North Carolina needs more businesses
Published November 27, 2019
By John Hood
During 2018, North Carolina lost some 338,000 private-sector jobs, or 9.1 percent of the total. Did you happen to notice this economic catastrophe?
I doubt it, because North Carolina businesses added nearly 413,000 jobs during the same 12-month period. There was a net gain, not a net loss. But even when the labor market has a good year, lots of jobs go away. Companies cut back. Some businesses close altogether.
Because net changes in economic conditions get more political and media attention — and they should, make no mistake — we can sometimes forget just how much churn is a feature of any modern economy. New technologies replace old ones. New ideas do, too. Consumer preferences change. Producers must adjust to that, or suffer the consequences.
As disorienting as such changes can be sometimes, we shouldn’t want it any other way. The alternative would be far worse. Without the dynamism of free enterprise, the vast majority of us would be poorer, sicker, and sadder. I don’t mean to diminish the difficulties faced by those whose employers make mistakes, fall behind technologically, or simply fall out of fashion. But efforts to protect wobbly businesses from market forces end up hurting far more people. Churn is a sign of vitality.
Indeed, North Carolina would benefit from more of it. While 2018 was a good economic year for our state, it wasn’t a great one, comparatively speaking. Growth in real gross domestic product was a bit below the national and regional averages. So was net job creation. North Carolina’s economic performance has picked up a bit in 2019, according to the available data, but we could still be doing much better.
In particular, we’d be better off if there were more entrepreneurs starting new businesses. The Ewing Marion Kauffman Foundation publishes an annual compilation of data on the subject. North Carolina got a score of .44 on the 2018 Kauffman Early-Stage Entrepreneurship Index. That’s better than average. However, our key regional competitors Florida (2.27) and Georgia (1.47) were among the highest scorers on business startups in the nation.
So was California (2.78), by the way. It’s now a thoroughly blue state with relatively high taxes and regulatory burdens. Does that mean conservatives are all wet when we advocate more economic freedom to boost entrepreneurship and economic growth in North Carolina?
Not at all. While some conservatives grossly oversimplify and exaggerate the effects of public policy, most of us point out that economies are highly complex systems with multiple causalities. California has a fantastic climate, abundant raw materials, and excellent ports and trade connections to fast-growing Pacific Rim countries. It is also home to highly innovative industries that got their start in California decades ago, before its decisive turn to left-wing politics. Recently, there has been a steady emigration of innovative people and firms from California to freer states, but given the relative magnitudes involved and the continuing salience of California’s other attractions, it would take a very long time for such emigration to destroy that state’s economic base.
The real question has always been how state policies affect economic performance after adjusting for non-policy factors. In other words, given the limited levers that governors and legislatures can truly control, what direction should they be pulling?
While there is no unanimous verdict in the economic literature — there rarely is — most studies show that economic freedom boosts economic growth in general and entrepreneurship in particular. For example, a recent paper in the journal Contemporary Economic Policy found that a 10 percent increase in economic freedom is associated with a 5 percent increase in state GDP. And a 2019 study in the journal Small Business Economics found that “economic freedom is positively associated with firm and job creation.”
Within our region, Florida (#2) and Georgia (#6) are higher in economic freedom than North Carolina (#14), according to the latest Fraser Institute study. We still need to tax less and deregulate more, among other things, if we desire more jobs and higher incomes.