Since Republicans in North Carolina took control of both the executive and legislative branch in January this year, they have been performing big operations to the public policies in attempt to boost the state’s faltering economy.
In the past few months, Republicans in the General Assembly have been making effort to overhaul the current tax structure, privatize public school, cut state funding to high education and impose tougher measures on abortion.
There has been a lot of debate among politicians and economists concerning whether tax cuts are key to prosperity. David Ricardo, a famous British economist in the 18th Century, argued that the timing of taxes does not matter based on an individual’s rational expectation. In other words, if a government lowers taxes today but still keeps the same level of debt by issuing bonds, the public will not change their behaviors on consumption because they expect the government will raise taxes in the future to pay back the debt. What Ricardo found out has been dubbed “Ricardian Equivalence.” With regard to the tax plan proposed by the lawmakers, they tend to maintain revenue by broadening the base of sales tax or other means. Tax cuts on corporation and household income are positive in general, but if people don’t see decrease in government spending goes hand in hand with tax cuts, they in fact nullify the effect of tax cuts by not consuming more at all.
However, cutting taxes alone is not the panacea to boost economic growth. Republican lawmakers said lower taxes on corporation income will lure more companies to settle in North Carolina and thus bring more job opportunities. Their imagination of the economic mechanism of creating jobs is too simple. Two essential factors determine total production in an economy: physical capital and human capital. Economic theory suggests that human capital would be an important determinant for economic growth, and plenty of empirical studies for a broad group of countries around the world confirm the linkage.
One of the most popular measurements of the level of human capital is schooling, or years in education. Economist Robert Barro’s empirical work shows that economies that start with a higher level of education grow faster for given values of policy variables than those starting with a lower level of educational attainment.
Unfortunately, the public policy that affects the quality of human capital most here in North Carolina has been deteriorated by the state government. The state budget, released on Sunday, showed signs of forsaking public education by eliminating tenures for teachers and those tenures for teachers who already have it will be gone by 2018. Salary of teachers will remain near the bottom among states. Legislators are hoping this will give enough incentive to differentiate outstanding teachers from the mediocre, eventually luring in the good ones to work for private schools. But private schools are not able to expand their capacity to afford more teachers in a short amount of time. Kids who are from low-income families are forced to stay in public schools despite fewer resources. The change in the budget will not attract more high-quality teachers to the state, as lawmakers claimed. In contrast, it’s more likely to kick them out of the game and let other states share our high-quality teachers.
Further, series of conservative social policies in the state shut the door of welcoming immigrants and talented people to come and work. As it was mentioned before, human capital is the key part of economic production. Companies will not move to North Carolina if people don’t want to move here, no matter how low the tax rate is. A ban on gay marriage has already said no to gay people who have particular talent to settle and work in North Carolina. Lower taxes on income need a broader base of population to support so that the government can maintain its revenue to a certain level. In an extreme case, Detroit has provided a lesson. It does not seem that North Carolina will be in that destructive situation, but we must pay attention to the warning signs.
