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Executive Summary<\/strong><\/p>\n What are North Carolina\u2019s prospects for making a sustained COVID-19 economic recovery? With a still-staggering labor market and economic hardships on the rise, state leaders have committed to the priorities of economic growth and prosperity. In this Brief, to assess the state\u2019s prospects for sustained recovery, we focus on two main components: the state\u2019s fiscal health and the state\u2019s economic health. We review recent studies on North Carolina\u2019s state budget to show how years of fiscal discipline have put the state budget in good condition. Next, we measure economic health by combining recent studies on economic freedom. We discuss many useful approaches to measuring the health of an economy, but economic freedom indexes are directly related to North Carolina\u2019s stated objectives of promoting growth and prosperity, especially in rural areas. We find that North Carolina has created balanced improvements in the state\u2019s economic climate. However, there is room for improvement, especially in worker regulations and market restrictions. Furthermore, the pandemic has altered the way the government regulates economic activity. Many of North Carolina\u2019s COVID-19 economic policies today will be affixed into future measures and indexes of economic conditions. North Carolina currently lags behind Tennessee, Virginia, and Georgia in these rankings. These indexes are known to correlate with economic growth and prosperity. Therefore, the decisions of today\u2019s policymakers will affect the climate of COVID-19 economic recovery well into the future. North Carolina\u2019s prospects for sustained recovery are good, underscoring the need to maintain good fiscal health and continue improving economic health in the state.\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0<\/p>\n <\/p>\n [\/et_pb_text][\/et_pb_column][\/et_pb_row][et_pb_row _builder_version=”3.25″][et_pb_column type=”4_4″ _builder_version=”3.25″ custom_padding=”|||” custom_padding__hover=”|||”][et_pb_text _builder_version=”4.8.1″ _module_preset=”default”]<\/p>\n \n [\/et_pb_text][et_pb_text _builder_version=”4.8.1″ _module_preset=”default”]<\/p>\n How poised is North Carolina for making sustained economic progress in a post-COVID recovery? The situation remains critical. Net job growth in North Carolina was just 1.1% during 2020, after factoring in the effects of the virus itself, the shutdowns, and the stimulus combined. This was the lowest annual rate since 2010 after the slow climb out of the Great Recession. As Figure 1 shows, the state\u2019s labor market has only partially bounced back from the March 2020 shutdowns. More than a hundred thousand more Carolinians are unemployed in December 2020 compared to March. While jobs have also come back, total employment remains more than two hundred thousand below pre-pandemic levels, and labor force participation still lags two percentage points, currently at 59.2%. The number of Carolinians on SNAP benefits increased 20% from February to August, and currently, 35% of households report difficulty meeting ordinary expenses, while 18% report being late on rent. Some food banks in 2020 were serving up to five times as many families as the same time in 2019.[1]<\/a> These problems are even worse in the vast rural areas of the state, and among underrepresented communities.<\/p>\n Figure 1: North Carolina Labor Market Conditions, 2008-2020<\/strong><\/p>\n [\/et_pb_text][et_pb_image src=”https:\/\/affiliate.wcu.edu\/csfe\/wp-content\/uploads\/sites\/61\/2021\/02\/Picture1.png” title_text=”Picture1″ _builder_version=”4.8.1″ _module_preset=”default”][\/et_pb_image][et_pb_text _builder_version=”4.8.1″ _module_preset=”default”]Source: authors\u2019 calculations using NC Commerce D4 System data: https:\/\/d4.nccommerce.com\/<\/a>. These policy initiatives are laudable in their intentions, and they support many meaningful achievements that might not otherwise be possible. However, these policies are not sufficient on their own for North Carolina to mount a sustained COVID-19 economic recovery. That is because these policies generally fall into a \u201ctop-down\u201d category, while research in economics shows that \u201cbottom-up\u201d forces are crucial, irreplaceable ingredients to the human recipe for prosperity and flourishing.