Constructive conservatism at work in NC

by John Hood, John Locke Foundation and NC SPIN panelist, published in News and Observer, September 5, 2014.

Democratic politicians and liberal activists in North Carolina are frustrated. When Republicans won the legislature in 2010 and began implementing conservative reforms, the Left pushed back forcefully. After Republicans expanded their majorities in 2012 and elected their first governor in a generation, liberals redoubled their efforts.

So far, they have little to show for it. While some of their tactics were always about politics – the high proportion of personal attacks is a dead giveaway – other critics really have tried to persuade GOP officials. Why have liberals been so unconvincing?

One reason is that their arguments are rooted in a fictional account of state history. Call it North Carolina Exceptionalism. It holds that during the first half of the 20th century, the state was governed by skinflint conservatives content to preside over a moribund economy. But then came Kerr Scott and Luther Hodges in the 1950s, Terry Sanford in the 1960s and Jim Hunt in the 1970s. They were progressives whose investments in education and infrastructure caused North Carolina’s economy to outperform the rest of the South and the nation.

This is a fairy tale. What typically follows is a ghost story: that since 2010, ghoulish Republicans have destroyed North Carolina’s public assets and reversed decades of progress.

Did our economy languish until the 1950s and then become a “Dixie Dynamo” because of Kerr Scott’s road-building, Luther Hodges’ Research Triangle Park and Terry Sanford’s tax and spending hikes? Not according to standard measures such as gross domestic product and personal income. The Bureau of Economic Analysis publishes a state GDP statistic that begins in 1963. From that year until 2010, North Carolina’s GDP growth averaged 7.7 percent a year (in nominal dollars). South Carolina’s average growth was also 7.7 percent. Georgia (8.2 percent) and Virginia (7.9 percent) grew a little faster, while Tennessee (7.4 percent) grew a little slower. The average for the 12 Southeastern states was, again, 7.7 percent.

State policies affect economic growth. But other factors predominate. During this period, the Southeast attracted large inflows of people and investment. The region’s lower costs for land and labor, its natural and human resources and its attractive climate (moderated by the spread of air conditioning) helped to propel its GDP growth about 10 percent above the national average. So North Carolina didn’t grow faster than the U.S. as a whole for any exceptional reason, such as “investing” more in government. It simply matched the region’s performance.

Now look what happens when GDP is adjusted for population to isolate gains in capital investment and productivity. From 1963 to 2010, the Southeast’s average annual growth of GDP per capita was 6.2 percent. North Carolina’s rate was 6.1 percent. All our neighboring states had higher rates. You can divide the trend into three periods. From 1963 to 1980, North Carolina’s per-capita GDP growth was lower than the regional average and that of all of our neighbors. During the next 17 years, through 1997, North Carolina outperformed the Southeast and most neighboring states. Then our state’s fortunes dipped. From 1997 to 2010, North Carolina lagged behind both the Southeast and national averages (most of our neighbors also posted weak growth).

Another data series, per-capita income, has an earlier start date. It reveals that North Carolina’s strongest decade of relative growth was actually the 1940s, although the 1980s and 1990s were also strong. Once again, things went south around the turn of the century. From 2000 to 2010, North Carolina’s real per-capita income rose only 1 percent while the region (5 percent) and nation (4 percent) experienced at least some growth.

I’m not questioning the value of building roads, attracting tech firms or improving education. Conservatives oppose none of these. Indeed, North Carolina governors such as Cameron Morrison, Luther Hodges and Jim Martin were right-of-center leaders who believed in what Martin called “constructive conservatism,” a philosophy emphasizing both the value of public investment and the need for pro-growth tax and regulatory policies to encourage private investment.

McCrory and legislative leaders have read the nonfiction edition of North Carolina’s history. They are also aware of the recent explosion of scholarly research about state economic growth. Appearing in peer-reviewed journals, these studies buttress the tenets of constructive conservatism. Most found that, all other things being held equal, higher state taxes and regulatory burdens are associated with lower economic growth, the quality of public services is positively related to economic growth, but the level of state spending on public services is not consistently related to their quality.

To apply these insights, state policymakers should keep tax and regulatory burdens as low as possible consistent with the delivery of core services. That may mean spending more on high-priority programs, yes, but today’s competitive climate also requires that we raise the productivity of education, infrastructure and other services – value created per dollar spent. That’s the strategy McCrory and the legislature are pursuing. It’s why they rewrote the state’s highway formula, sought efficiencies in the UNC system and restructured how schoolteachers are paid.

Is this 21st century version of constructive conservatism working? Early indications are promising. In the past year, North Carolina has outpaced the nation, the Southeast and neighboring states in most growth measures, such as GDP per capita and job creation. But it’s much too early to draw firm conclusions.

North Carolinians are a diverse lot. We’ll continue to disagree. Still, the quality of the debate would improve dramatically if liberals would stop telling fairy tales and ghost stories. When it comes to economic history, let’s stick to nonfiction.