John Locke Update / Research Newsletter (Archive)

Time to Dump Economic Development Policy

posted on in Economic Growth & Development
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Credit: Marion Doss on Flickr / CC BY-SA 2.0

That’s right. North Carolina should abandon what it has been referring to for years as economic development policy and completely refocus its efforts in the area of economic policy on economic growth. These are distinctly different goals that more often than not come into conflict with each other. Most policies meant to promote economic development create economic inefficiencies and therefore hinder economic growth.

For decades North Carolina has been pursuing “economic development policy.” Indeed, the Department of Commerce (DOC) is completely dedicated to this concept. As is emphasized on the DOC website, “The NC 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 “giv[es] companies the assistance and resources necessary to meet their unique business needs.” But as has been demonstrated many times over, both theoretically and historically, government agencies, as non participants in the market process have no way of efficiently determining what a company’s unique business needs are. The DOC has no market incentive—profit and loss—nor the necessary market knowledge to get these decisions right. In attempting to implement such policies, it is invoking what Nobel Laureate F.A. Hayek, in his arguments against market socialism, referred to as a “pretense of knowledge.” And since the money that is used to implement these policies is not manna from heaven, what the DOC is really 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. It necessarily entails an effort 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. This in fact is what “crony capitalism” is all about. On the DOC website, the agency boasts about the specific industries that it targets for special consideration. They include tourism, the film industry, sports development, telecommunications, biotechnologies, health care, and financial services. In reality, economic development is simply a disguised form of state central planning of the economy, and it should be abandoned.

Policy that focuses on economic growth rather than economic development starts from a different premise than that taken by the DOC and programs like the One North Carolina Fund, the Golden LEAF Foundation, and the North Carolina Job Development Investment Grants (JDIG), that the state has supported over the years. All of these have to channel resources into government determined uses and away from market allocation based on free choice.

The starting premise behind policies to promote economic growth is that private entrepreneurs, using their own money or the money of voluntary investors, know best how resources should be allocated. The problem facing policy makers then is to see to it that property rights are secure, that entrepreneurs can use their property rights in any way they believe will be most productive, and that tax and regulatory policies do not get in the way of this process. It must be recognized that economic development policies divert resources from this process, thereby moving resources to less efficient uses, hindering economic growth.

Over the past several years, North Carolina lawmakers have indeed begun to craft policies with an eye toward enhancing economic growth. They have done this primarily by implementing pro-growth tax and regulatory reform and cutting taxes overall. And economic growth rates in NC relative to the rest of the country attest to the success of this approach.

Unfortunately, they have continued to pursue anti-growth and counterproductive economic development policies. During the 2015 legislative session, every proposal to implement new or expand existing economic development programs was passed into law. This schizophrenic approach to economic policy is like trying to increase the speed that a boat is traveling by investing in a bigger and more powerful motor while simultaneous tossing a heavy anchor over the side. Sure the boat may continue to move forward and indeed it may increase its speed if the force of the new engine is greater than the drag of the anchor. But clearly the new engine would work even better if the anchor were lifted completely.

In June 2019 Roy Cordato retired from his full time position as Senior Economist and Resident Scholar at the John Locke Foundation and currently holds the position of Senior Economist Emeritus at the Foundation. From January 2001 to March 2017,… ...

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