Growth strategy backed by research
When you hear politicians utter the phrase “economists say,” be skeptical. There may well be economists who agree with their particular policy idea. But economists and other social scientists don’t speak with one voice. There are many differences of opinion, reflecting differences in assumptions and methodology.
As Democratic lawmakers, left-wing protesters and liberal editorial pages criticized the work of the Republican-led General Assembly this year, they often resorted to the “economists say” tactic. Few of these commentators were, in fact, economists or had evidently read the relevant literature on state economic growth.
I’m not an economist, either. But I employ economists specializing in state policy — and we have done the required readings. Based on this information, we believe the fiscal and regulatory decisions made this year by Gov. Pat McCrory and the state legislature are the right medicine for North Carolina’s economic maladies.
While researching my 2012 book “Our Best Foot Forward: An Investment Plan for North Carolina’s Economic Recovery,” my colleagues and I gathered dozens of studies of state economic growth. We limited our search to studies published since 1992 in academic or professional journals that tested the relationship between state fiscal or regulatory policy and economic measures such as income growth and job creation. We excluded research conducted by special-interest groups and conservative or liberal think tanks.
I’ve continued to add to this database since the book’s publication. At present it contains 146 articles published between 1992 and 2013. Some of them tested only one potential relationship between a state policy decision and economic growth. Other studies tested multiple policies. Here are the main findings:
• Most scholarly studies of overall state and local taxes found that they were negatively associated with economic growth. That is, 28 studies found that higher taxes were linked to weaker growth, while 11 studies yielded mixed or statistically insignificant findings and only one study found that higher taxes were linked to stronger growth. The findings of more than two-thirds of the relevant studies, in other words, were consistent with the Republicans’ decision to combine tax reform with tax reduction.
• With regard to specific state tax policies, there were negative associations with economic growth in 61 percent of the studies examining personal income tax burdens, 67 percent of the studies examining marginal tax rates, and 68 percent of the studies examining taxes on business or corporate income.
• Some critics of the Republicans’ fiscal strategy say that North Carolina would be better served by a strategy that maintains or increases the current tax burden to fund education, infrastructure or other state programs. This idea may be plausible but it lacks strong empirical support. Of the 13 studies testing the relationship between total state spending and economic growth, only one found it was positive. Seven studies found that higher spending was associated with weaker economic growth and the other five were inconclusive.
• With regard to specific state spending policies, 33 studies tested the link between education expenditures and economic growth. Only 14 studies found a positive association, while 11 studies found mixed or insignificant results and eight studies have a negative association (the economic benefits of additional education spending were lower than the economic costs of the taxes required). Of the 24 studies examining infrastructure spending, a somewhat-higher plurality (46 percent) found positive results, but most studies still found inconclusive or negative relationships.
Finally, there were 23 scholarly articles that looked at state regulation and 20 articles that studies broad indexes of economic freedom that include both fiscal and regulatory policy. The results here were unmistakable: scholars found a positive economic effect for less regulation 74 percent of the time and for economic freedom 75 percent of the time.
There remains plenty of room for debate here. Liberals could claim that the minority of studies supporting their view were better designed, for example. But they can’t simply claim that “economists say” liberals are correct about promoting economic growth. That’s incorrect.
John Hood is president of the John Locke Foundation.