by Dr. Roy Cordato
Senior Economist, Emeritas
As noted previously, this newsletter has expanded its focus. In addition to issues related to the environment, we will now also include discussions of topics related to economics. As in the past, the newsletter will discuss relevant analysis done by the JLF and other think tanks as well as items in the news.
Economic development vs economic growth
In recent months we have been hearing a great deal about North Carolina’s film incentives program, or what I like to call aid to dependent movie moguls. The program uses money coercively taken from taxpayers to subsidize major Hollywood movie companies for what, I guess, is the honor of having them make movies in North Carolina. My colleague Jon Sanders has written on this topic extensively, and I will not reiterate his very compelling case for eliminating this corporate welfare program when it expires this year.
Film incentives are just one example of a larger problem that has plagued economic policy in North Carolina. For many decades, politicians have come to believe that what is called "economic development policy" can be a meaningful driver of economic wellbeing in the state. Indeed the Department of Commerce is completely dedicated to this concept. As is emphasized on the DOC website, "The N.C. Department of Commerce is the state’s leading economic-development agency, working with local, regional, national and international companies."
And how is this accomplished? According to the DOC it is "dedicated to giving companies the assistance and resources necessary to meet their unique business needs." Since these resources are not manna from heaven, in reality what the DOC is doing is using the state’s taxing authority to transfer resources from the vast majority of North Carolina taxpayers to businesses that the agency determines are worthy of its largesse.
Economic development policy has come to mean efforts by the state to pick winners and losers in the marketplace by using tax breaks and direct subsidies to promote specifically targeted businesses and industries. It is the essence of "crony capitalism." On the DOC website, the agency boasts about the specific industries that the state targets for special consideration. In addition to film, they include tourism, sports development, telecommunications, biotechnologies, health care, and financial services. To this list should also be added various forms of so-called renewable energy like wind and solar power. Clearly this is a model of bureaucratic central planning of the economy that replaces the decisions of consumers and private sector entrepreneurs with those of politicians and bureaucrats. The entire approach should be abandoned.
Ultimately the policy of "economic development" should be jettisoned and replaced with "economic growth." Unlike economic development policy, economic growth policy would not focus on one business, industry, or region of the state over another but, instead, would adopt policies to maximize economic growth rates (GDP) for the state as a whole. It is overall economic growth that creates employment opportunities and drives down unemployment rates. It is economic growth that creates real prosperity and lifts people out of poverty. A well-known saying is that a rising tide lifts all boats. Creating the conditions for economic growth will, in turn, create a rising tide. Targeting favored businesses and industries in the pursuit of economic development sloshes water around, lifting some and sinking others. Economic development and economic growth are at odds. By replacing the decisions of entrepreneurs and investors in private markets with the decisions of politicians and bureaucrats, resources are misallocated, inefficiencies are created, and the state’s economic growth potential is reduced.
Practically this implies that the state should pursue policies that eliminate economic distortions rather than create them, as do economic development policies. It should start by eliminating all programs focused on economic development including The One North Carolina Fund, JDIG (Job Development Investment Grants), the Golden Leaf Foundation, and of course the film incentive program.
While in the last year the General Assembly has taken important steps toward reducing these problems, North Carolina’s tax system still penalizes investment and entrepreneurship by double, and in some cases triple, taxing the economic returns to these activities, hindering economic growth. To further ameliorate these problems, the state should adopt what is known as a consumed income tax, where all saved income is eliminated from the tax base. At a minimum, the state should abolish the taxation of capital gains. Also, while in 2013 important steps were taken to reduce the negative effects of the corporate income tax, it should ultimately be abolished.
And finally, the state should pursue an energy policy that focuses on cost and reliability rather than renewable energy sources and conservation. Most importantly, the legislature should start by repealing the state’s renewable portfolio standard, Senate Bill 3, which forces electric companies to use high priced and unreliable sources of energy like solar and wind power. The repeal should include the sections forcing customers to pay for nuclear plants that are unfinished and may never be finished. This is known as Construction Work in Progress (CWIP).
The point of all of these policy changes is to lower the cost of doing business in North Carolina, not just for a select few at the expense of everyone else, as is the case with economic development policy, but for all entrepreneurs and investors. It is a model for the state that says the best thing the state can do is get out of the way and let resources flow to their highest valued uses, which can only be discovered through the market place and the system of profit and loss. It is certainly not something that bureaucrats can have the knowledge to plan. As Nobel Prize winning economist FA Hayek has stated:
"The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design."
No one fits this category of "men" more neatly than those who believe that they can direct economic investment from a perch in Raleigh, while risking none of their own resources.
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.