Time To Dump Economic Development Policy | Eastern North Carolina Now

    Publisher's note: The author of this post is Dr. Roy Cordato, who is Vice President for Research for the Carolina Journal, John Hood Publisher.

State should focus on growth rather than development


    RALEIGH     North Carolina should abandon what it has been referring to for years as economic development policy and completely refocus its efforts in the area of economic policy on economic growth. These are distinctly different goals that more often than not come into conflict with each other. Most policies meant to promote economic development create economic inefficiencies and therefore hinder economic growth.

    For decades North Carolina has been pursuing "economic development policy." Indeed, the N.C. Department of Commerce is completely dedicated to this concept. As is emphasized on the DOC website, "The N.C. Department of Commerce is the state's leading economic-development agency, working with local, regional, national and international companies."

    And how is this accomplished? According to DOC, it "giv[es] companies the assistance and resources necessary to meet their unique business needs." But as has been demonstrated many times over, both theoretically and historically, government agencies, as nonparticipants in the market process, have no way of efficiently determining what a company's unique business needs are.

    DOC has no market incentive - profit and loss - nor the necessary market knowledge to get these decisions right. In attempting to implement such policies, it is invoking what Nobel Laureate F.A. Hayek, in his arguments against market socialism, referred to as a "pretense of knowledge."

    Since the money that is used to implement these policies is not manna from heaven, what DOC is really doing is using the state's taxing authority to transfer resources from the vast majority of North Carolina taxpayers to businesses that the agency determines are worthy of its largess.

    It necessarily entails an effort by the state to pick winners and losers in the marketplace by using tax breaks and direct subsidies to promote specifically targeted businesses and industries. This, in fact, is what "crony capitalism" is all about.

    On the DOC website, the agency boasts about specific industries it targets for special consideration. They include tourism, film, sports development, telecommunications, biotechnologies, health care, and financial services. In reality, economic development is simply a disguised form of state central planning of the economy, and it should be abandoned.

    Policy that focuses on economic growth rather than economic development starts from a different premise than that taken by DOC and programs the state has supported over the years, like the One North Carolina Fund, Golden LEAF Foundation, and Job Development Investment Grants. All of these channel resources into government-determined uses and away from market allocation based on free choice.

    The starting premise behind policies to promote economic growth is that private entrepreneurs, using their own money or money from voluntary investors, know best how resources should be allocated. The problem facing policymakers then is to see to it that property rights are secure, that entrepreneurs can use their property rights in any way they believe will be most productive, and that tax and regulatory policies do not get in the way of this process.

    It must be recognized that economic development policies divert resources from this process, thereby moving resources to less efficient uses, hindering economic growth.

    Over the past several years, North Carolina lawmakers have indeed begun to craft policies with an eye toward enhancing economic growth. They have done this primarily by implementing pro-growth tax and regulatory reform and cutting taxes overall. And economic growth rates in North Carolina relative to the rest of the country attest to the success of this approach.

    Unfortunately, policymakers have continued to pursue anti-growth and counterproductive economic development policies. During the 2015 legislative session, every proposal to implement new or to expand existing economic development programs was passed into law.

    This schizophrenic approach to economic policy is like trying to increase the speed that a boat is traveling by investing in a bigger and more powerful motor while simultaneously tossing a heavy anchor over the side. Sure, the boat may continue to move forward, and indeed it may increase its speed if the force of the new engine is greater than the drag of the anchor.

    But clearly the new engine would work even better if the anchor were lifted completely.
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