<\/p>\n Think of the economy as an ecosystem of natural activity. Under good conditions, the ecosystem will thrive, and we will see richer combinations of biodiversity. But under adverse conditions, individual species will struggle, symbiotic interactions and cross-fertilizations will falter, and life in general will be less abundant or vibrant. When economists think about the economy in this evolutionary way, we use something like Figure 2 as guidance.<\/p>\n Figure 2: Economic Recovery over Time<\/strong><\/p>\n [\/et_pb_text][et_pb_image src=”https:\/\/affiliate.wcu.edu\/csfe\/wp-content\/uploads\/sites\/61\/2021\/02\/Screen-Shot-2021-02-01-at-3.03.32-PM.png” title_text=”Screen Shot 2021-02-01 at 3.03.32 PM” _builder_version=”4.8.1″ _module_preset=”default”][\/et_pb_image][et_pb_text _builder_version=”4.8.1″ _module_preset=”default”]To start using Figure 2, we pick a point in time, and we take stock of the health of the economy as well as the capacity of the government at that point in time. As we roll things forward, there will inevitably be shocks to the economy, such as natural disasters, wars, and disease outbreaks. These shocks disrupt people\u2019s public and private lives, destroying jobs and capital in fell swoops depending on the severity and the size of the shocks\u2014and depending on how novel they are. Minor shocks are simply absorbed into daily life, like Californians going undisturbed by routine earthquakes.<\/p>\n But with large enough shocks, people\u2019s lives get disrupted and governments are expected to respond with policies intended to absorb and stabilize things. This forms the top-down responses labeled #2 in the Figure. Meanwhile, ordinary people adapt their households, businesses, and communities in myriad numbers of ways known only at local levels. These responses comprise the bottom-up forces labeled #3 in the Figure.<\/p>\n Through time, these top-down and bottom-up adjustments to inevitable shocks play out over and over, and in good conditions, we experience a steady churn of creative destruction that hopefully washes out to economic growth and rising prosperity over time.<\/p>\n Quantitative researchers across many fields have devised different ways to measure the health of an economic ecosystem. Some approaches emphasize the underlying legal structure; for example, the American Bar Association\u2019s annual Rule of Law Index<\/em> measures protection of property and contract rights in its ranking of 128 countries. Similarly, the Cato Institute\u2019s annual Index of Human Freedom<\/em> measures protections of individual rights from both government and non-government sources of infringement. Other approaches emphasize the underlying culture: for example, the World Values Survey<\/em> internationally, and the General Social Survey<\/em> in the United States, both elicit public attitudes toward personal freedom and economic success. Still other approaches such as the Global Entrepreneurship Monitor<\/em> and the World Bank\u2019s annual Doing Business<\/em> report focus on the ease of business startups and failures. Researchers at Yale and the Urban Institute calculate an annual Economic Security Index<\/em> to gauge people\u2019s financial vulnerability. A German think tank publishes an annual Social Justice Index<\/em> that combines metrics from environmental, economic equality, and poverty dimensions. The list of researchers measuring different aspects of an economy\u2019s health goes on.<\/p>\n When it comes to North Carolina\u2019s goals for growth and prosperity, economic freedom indexes are the most important among all barometers of economic prospects for growth, especially bottom-up growth. In the rest of this study, we follow the approach in Figure 2 to assess North Carolina\u2019s prospects for COVID-19 economic recovery. First, we assess the top-down capacity by taking stock of the state\u2019s current budget situation. Next, we will assess the bottom-up prospects by updating the most recent indexes of economic freedom in North Carolina, both at the state level and by drawing on information from very recent studies, also the municipal level.<\/p>\n To measure government capacity in Part #2 of Figure 2, we will provide a brief update on North Carolina\u2019s fiscal condition. Thankfully, North Carolina\u2019s fiscal house appears to be in good order, although this has not always been the case. Coming into the pandemic, North Carolina boasted a buffer of nearly $6 billion in cash, including $1.2 billion in its rainy day fund, $2.9 billion in its unemployment insurance fund, and $1.5 billion in other department funds. In contrast, 36 other states have smaller rainy day funds.