Free+Clear: Nascar next door

 In April 2016, Free+Clear

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What makes some economies prosper and others fall behind? We’re hearing a wide range of answers to this question as candidates make their pitches for our votes. Here in North Carolina, the question has taken on greater salience as a key dividing line between the newly empowered Republicans and Democrats trying to regain control of some part of state government. Republicans tend to emphasize how state government can inhibit prosperity by imposing excessive taxes and regulations. Democrats tend to emphasize how state government can enhance prosperity by providing public services.

This is not an either-or proposition. No one doubts that roads and schools are valuable assets with broad economic benefits. There is good reason to doubt, however, that high-spending states end up with measurably better roads and schools. Still, almost no one thinks government is only a hindrance to economic growth — or only a help to it.

In today’s polarized political climate, answering an important policy question with “it’s complicated” or “it depends” may not encourage applause or win votes. But if it’s true, you ought to say it anyway. Whatever economic theory you espouse, you can probably find some examples to fit it. A new study published in the journal Public Finance Review illustrates the point — and spotlights North Carolina. Authors Grant Driessen and Steven Sheffrin, both Tulane University scholars, used professional athletes as a proxy for high-income professionals who could decide where to live and work on the basis of state policies.

Previous studies have looked at career choices by basketball and baseball players, but this study is intriguing because it compared location decisions of two groups competing in very different arenas: golf and NASCAR. While both sports feature nationwide tours during which competitors earn income in multiple states, each has its own internal structure. Driessen and Sheffrin observe that “while golf is a relatively individual enterprise, requiring only a minimal level of coaching and access to practice facilities that can be found almost anywhere in the country, race-car driving is done with a team and has mechanical requirements that increase the value of agglomeration.”

Agglomeration is a funny-sounding word that is increasingly common in the literature of economic development. Whenever you see it, just think “clump.” Through history, industries often have not been distributed evenly across a city, region, country or continent. Specialization has been common. Within such clumps, it is easier for firms to find the capital and talent they need, such as investment talent on Wall Street, banking talent in Charlotte or musical talent in Nashville.

As racing fans know, North Carolina is home to much of the talent required to field competitive NASCAR teams. During the period before 2014 when Driessen and Sheffrin studied the issue, North Carolina had higher-than-average tax rates on personal and corporate income. They found that professional golfers tended to establish residence in low-tax jurisdictions such as Florida, but race car drivers didn’t follow suit. Practical benefits from staying in North Carolina were more valuable than tax savings they might have realized from going somewhere else. It’s similar to tech entrepreneurs remaining in high-cost California. Proximity to Silicon Valley means easy access to the financial, intellectual and human capital they need to prosper.

Agglomeration is a real phenomenon. But, again, it is important not to oversimplify complex economic patterns. Not all industries look like NASCAR or the tech corridor. Changes in business organization and consumer preferences have been creating lots of sectors and professions that look more like professional golf, in which work can occur just about anywhere. Moreover, clumps change and migrate over time in response to changes in relative costs and benefits. Many tech companies are based in Texas, North Carolina, Florida, Virginia and even Utah. Textile plants first clumped in the Northeast, then moved to the South, then moved elsewhere.

There is no one lever you can pull that will “win” the competition for new jobs, industries and economic opportunities. There is no trick — only the hard work of governing wisely.  

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