Fostering economic development

Although economic development has dominated the agendas of many governors, legislators and local elected officials in North Carolina, it remains one of the most misunderstood activities that governments undertake.

All too frequently, the political incentives to attract media attention by making job announcements outweigh the need for having a policy that maintains a balanced, efficient and fair economic environment. Such a policy would provide the maximum amount of opportunity and prosperity for North Carolinians. It would respect the rule of law, protect private property, promote competition, and allow markets to operate freely.

Defining economic development

Just what does the term “economic development” really mean? Is it population growth? Is it per-capita-income growth? Is it a reduction in the reported unemployment rate?

These measures are often useful, but they tell us very little about citizens’ actual economic well-being. Is population growth desirable if it doesn’t pay for itself and results in higher taxes? Is per-capita-income growth desirable if inflation and taxes consume it all? Are county unemployment rates reliable enough to base tax credits on them, in light of the N.C. Constitution’s call for a fair and equitable tax system? Although these indicators can be useful tools for private businesses and government officials, a low ranking should not be used to justify state intervention in private markets that are more complex than numbers can convey.

The term “economic development” isn’t mentioned in the state constitution; until recently, state and local economic-development programs were basically operating with no clear authority to intervene in the economy. On March 8, 1996, the N.C. Supreme Court gave governments an “economic-development permission slip.” In Maready v. Winston-Salem, the court ruled (on a 5-2 vote) that publicly funded economic-development incentives constitute a public purpose consistent with the constitution’s intent.

The corporate-welfare budget

The acceptance of economic development as a government responsibility has led to state and local policies that have collectively been called “corporate welfare.” This includes state tax and subsidy policies that favor individual businesses, selected industries, or specific geographic regions. Unlike such practices as maintaining low across-the-board tax rates or providing core public services such as education, highways and public safety, corporate welfare doesn’t benefit everyone. Instead, it requires public officials to intervene in private markets to decide which businesses or regions are worthy of support. This sets the stage for increased special- interest lobbying, strings-attached campaign contributions, and unethical behavior in public office.

A partial list of corporate welfare would include overseas advertising subsidies in the departments of Commerce and Agriculture, special marketing programs for industries as varied as film production and meat-goat farming, state subsidies for private ventures such as the N.C. Biotechnology Center’s venture-capital fund, below-cost state services offered to agricultural and other businesses, regional subsidies such as the state’s investment in the Global TransPark in Kinston, and special tax breaks for job creation in “distressed communities,” worker training, and research and development.

In its 2002 alternative budget, the John Locke Foundation identified some $255 million in corporate subsidies and “economic development” tax credits. If these special programs were eliminated in favor of across-the-board tax reduction, North Carolina could reduce its relatively high corporate tax rate to 5 percent and repeal the personal-income-tax hike passed in 2001. Both actions would help to create a lower-cost environment in which businesses of all sizes could thrive, not just those big enough or powerful enough to attract political attention.

Research shows that government-subsidized economic-development projects have few significant effects on business expansion or relocation decisions. For example, a 1999 study from the Kenan Institute of Private Enterprise at UNC-Chapel Hill concluded that “state incentives play only a marginal role in the location decisions of private firms.” Another study, by an economist with the General Accounting Office, found that most attempts by state governments to “guide” their economies fail. The report did identify three variables that had a statistically significant impact on state economic growth: the starting size of the state’s economy (smaller ones grew faster), marginal state and local tax rates (high is bad), and the amount of “rent-seeking behavior” in the state, measured by the percentage of workers employed in government, law and lobbying.

If targeted tax breaks and interference in the market don’t generate economic benefits, what does? A 1996 study conducted for the John Locke Foundation by economist Mike Walden of N.C. State found that spending on law-enforcement activities had a large payoff in jobs and income growth. Education and highways delivered modest payoffs. Other government spending actually reduced jobs and incomes, because the taxes levied to finance them took money away from more productive private investments. These and other research findings suggest that the safest course for policy-makers is to concentrate on doing basic tasks well — including providing tax and regulatory relief — rather than letting themselves be distracted by politics, media spin and peddlers of dubious projects such as the Global TransPark, state grants to biotechnology companies, or the ill-fated N.C. Information Highway.

Recommendations

1. State and local leaders should phase out business recruitment and marketing programs, and end targeted incentives and subsidies for unprofitable enterprises, saving hundreds of millions of dollars annually.

2. State and local leaders should pursue economic development by improving core government services, such as public schools and highways, and by further reducing taxes and reforming the state’s antiquated tax code.

[Paul Chesser is a regular contributor to the John Locke Foundation’s Carolina Journal, which originally published this essay.]