Lawson for Congress

While attending Monday’s Gaston County GOP Straw Poll, I had the pleasure of meeting Bill Graham, who is running for the Republican gubernatorial nomination in 2008. Bill addressed the crowd for a few minutes, and made an interesting point about jobs and economic growth in North Carolina. To paraphrase, he said that North Carolina needs a governor who will sit in a CEO’s office, and not leave that office until the CEO has made the “right decision” about bringing business and jobs to North Carolina.

That seemed an interesting way to characterize the governor’s role in economic development, so when he opened the floor for questions, I raised my hand (the following is paraphrased, but I believe I captured the essence of the dialog):

BJ: “Mr. Graham, I don’t know that I’m comfortable with the image of a governor twisting a CEO’s arm to bring jobs to North Carolina. Are there better ways to encourage companies to locate here voluntarily?”

BG: “Oh, no — what I mean is that North Carolina needs a governor who is a cheerleader for the state. CEOs need to know what a great place North Carolina is for business.”

OK, that sounds good. But personally, I didn’t think Mr. Graham was giving CEOs enough credit. If the arguments for locating a business in North Carolina were unambiguous, nondiscriminatory, and not dependent on special government handouts for business “recruitment”, it seems that CEOs would be beating a path to the state without even being invited by the governor. So I persisted:

BJ: “So what steps can you take to stop capital and job flight, and make the entire state of North Carolina a magnet for investment?”

BG: “We need all our counties to have a diversified portfolio of industries. We’ve seen the problems that result from anchor industries such as textiles and furniture leaving, and the economic devastation that results in those counties.”

OK, so that’s a desirable end goal, but how do we get there? And what about small businesses and entrepreneurship? Why should we depend on recruiting “foreign” corporations from outside the state? How can we start and grow businesses among the people that are already here? So I persisted further:

BJ: “So in addition to recruiting companies from outside the state, how do we encourage entrepreneurship and small business inside the state?”

BG: “Cut taxes, and focus on greater local control of resources for transportation and education.”

Wow. That was good. Shocking clarity. I sat back in my chair without anything else to say. What would life be like if he makes good on that goal?

North Carolina is already a pretty good place for business, at least relative to some other parts of the country. We have lower tax burdens than the Northeast and far West, easy access to DC, NY, and Chicago, and a cost of living that’s allowed some to play “geographic arbitrage” and finance retirement selling a house in California and moving here (well, that worked until a couple years ago… but I digress). But we still have one of the highest tax burdens in the South, and no one would rightfully characterize North Carolina as a “tax haven”.

So what is a “tax haven”, anyway? At one point, my mental image of a tax haven was a luxurious offshore place where rich guys sat around and discussed how much they were paying their lawyers and accountants, but that it was still worth it to avoid paying any taxes. There’s more to come on this topic, but suffice it to say that my view has changed dramatically.

Imagine that you’ve just sold a company that you started several years ago. You were privileged to work with a talented and dedicated team of people, you created significant value in the marketplace, and you and your investors were compensated through an acquisition. Now what happens? People start showing up to sell you access to tax havens. But wait! I’m not like those guys! I’m someone that likes to do… to create… to build value in the marketplace!

Regardless of how idealistic you are initially, you begin to realize that once you have some (indeed, any) capital to deploy, you spend a great deal of time thinking about how to most efficiently deploy it. If you’re going to start a company today, where would you go? Or if you’d rather just invest in existing businesses, will you invest domestically, or through a life insurance vehicle located in an offshore trust that can grow tax free?

Ironically, it appears that the Kennedy family has chosen to domicile much of their wealth in Fiji. This citation is not to pass judgment, and I haven’t personally read the book cited in the link. It’s just an important illustration of an immutable law of monetary physics: money flees from taxes, just as surely as water spills downhill.

Our founders wisely gave us the concept of autonomous states, within the limits of the Constitution, so that competition among states could help make the nation as a whole more competitive. But in recent years, this idea of competition has taken on an unhealthy and perverse twist. The idea that governors, or governments, should be bidding, enticing, and recruiting in a selective, discriminatory fashion distorts the economic environment and hinders overall economic growth.

A simple example will clarify my point. The fantastic barbecue we enjoyed at the Straw Poll was hosted at Alfred & Charlies BBQ House. The founder, let’s call him Alfred, started this restaurant about eight years ago, and it has grown to be a fixture in the community. Let’s say that there’s an aggressive barbecue chain out of Atlanta called the Sweet Jesus Second Coming BBQ House. The owners figure that expanding into the NC Bible belt is a great idea, and they want to open a regional distribution center to support their growth. Naturally, the NC governor wants the SJSC Distribution Center and its 375 new jobs. He visits the CEO along with several county representatives, and they pitch a proposal of tax abatements, utility rate guarantees, and various other incentives until SJSC makes the right choice.

Sounds like a great thing, right? There’s a press release, a groundbreaking at the construction site, and a few years later there are SJSC BBQ houses popping up all over the place. And thanks to the economic incentives provided by NC, the cost savings given to SJSC are either retained by the company for reinvestment to better compete against natives like Alfred & Charlies, or perhaps they pass the savings on to the customers, and Alfred can’t figure out how these new guys are undercutting his prices and costing him business. Additionally, although Alfred was hoping to open up a new store or two, he’s just not been able to quite get there. Between payroll taxes, insurance costs, and utilities going up, he’s managing cost challenges on a number of fronts. Too bad he didn’t get sweet deal that we gave to Sweet Jesus.

The point is that selective incentives to recruit business are incompatible with a free market, and have unintended consequences. They are not given to small businesses, who have to grow against the odds without receiving any favors. They are typically given to large corporations who can make a large enough investment to deserve “special treatment”. This government favoritism to corporate interests is at the heart of what we all see as a “class struggle” that tears this country apart.

Simply speaking, corporations are not inherently evil because they are big. But when government gives any company an unfair advantage over its competitors… well, that’s evil. Finally, lack of an obvious competitor to a company receiving “corporate welfare” doesn’t make the handout any less damaging. The presence of government support may be the barrier that prevents a new company from entering the market and offering a better customer experience.

I’ve already commented on our international competitiveness, but imagine for a moment the combination of a President committed to ending taxes on productivity (that’s taxes on income and capital gains) and a TRUE free market Governor. Suddenly our nation becomes a global tax haven, and North Carolina leads among the states as one of the best places to start and grow a business. Such an environment would encourage entrepreneurship, family businesses, and put little guys on an equal playing field with large multinational corporations. (If you don’t believe me, read this.) So my final question to Bill Graham, and all gubernatorial candidates, is as follows:

How will you make North Carolina a domestic tax haven to encourage entrepreneurship, grow local businesses, and attract new businesses in a non-discriminatory fashion?

Regarding Democratic challengers, they will need to step out of the shadow of Governor Easley’s record. Anyone want to give money to a tire company in North Carolina?

This entry was posted on Wednesday, August 15th, 2007 at 5:12 am and is filed under economic freedom, free market, free trade. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.