsletter will report how many, if any, high ozone days have been experienced throughout the state during the previous week, where they were experienced, and how many have been recorded during the entire season to date. (Note: ground level ozone, which is what we are reporting on, is often called "smog.") According to current EPA standards a region or county experiences a high ozone day if a monitor in that area registers the amount of ozone in the air as 76 parts per billion (ppb) or greater. The official ozone season will end on October 31. All reported data is preliminary and issued by the North Carolina Division of Air Quality, which is part of the state’s Department of Environment and Natural Resources. Thus far this season there have been 5 high ozone days recorded on any of the state’s 42 monitors. Three occurred on June 25 and two on August 5.

The table below shows all of North Carolina’s ozone monitors and the high reading on those monitors for each day of the 7-day period, October 12-18.

Click here for the Economics & Environment Update archive.

You can unsubscribe to this and all future e-mails from the John Locke Foundation by clicking the "Manage Subscriptions" button at the top of this newsletter.