NC's business reputation becomes issue in governor's race

Candidates debate business climate

rchristensen@newsobserver.comJuly 22, 2012 

  • What’s in a ranking? Despite having the fourth-highest unemployment rate in the country, North Carolina continues to rank highly on a number of best-of lists. Here’s a sampling: • North Carolina ranked third in three recent surveys of the best states for business conducted by Forbes magazine, Site Selection magazine and Chief Executive magazine. North Carolina was rated fourth by CNBC. • The Beacon Hill Institute Competitive Report, which takes a broader view of economic competitiveness, ranked North Carolina 21st. Beacon Hill included not only such standard measures as rate of unionization but also pollution, infant mortality rates and the number of technology degrees. • North Carolina was rated 23rd by the American Legislative Exchange Council Laffer Competitive Index, a group that advocates for a more conservative agenda. • The state fared poorly – 44th – in state business tax climate in a survey by the Tax Foundation, which examined only state taxes.

North Carolina has long seen itself as the “Dixie Dynamo,” as National Geographic magazine once called it, a Southern economic powerhouse with big banks, Research Triangle Park, cutting-edge research universities and a muscular manufacturing base.

But the question of whether the dynamo is losing some of its force has become an issue in the governor’s race. Republican candidate Pat McCrory asserts that North Carolina is in danger of losing its reputation as a regional leader.

It is a debate echoed in the legislature, in business circles, in think tanks and universities. In part it reflects a philosophical divide about the best way for North Carolina to recover its economic momentum following the worst recession since the Great Depression.

Republicans, in particular, have argued that the state is falling behind its competitors and that the state needs to take steps to make it more competitive, including cutting the corporate income tax, reducing individual income tax rates on high earners and making the regulatory environment more friendly to business.

“During the past decade, our brand has been tarnished whether we liked to admit it or not,” McCrory, the former Charlotte mayor, told a group of business people in Cary this month. “Many of you in business know that you cannot live off your brand forever. Right now, I see the competition, even in the surrounding states of South Carolina, Tennessee and Virginia, where they have some governors who are incredibly dynamic, who are trying to take our companies. And some of these companies are saying, ‘We can move.’ ”

Losing competitive edge

Democrats tend to argue that renewed public investment in education – in which North Carolina has traditionally led the South – along with aggressive industrial recruitment is the formula for keeping the state a leader in the South. They blame Republicans who now control the legislature from backing away from education.

“I think we are losing our competitive edge,” Lt. Gov. Walter Dalton, the Democratic nominee for governor, said in a recent interview. “But I think it’s because of the cuts we have seen this General Assembly make to economic development and to education and what I perceive to be as opposition to recruitment initiatives.”

North Carolina’s slow emergence from the Great Recession drives the debate. The state’s 9.4 percent unemployment rate is the fourth-highest in the country and well above the national average of 8.2 percent

A major reason is the state’s heavy reliance on manufacturing, said Michael Walden, an economics professor at N.C. State University. Manufacturing represents 23 percent of the state’s GDP, compared with 13 percent nationally.

“States that have a heavy commitment to manufacturing typically have much higher increases in unemployment rates in recessions,” Walden said.

Much of North Carolina’s problems, Walden and other economists suggest, are based on economic trends that defy easy public policy solutions. Neighboring South Carolina, which has been dominated by conservative Republicans and which also has a large manufacturing base, also has an unemployment rate of 9.4 percent.

North Carolina also had the fourth-highest rate of in-migration from other states during this century’s first decade. So while North Carolina’s economy was cooling down, people were moving here looking for jobs. In a sense, Walden said, North Carolina was importing unemployment.

‘Something is not working’

McCrory sings from the same hymnal as the Republican legislative majority that assumed power in January 2011. The GOP engineered one of the most business-friendly sessions in recent memory.

Democrats have controlled politics in Raleigh for nearly all of the past century. And they had a reputation for being business-friendly.