<\/p>\n These reserves had been built up over time through fiscal restraint, a growing economy, and a gradual strategy to phase-in corporate and income tax rate reductions. Prior to the pandemic, North Carolina was on its way to its sixth straight year of budget surplus under a planned 16% total growth in state spending over eight years up to 2020. Total state debt decreased by 35% from $6.5 billion in 2010 to $4.2 in 2020, freeing millions in saved debt service expenditures for other expenditures.<\/p>\n By contrast, entering the Great Recession the state\u2019s capacity was much lower and posed a major disadvantage to recovery. The rainy day fund was only $800 million in 2008 and it barely lasted a year. The state had to borrow more than $2.8 billion in federal funds to meet its unemployment claims. Declining revenues upset a planned 49% increase in spending over eight years; instead the state suffered through rising deficits and mounting debt amid government employee layoffs and furloughs.<\/p>\n Thankfully these kinds of disturbances have so far been avoided since the onset of the 2020 pandemic, as Governor Cooper has drawn on hard-saved taxpayer reserves to cushion the blow. Despite the sharp decline in sales and gas taxes (a potential 10% drop in revenue), NC\u2019s finances remained strong heading into 2021. With this better fiscal buffer, North Carolina had a high government capacity to confront the shock of COVID-19 and restrictions.<\/a>[1]<\/a><\/p>\n The connection between economic freedom and prosperity traces back to the founding father of economics, Adam Smith, and his 1776 classic, An Inquiry into the Nature and Causes of the Wealth of Nations<\/em>. Until roughly the time of Smith, people had historically lived mostly poor lives. Smith and his contemporaries took note of how life proliferated when people traded with each other on a large scale, in particular across great distances and national borders.<\/p>\n Illustrating with his famous examples\u2014the pin factory, the woolen coat, the invisible hand\u2014Adam Smith launched the idea that the key to prosperity is the freedom to specialize and trade, or what he called a society\u2019s \u201csystem of natural liberty\u201d. Building an economy on the principle of natural liberty means allowing individuals the autonomy to engage and specialize in their own pursuits, free from undue restrictions. Freeing people to pursue their own individual projects not only results in personal empowerment and human dignity, Smith argued, it also unleashes the economic forces of specialization and exchange, which together lead to innovations, many of which will fail, but some of which will fuel the prosperity of great masses of people. Economists from Karl Marx to Paul Krugman have been trying to figure out this idea ever since.<\/p>\n To modern economists, economic freedom can be measured with government policies that affect the economic climate. These measurements can then be compared to equivalent measurements in different places and times. Economic freedom indexes at the international and state levels have been published annually going back decades. Now, within the past few years, an emerging offshoot of this literature is generating indexes of economic freedom at the metro\/micropolitan and local\/regional levels as well.<\/p>\n Calculating these indexes is straightforward. Researchers first identify measurable policies that affect economic freedom and then categorize them into very broad areas, such as labor market regulations or tax policy. Next, researchers measure as many specific policies within those broad areas as they can, such as occupational licensure or the highest marginal tax rate. Finally, researchers assign scores to individual policies and then take a weighted average to get a single score. Most economic freedom indexes scale their scores from 1 to 10, but not all do.<\/p>\n The annual Economic Freedom of North America <\/em>(EFNA) report measures state policies and calculates an index of support for economic freedom.[2]<\/a> Each state is assigned a score between 1 and 10 that represents a composite of ten separate measures organized into three policy areas: government spending, tax competitiveness, and worker regulation. Calculating the index is as simple as gathering the reported data and taking a weighted average. The EFNA calculates annual scores dating back to 1984, with 2018 being the most recent year of data published in the 2020 report.