MEDIA CONTACT: Dr. Mike Walden, 919.515.4671 or michael_walden@ncsu.edu

YOU DECIDE: What causes economic growth?

By Dr. Mike Walden
North Carolina Cooperative Extension Service

As I travel around North Carolina and talk to both elected officials and citizen groups, the number one economic issue I hear discussed is economic growth.

Communities are interested in making sure folks have good jobs that pay a decent salary. To achieve this goal, localities must make themselves attractive for new businesses or the expansion of existing ones.

Then the question becomes how to do this, or more specifically, what features and characteristics of communities are related to successful economic growth? Clearly there are many candidates: workers' availability and cost, cost of living, tax levels, education quality and infrastructure such as roads and public utilities.

As might be expected, economists have devoted considerable time to understanding the determinants of economic growth. I dare say this might be one of the most studied of all topics in the profession.

What can we learn from this research, and what practical advice can be provided to policy makers?

It shouldn't be surprising that at the top of the list of factors important to economic growth is labor. Even in today's technological world, most businesses need to hire workers, so most studies find worker availability and cost crucial in attracting new firms. Studies find that, all else being equal, companies prefer to locate where wages are lower.

Yet this doesn't mean businesses want only to hire the cheapest workers, because "all else" isn't always equal. Specifically, worker productivity, or how much a worker can produce in a given period of time, varies. And more productive workers are also associated with faster economic growth. So what firms really want are workers who produce the most per dollar of salary. Indeed, these are the most valuable workers.

In today's economy, the most productive workers are generally those with training beyond high school. Virtually every study of the last 25 years has found a positive link between economic growth and the workforce's educational level. A big reason that Southern states like North Carolina outpaced other states in growth is relatively low public college tuitions and big jumps in the number of college-educated workers.

Today's businesses need to move people and products fast and require access to adequate utilities like power (electricity, natural gas) and water and sewer. Therefore, it's a no-brainer that access to good roads and utilities is a virtual must for attracting companies and jobs. Frequently important is proximity to interstate-quality highways and, increasingly, to air transportation.

An often-controversial topic is the issue of taxes and economic growth.

Two questions frequently arise: Can higher tax rates deter economic growth, and do taxes' influences on economic growth depend on how the tax revenues are spent?

Recent research suggests the answer to both questions is "yes."

Higher corporate income, personal income and property taxes all are linked to slower rates of business formation.

What seems to matter most for the personal income tax is the level of progressivity in the rate. An income tax system that taxes all incomes at closer to the same rate, rather than one that taxes higher levels of income at higher rates, seems to be more conducive to business investment and economic expansion.

However, there's a big caveat to this role of taxes. Higher levels of taxes, if spent on functions valued by businesses — education, transportation, public safety — can actually encourage more economic development. The trick for public decision makers is providing adequate levels of these desired services at the lowest possible taxpayer cost. In other words, businesses want government to use resources efficiently.

To know economic growth's determinants is the first step in improving our future. Next is to decide how to shape those elements into a workable plan.

It's a continuing challenge!

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Dr. Mike Walden is a William Neal Reynolds Professor and extension
economist in the Department of Agricultural and Resource Economics of North
Carolina State University's College of Agriculture and Life Sciences. He
teaches and writes on personal finance, economic outlook and public policy.
His You Decide column is provided every two weeks by the Department of
Communication Services. Earlier You Decide columns are available on the Web
at http://www.cals.ncsu.edu/agcomm/writing/walden/decide.htm
Related audio files are at
http://www.ces.ncsu.edu/depts/agcomm/writing/walden/index.html