Tuesday, January 6, 2009

A “Magic Formula” for Eastern NC

With unemployment at 9.9% in Rocky Mount and 7.5% in Greenville (according to the Bureau of Labor Statistics), there is a strong desire for a political solution to a deteriorating economy. The cry of "Do Something; Anything" is what leads to the wasting of taxpayers' money like with the Randy Parton Theater fiasco, or with giveaways to special interest groups like Hollywood production companies to film in Wilmington.

What eastern NC needs is real growth and not some ad hoc, temporary political solution. Those have been tried and still the average annual income in eastern NC is 15% less than the rest of the state. Eastern NC needs widespread, systemic growth, but growth cannot be forced. Farmers know that you can't force crops to grow. You can only set the right conditions: prepare the soil; provide water; control pests; augment the soil; etc., but you certainly cannot force growth.

The same can be said for economic growth—you can't force it. It has to occur naturally and spontaneously. It can be encouraged by setting the right conditions. Luckily those conditions can be discovered and have been discovered by economic science. There is a pattern to economic growth. This pattern has many names, which I tell my students is a magic formula. It seems like magic because without anyone issuing orders, without a central planning board, with individuals acting in their own interests as they best see it, we have achieved, in a very short period of time, living standards that had never been seen in the preceding 5,000 years of recorded human civilization. Fortunately, the magic formula for economic growth is not a secret formula (we're allowed to talk about it), but unfortunately it is seldom heard over the demagogic political voices.

The goal of an economy is not balanced trade, universal health care, or even jobs. Jobs are easy to create. Stalin and Mao created many jobs. The key is to have jobs that create goods and services that people want and desire. The true sovereigns in the economy, the consumers, set the goal of the economy, which is an increase in the standard of living for all. The means by which this is achieved is through the production of more goods and services. But how can more be produced using the same amount of resources? The answer is that it must come through an increase in productivity. Increasing productivity comes from newer and better machines. Economists call this "Capital Accumulation." Capital accumulation comes about through investment, and investment funds come from savings. Thus the magic formula for economic growth is this: savings leads to investment, which leads to capital accumulation, which leads to higher levels of productivity and creates higher living standards. Notice that the magic formula follows the age old wisdom of the pre-20th century American: saving is good; invest and in time it will bear fruit; and you can't get rich by eating the seed corn. By following this formula, America has created a higher standard of living for more people in barely two centuries.

Governments do not make wise choices with investment dollars, just look at the DOT, Randy Parton Theater, or the giveaways to large corporations in the vain hope that they will create jobs. Government has no guiding star by which it knows where to put resources. The current practice of catering to the loudest special interest group is not good enough.

In a market economy, it is the entrepreneurs who make investment decisions. They are self-directed but others-focused. Entrepreneurs follow market signals and direct resources to their highest-valued uses, maybe not perfectly, but better than the governmental alternative.

Eastern NC has great potential for growth, but it will not occur overnight and it cannot be done by some get-rich-quick political scheme. The economic ground has to be prepared. Savings and capital accumulation are currently discouraged. A return to the magic formula is necessary. As such, we must resist the calls for political bail-outs, corporate welfare, business incentives, and the creation of new projects to “jump start” growth. We need to unleash the entrepreneurs. We need to make starting and keeping a business easier. Often the best thing to do is not a government hand-up or hand-out, rather it is to just step out of the way.


Bam said...

Paul - Well put! I agree that there is tremendous potential in eastern NC, and that it will only be realized by the methods you cite and a lot of hard work. MOC is fortunate to be sitting in the middle of this region.


Ryan N. Schmidt said...

Dr. Cwik,
Well thought out comments on the potential expansion of Eastern North Carolina and the political influences that drive decision-making. I would like to add that it may be important to also consider that many in Eastern North Carolina commute to areas of Western North Carolina (specifically Raleigh/Durham)and the RTP area to invest their dollars through consumer spending. The travel distances, compared to other states, allow this convenience while hurting their own communities. From a state perspective, spending within the borders of a state is good, while local governments conceptualize plans for local spending, and these plans often contradict the very state being represented. North Carolina is fairly unique in that everything is relatively close and choices on not just what is consumed but where it is being consumed create tension within the boundaries as the United States seems to be at a spending threshold.

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