TAKE 5: Economist responds to changes, controversies

Aug. 24, 2013 @ 05:02 AM

This week, we Take 5 with Dr. Michael Walden, the William Neal Reynolds Distinguished Professor of Economics at North Carolina State University, about the state budget and North Carolina’s economy. Walden, a graduate of the University of Cincinnati and Cornell University, has served as a professor at NCSU since 1978. He writes and co-produces The Economic Perspective, a weekly program heard on radio stations in five states, and “You Decide,” a biweekly column appearing in more than 40 newspapers across the state.

You recently wrote, “…there are actions North Carolina public leaders can take to improve the long-run competitive position of the state and to gain both jobs and income. These actions revolve around the two broad areas that state government directly controls — state taxes and state spending.” Now that North Carolina’s new state budget is in place, it's being attacked by skeptics but hailed by the Republican-led majority as the first step in a fix to the state's fiscal problems. As an economist, what's your reaction to lawmakers’ new tax cuts and spending plan?

The empirical literature suggests the significant reduction in the state corporate income tax rate might be the most important component of the tax changes. Some studies also find the "flattening" of the individual income tax rates (that is, one rate applying to all taxable income) can be helpful for economic growth. Still — if these studies are accurate, while helpful — they alone likely won't create an economic boom in the state. Taxes are important, but they are "down the list" from labor costs, labor quality, energy costs, infrastructure quality and access to markets. These other factors will determine how fast the state grows.

There still remains a problem in the budget related to the rapidly increasing expenditures for state-funded health care programs — particularly Medicaid. Health expenditures in the two-year budget are expected to rise more than 11 percent. Ideas for serving the health care needs of low-income residents but in a more efficient (less-costly) way are needed. The shift in state spending — seen in almost all states — over the last several decades out of infrastructure and human capital development (education) to health spending has been the most significant and important challenge for state leaders.

North Carolina Policy Watch, a non-partisan public policy organization that has been critical of the legislature and Gov. Pat McCrory, recently wrote that, “The final budget may invest more than last year's budget in simple terms of dollars spent, but it still falls short of what is needed to maintain current service levels for several major areas in the budget.” Is that accurate? And how should North Carolinians try to make sense of the controversy and squabbles over the budget?

Spending and support for education is probably the most contentious part of the budget. I think everyone recognizes the need for a well-trained workforce that will attract businesses paying good salaries. The issue is, how do we get this? What is the best way to improve performance at the K-12 level? What is the relative importance of teachers, class size, technology, student preparedness and parental support?

For example, several studies over the years have found parental support as one of the most important — perhaps the most important — factor behind a student's academic achievement. How can schools and the state improve parental support?

Another question is whether we need to dramatically expand the offerings for vocational and technical education at the high school level as an alternative to college prep. Several labor market studies show a current or looming shortage of qualified workers in some vocational and technical occupations. Providing a track for this kind of training at the high school level would give an option for students with these kinds of interests.

At the higher-ed level (community college and university levels), an ongoing, big question is how the costs should be split between the student — who directly benefits from the degree — and state taxpayers. Would a higher tuition cost motivate greater student focus and higher graduation rates since students would have their "money on the line," or would higher tuitions simply prevent more students from attending college or put them more into debt with student loans? We need to have this debate and perhaps some creative thinking. Oregon, for example, is providing higher education tuition free to students in exchange for taking 3 percent of graduates' salaries for 24 years.

Lastly, I applaud the budget-crafters in significantly increasing spending for building and equipment maintenance and improvement and for increasing monies in the "rainy-day fund."

Most of us grew quite weary with the disagreements between legislators and the governor over key budgetary issues and the time it took the Republican majority to craft a passable spending plan. If all this were up to you (maybe if you had Art Pope’s job?), what would your revenue and expense plan for the state of North Carolina look like?

I would try to (a) simplify the tax code with fewer deductions and exemptions, lower rates, and a broader tax base, and over time (b) try to reduce the share of state spending for health care and increase the share for infrastructure and human capital (education) development. Converting Medicaid support from a "pay-the-bills" approach to vouchers to client households for purchase of private market insurance is one approach discussed in other states.

Fracking, the practice of using hydraulic fracturing to extract natural gas, is seen as potential game-changer for North Carolina. But few people realize North Carolina has the largest reservoir of offshore oil of any state along the East Coast. How could tapping into these reserves, as well as pursuing fracking, impact our state's economy?

I recently published a report on the potential economic impacts of both onshore and offshore energy development in North Carolina. Based on current estimates of attainable supply and resource prices, I estimated the largest impacts from offshore development. Almost $2 billion of annual income and 17,000 jobs could result if offshore reservoirs of oil and natural gas were developed. Of course, potential environmental costs to coastal communities and to nature would also need to be considered.

Why do North Carolina's economic numbers (for example, unemployment rate) appear to be worse than the nation's?

North Carolina has a "bumpier" business cycle. We typically suffer more in recessions, but have a sharper rebound. We saw this pattern in the 2000s, with a deeper 2001 recession but job growth that was twice as fast as the nation's in the mid-2000s. We've seen this again in the current cycle — deeper job losses in 2008-2010 but faster job growth than the nation since then (5.5 percent for N.C. vs. 5.1 percent for the nation).

Our unemployment is still higher than the nation's today for two reasons: it peaked at a higher rate, and people continue to move to North Carolina at a faster pace than in other states. Not all of those new households will immediately be employed — so they add to the state's jobless rate until they do find work.