Further complicating the narrative: North Carolina fares well in most national surveys that attempt to rate which states are business-friendly. The surveys often include surveys of executives or industrial recruiters, and take into consideration a state’s rate of unionization, tax laws, workforce, regulatory climate and other factors.

McCrory was asked recently how he can square the state’s mainly high pro-business rankings with his argument that state policy was not sufficiently pro-business.

“All I can say is that we have the fourth-highest unemployment rate in the country,” he replied. “Something is not working.”

McCrory’s views reflect those of many in the business community who believe the state has gotten complacent while other states have made themselves more competitive.

“While we have benefited from these very strong ratings, other states have been busier making their business climates more competitive,” said Lew Ebert, president of the N.C. Chamber of Commerce. “They have taken a look at not only tax but some of the non-budget items that this legislature took care of last year – workers’ comp, tort reform, taking a hard look a regulations, medical malpractice reform.”

John Hood, president of the John Locke Foundation, a Raleigh-based conservative think tank, charts North Carolina’s economic decline as beginning in the late 1990s. In a recently published book “Our Best Foot Forward,” Hood argues that North Carolina has moved from “Dixie Dynamo” to “Dixie Dawdler.”

Having gone back and looked at the state’s economic growth beginning in the 1930s, Hood found the first decade of this century was the first time North Carolina’s real per capita income grew at a rate less than both the Southeast and the U.S.

“What really happened over the past decade and a half is that North Carolina’s economy failed to keep pace in innovation, investment, entrepreneurial activity and job creation,” Hood writes.

Very friendly to business

Keith Crisco, the state commerce secretary, agrees the competition is keener. But he said no state can compete with North Carolina when it comes to customized training, its community college system, its university system and its low cost of doing business.

“The governor of Virginia – when he was asking for more money (from his legislature) – he mentioned we have to do something about North Carolina; they are taking it to us,” Crisco said.

Crisco said that since the beginning of the Perdue administration, companies have pledged 97,000 jobs and $22.5 billion in investments. In 2011, he notes, North Carolina’s GDP grew by 1.8 percent, twice the growth rate in the Southeast and second only to Tennessee.

Crisco acknowledges there was some “sticker shock” on the corporate income tax, which is higher than in neighboring states, but he notes that Democratic Gov. Bev Perdue has joined some Republican lawmakers in supporting a reduction.

McCrory wants to reduce the corporate tax, the high marginal rate for personal income tax, and the estate tax.

He has not put a cost on his proposals.

Some worry that those tax cuts would mean not maintaining the public investments that made North Carolina a regional force.

Dalton said there could already be a negative effect on the state’s economic competitiveness because of the legislature’s cuts of 15 to 18 percent to the University of North Carolina system, 10 percent to the community college system, $6.5 million to the job recruitment fund, and 17 percent to the N.C. Rural Economic Development Center.

Jesse White, former executive director of the Southern Growth Policies Board and the former co-director of the Appalachian Regional Commission, said North Carolina built its reputation under governors such as Terry Sanford and Jim Hunt by investing in higher education and aiding technology through such groups as the N.C. Biotechnology Center – not by trying to get the lowest taxes or the least regulation in the South.

“Nobody who seriously looks at economic development would argue that North Carolina businesses have been over-regulated,” he said. “It’s a very business-friendly state.”

Economic development, of course, is a very complicated and nuanced issue, which does not lend itself to the bumper sticker mentality of political campaigns. Some economic strategies work in certain industries, and for certain areas, but not others.

“It depends on whether you are trying to attract a Red Hat or a Randy Parton Dinner Theatre,” said Peter Coclanis, director the Global Research Institute at the UNC- Chapel Hill.

Although Republicans tend to line up behind tax cuts, and Democrats for education spending, those who have examined the issue say the debate need not always fall along partisan lines.

“I think you need a more thoughtful, calibrated approach than the kind of sound bites that seem to inform political campaigns,” Coclanis said.

Christensen: 919-829-4532

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