<\/p>\n Figure 3: North Carolina and Neighboring States <\/strong><\/p>\n Economic Freedom of North America<\/em><\/strong> (EFNA) Scores, 1984-2018<\/strong><\/p>\n <\/a> Figure 3 helps us visualize how North Carolina\u2019s economic climate has changed over time, and how it compares to both neighboring states and the national average. In the most recent (2020) EFNA report, North Carolina\u2019s overall score is 6.95 out of 10, compared to the national average of 6.25, for a ranking of 11th<\/sup> out of the 50 states. This ranking is substantially up compared to low points in 2002-03 (about 25th<\/sup>) and 2011-13 (about 20th<\/sup>). During those stretches, North Carolina\u2019s economic policies were in bad shape, and the EFNA index reflected that.<\/p>\n Figure 4: Sub Areas of North Carolina <\/strong><\/p>\n Economic Freedom of North America<\/em><\/strong> (EFNA) Scores, 1984-2018<\/strong><\/p>\n [\/et_pb_text][et_pb_image src=”https:\/\/affiliate.wcu.edu\/csfe\/wp-content\/uploads\/sites\/61\/2021\/02\/Picture4.png” title_text=”Picture4″ align=”center” _builder_version=”4.8.1″ _module_preset=”default”][\/et_pb_image][et_pb_text _builder_version=”4.8.1″ _module_preset=”default”]<\/p>\n Source: Author\u2019s graph using information from Stansel et al (2020).<\/p>\n What is driving North Carolina\u2019s improved economic freedom ranking over the past decade? Figure 4 breaks down the EFNA scores into the three policy areas of the index. Looking first at Area 1 (budget health), the low points of 2002-03 and 2011-13 are visible as sharp downturns in the Area 1 component. But for nearly the past decade, the Area 1 component has increased as the state\u2019s fiscal house improved. In addition, the last decade also shows increases in Area 2 (tax competitiveness) and Area 3 (worker regulations). This means that North Carolina\u2019s rise in the overall index has been a relatively balanced one: it has been driven by increases in all three measured policy areas.<\/p>\n Table 1 lets us compare recent rankings to neighboring states in the southeast. This information shows that North Carolina\u2019s regional economic freedom ranking is a mixed bag. On the one hand, North Carolina consistently outranks South Carolina, and this difference may be widening over the years. The Tarheel state also sits pretty comfortably above the national average.<\/p>\n On the other hand, North Carolina lags behind Georgia, Tennessee, and especially Virginia. Over the past two decades, Tennessee has not ranked outside the top 10 except once, Virginia has never ranked below 6th, and Georgia has stayed at 16th\u00a0or better and has a four-year streak ranked among the top 7. Meanwhile, North Carolina has bounced up and down, slumping as low as 25th\u00a0in the nation. But again, the last decade has seen policies that improve the economic climate in North Carolina, and the EFNA index has reflected that as well.<\/p>\n \u00a0Table 1: Score and Rank out of 50 on Economic Freedom of North America<\/em> (EFNA) Index,<\/strong><\/p>\n NC and Neighboring States, 2001-2018<\/strong><\/p>\nIntroduction<\/h4>\n
\n[\/et_pb_text][et_pb_text _builder_version=”4.8.1″ _module_preset=”default”]State leaders have responded with renewed commitments to supporting growth and prosperity. The state\u2019s 2020 annual review of development says, \u201cRural prosperity is a top priority for Governor Cooper, and now, more than ever, it is essential that we help communities recover and prepare for economic growth if we want the entire state to prosper.\u201d Reinforcing this, NC Commerce Secretary Anthony M. Copeland said the state remains focused on \u201ca well-trained workforce, modern infrastructure, and a strong, competitive tax structure that attracts jobs and investment.\u201d Specific policies that leaders have delivered in pursuit of those goals include federal funding through the Appalachian Regional Commission, grants to community, infrastructure, rural projects, and a main street revival program.[1]<\/a><\/p>\nMethodology<\/h4>\n
North Carolina\u2019s Budget Coming into the COVID-19 Pandemic<\/h4>\n
What is Economic Freedom and Why is it Important?<\/h4>\n
Economic Freedom in North Carolina and Neighboring States<\/h4>\n
\n[\/et_pb_text][et_pb_image src=”https:\/\/affiliate.wcu.edu\/csfe\/wp-content\/uploads\/sites\/61\/2021\/02\/Picture3.png” title_text=”Picture3″ align=”center” _builder_version=”4.8.1″ _module_preset=”default”][\/et_pb_image][et_pb_text _builder_version=”4.8.1″ _module_preset=”default”]Source: Author\u2019s charts using information from Stansel et al (2020).<\/p>\n