June 24, 2014
RALEIGH — Within hours of the announcement last week that two Charlotte-based companies, LPL Financial and The Lash Group, would relocate thousands of jobs across the border to South Carolina, political and civic leaders in Charlotte and Raleigh began pushing the panic button on business incentives, arguing that North Carolina’s current package of corporate giveaways is inadequate.
The resulting furor was a perfect illustration of why you can’t make good public policy on the basis of a few hyped anecdotes.
To argue that North Carolina ought to be more generous with incentives — as if shelling out $17 million in tax money for an Advance Auto Parts headquarters in Raleigh wasn’t already recklessly generous — is necessarily to argue that North Carolina is currently falling behind in economic development. If North Carolina was matching or exceeding its competitors in job creation and economic growth, the case for expanding the state’s incentive programs would be weak.
So let’s compare the two Carolinas in actual economic performance:
• Since the start of 2014, payroll jobs in North Carolina have increased by .44 percent. Payroll jobs in South Carolina have increased .40 percent. If you look only at the private sector, North Carolina has posted a .74 percent rise in payroll jobs so far this year vs. a rise of only .47 percent for South Carolina.
• Since the start of 2014, a separate measure — employed people in the BLS household survey — has increased 1.4 percent in North Carolina, compared with 1.2 percent in South Carolina.
• More generally, North Carolina’s gross domestic product grew by 4.2 percent in 2013, faster than the national average (3.5 percent) and South Carolina’s GDP (3.1 percent). For the economic sector for which incentives might be relevant, private-sector GDP, North Carolina’s 4.9 percent growth rate exceeded the national average (4 percent) and South Carolina’s (3.5 percent). The difference isn’t just explained by population flows. Real per-capita GDP rose 1.3 percent in North Carolina during 2013, compared with 1.1 percent growth in the nation as a whole and only about .1 percent growth in South Carolina.
When governors and legislators craft economic policies, the proper goal is to maximize the growth of jobs, incomes, and opportunities for the people who reside or do business in their respective jurisdictions. In theory, offering large cash grants or targeted tax breaks to favored companies might constitute good economic policy — if the result were a net increase in jobs, incomes, and opportunities. Advocates of incentives often assert this to be the case, however, rather than actually proving it.
They assume, for example, that incentives are all benefit and no cost. That’s not what happens in the real world. If giving cash or tax breaks lures a company into town, that typically increases the demand for public services. Who pays for them? The companies and households that didn’t get incentives. By attempting to steer resources towards industries that politicians believe to be more “deserving,” incentive policies also tend to warp the private markets for investment and job creation that ought, as much as possible, to be free from central planning by state or local governments.
If incentives were available to all companies, they would just constitute across-the-board tax relief — and there really is good empirical evidence that such policies boost state economic growth. Selective incentives, on the other hand, fare poorly in the economic literature. Most academic studies find that states and localities accrue no quantifiable net benefits from them, although the recipient companies certainly take the loot.
Rather than panic every time an incentive deal gets made in South Carolina or a neighboring state, North Carolina officials need to take some deep breaths and then refocus on what truly drives long-term economic growth. It isn’t gimmickry or giveaways. It’s a sustained strategy to deliver high-quality public services at the lowest possible cost, thus creating a business climate that welcomes investment, innovation, and entrepreneurship.
If anything, recent trends suggest that South Carolina officials might want to consider following North Carolina’s lead on economic policy, not the other way around.
John Hood is president of the John Locke Foundation.