North Carolina has long been concerned with economic development. Although North Carolina has certainly grown in jobs and incomes during the past quarter century, the growth has not been steady, nor has it been evenly distributed across all areas in the state. For example, many inner cities have not shared in the economic growth of recent years.
There's not a lack of suggestions for government policies to encourage economic development. Tax breaks for new businesses, infrastructure such as roads, bridges, and sewers, and increased spending on education have all been recommended as ways to improve jobs and incomes.
But there may be one successful economic development strategy which has been overlooked: law enforcement. Can spending more on police and the court system really make communities more attractive to businesses for jobs and income creation?
On an intellectual level, the answer can certainly be yes. Our economy is based on the private ownership of resources. If people feel secure in knowing that what they own is protected, they will be motivated to invest in those resources. On the other hand, if resource ownership isn't protected that is, if anyone can easily take what you own then you'll either spend much money on security, or you'll decide it's simply not worthwhile to invest in resources and their maintenance.
An example may clarify this point. Let's say you own a janitorial service company. Your business operates best if you invest in cleaning machines, like scrubbers and buffers. However, if these machines are always being stolen, then one of two things will happen. You'll either have to spend money on security services, which means less money to spend on cleaning supplies, machinery, and labor. Or, you'll decide to spend less money on buffers and scrubbers, a step which makes your janitorial services company less efficient and competitive. If the theft is too great, you may decide to pack up and leave the neighborhood, or simply get out of the business altogether.
There is statistical support for the idea that law enforcement can encourage economic development. In a study of the determinants of economic growth in North Carolina over the past 40 years, I found that increased spending on law enforcement was associated with increased income and job growth in the state. I discovered this relationship after accounting for all the other important factors with affect economic growth, like the national business cycle and tax rates. Furthermore, I found that spending an additional dollar on law enforcement had a greater positive impact on economic growth than spending an additional dollar on education or highways.
In a second study, I analyzed the determinants of economic growth in the 1990s for a group of cities in the country. Once again, I found that cities which have spent more per capita on law enforcement in this decade have added jobs at faster rates.
Of course, when most of us think of law enforcement, we think about catching and prosecuting thieves, burglars, arsonists, and killers. Certainly, protecting the public from these criminals is important to maintaining a safe environment for business investment, and the empirical evidence I cited above supports this.
But there's another type of law enforcement that is also important to the economy -- the enforcement of contracts. Our economy would soon grind to a halt without contracts. Most businesses, and consumers for that matter, are dependent upon others for the supply of goods and services at specific times. For example, delivering bread each day to the supermarket can't occur unless wheat is delivered to the mill on a specific schedule.
Contracts are written in order to ensure these schedules are met. In other words, contracts help make sure that promises are kept. Most contracts specify penalties if the quantity or timing of the supply is broken. Thus, the contract between the wheat farmer and flour mill gives the flour mill the confidence to sign a similar agreement with the supermarket. Together, these contracts help keep bread on the supermarket shelves for whenever the consumer wants a loaf.
One role of the law is to enforce these contracts. To the extent that contracts are enforced, and penalties imposed when contracts are broken, then economic parties will know that contracts have meaning. Belief in contracts will encourage trading, and trading and exchange keep the wheels of commerce moving.
So law enforcement has important economic ramifications. You decide how much emphasis it should receive as a tool in economic development.