John Hood: NC near the top of nation’s economic development

Published 12:00 am Tuesday, May 10, 2016

RALEIGH — When it comes to economic growth, North Carolina is one of the Magnificent Seven.

No, I’m not going to make an argument that the Tar Heel State is somehow analogous to the characters played by the likes of Steve McQueen or Yul Brynner in the classic 1960 Western — or the likes of Denzel Washington and Chris Pratt in the remake to be released later this year. Instead of leading the defense of a village from tyrannical bandits, North Carolina and six other states are leading the advance of America’s economy.

Here’s how I identified these seven leading state economies. First, I assembled the most recent 12 months of data for three key measures of economic growth: gross domestic product (GDP), employment, and per-person income. Next, I ranked the 50 states and the District of Columbia according to the growth rate for each measure. Finally, I determined how many states ranked in the top third nationally on all three measures.

There were just seven: California, Georgia, Hawaii, North Carolina, Oregon, South Carolina, and Utah. These state economies don’t just rate highly in one category. They are simultaneously creating jobs, raising personal incomes, and increasing the total production of goods and services at relatively high rates.

Why? It is true that four of the seven states have Republican governments, and five states — the Carolinas, Georgia, Oregon, and Utah — fare well in the Mercatus Center’s 2015 rankings of state economic freedom. But California and Hawaii are about as Blue as you can get in both political and policy preferences, yet they still post strong economic performances over the past year.

If you map the Magnificent Seven, you see a clump of three Southeastern states plus four that are on or near the Pacific Rim. I suspect this is significant. While there are pockets of relative economic health across the country, a disproportionate amount of America’s economic dynamism is found in these two regions. Patterns of interstate migration, supply chains, and international trade are clearly at play.

Public policies certainly do affect state economic performance, all other things being equal. There are Southeastern and Western states that aren’t doing well. If I were inclined to defend leftist economic policies, I’d be careful not to put too much stock in the relative performance of California and Hawaii. Both have distinctive natural assets and attractions that are difficult to screw up, at least in the short run.

As for North Carolina and its immediate neighbors, the Left has insisted for years that these states will never make economic gains as long as they restrain taxes, spending, regulation, and labor unionization. The Left is simply mistaken here, although you shouldn’t hold your breath waiting for an admission of error.

Unless you start out with massive endowments of raw materials, Pacific harbors, and tropical paradises, your best bet to become a successful state economy in the 21st century is to provide core public services at the lowest possible cost and otherwise get out of the way. Although there is such a thing as public capital investment, private capital investment is vastly larger and more important — and it will tend to flow to those places, in America and around the world, where investors can get their highest after-tax return. It’s not just financial capital that chases economic freedom, by the way. It’s also human capital, in the form of highly productive entrepreneurs, managers, professionals, and employees.

In recent years, North Carolina has become a top destination of such private capital. That’s why we’re posting solid GDP and income gains.

That’s also one of the reasons our state government is solidly in the black, with projected revenues now exceeding the original baseline by $561 million over the 2015-17 budget biennium.

It certainly helps that North Carolina is in a good neighborhood, economically speaking. But if we want to keep our place in the Magnificent Seven, we need to focus on maintaining and expanding economic freedom.

John Hood is chairman of the John Locke Foundation and an author.