Economic Growth

Governors Don't Transform Economies—for Good or Ill

They can formulate better policies, but they can't cure economic malaise.

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As he hopped around the state for his official campaign launch over the weekend, Republican gubernatorial candidate Ed Gillespie laid out the case for why he should move into the Executive Mansion: He's going to shape a "dynamic economy that creates jobs"—one totally unlike the "anemic economic growth" of the Terry McAuliffe years.

This would be wonderful if Gillespie actually could do that. But he can't. No governor can.

A governor certainly can improve Virginia public policy. For starters, Gillespie is entirely right to propose "modernizing our outdated tax code, and cutting taxes for families and small business owners and entrepreneurs."

He also is right that Virginia needs to "make it easier to open a new business, and expand an existing one," and to "foster entrepreneurship and small business formation." And that the state should "repeal antiquated regulations that are a drag on job creation."

Example: Virginia is one of the worst states with regard to the imposition of burdensome, illogical occupational-licensing rules. The commonwealth even requires a license to upholster furniture. Such licensing not only makes it harder for young people to start successful careers, it also erects a barrier to skilled tradesmen who otherwise might move to Virginia. As the Brookings Institute reports, people under 35 are one-fifth less likely to move between states when they work in heavily regulated occupations.

Cutting taxes and regulation can indeed help. And if Gillespie had stopped there, he would have made a rock-solid case.

But no. Political campaigns do not reward rhetorical moderation. And save for a sentence or two nodding in the direction of Washington, Gillespie's kickoff speech leaves the impression that McAuliffe and Gillespie's likely opponent, Lt. Gov. Ralph Northam, bear the blame for the state's economic malaise—which will be cured once he takes office.

Not quite.

The Republican points out that Virginia has fallen in CNBC's list of best states for business—from first place to 13th. That Virginia has shed 69,000 manufacturing jobs, that its labor force participation rate has "hit a 10-year low," and so forth.

True enough.

But if you look at the CNBC analysis, you'll find that Virginia actually does quite well in most categories. The state ranks No. 3 for the quality of its workforce—up from No. 6 last year. Virginia also ranks third for business friendliness. And despite Gillespie's claim that "without education reforms we won't have a workforce ready to meet the demand for highly skilled and well educated workers," the commonwealth ranks fifth on CNBC's education metric—up from sixth last year. Not too shabby.

Moving up on a scorecard from third place or fifth place to first place might boost the economy—but only marginally.

Virginia falls shortest in CNBC's rankings in areas such as the cost of living, the cost of doing business, the general health of its economy and the state of infrastructure. A governor can't move mountains in any of those categories, except infrastructure. And after Gov. Bob McDonnell's $6 billion transportation package—which Americans for Tax Reform denounced as the "largest tax increase in Virginia History"—Gillespie probably won't propose a massive new public-works program, either.

Likewise, the loss of manufacturing jobs and the shrinking of labor-force participation are both long-term national trends. A president would be hard-pressed to reverse them, let alone a governor.

This cuts both ways, incidentally: Gov. Terry McAuliffe is forever announcing economic-development deals to bring a hundred jobs here and 200 jobs there. Which is nice. But in a state with a civilian labor force of more than 4 million people, such projects are of minuscule significance. (One small irony: Most of those projects probably will go on-line after McAuliffe leaves office, to the political benefit of his successor—just as Virginia's economy during McAuliffe's tenure received many minuscule boosts from deals put together by McAuliffe's predecessor.)

Gillespie is specific about ways in which he can use the federal government to Virginia's advantage—e.g., by making "sure Norfolk remains the biggest Naval base in the world" and getting "more of our federal transportation dollars back into Virginia." But keeping naval facilities big merely maintains the status quo. And there are only so many more federal transportation funds to capture: The Federal Highway Administration's formulas already guarantee no state receives "less than 95 cents of every dollar it contributed to the Highway Account of the Highway Trust Fund." This is marginal stuff, not transformational.

The biggest economic challenge facing Virginia is to diversify the economy: At present, federal spending makes up about 30 percent of the state's GDP. So when federal spending shrinks, Virginia gets squeezed badly. Even assuming it's the governor's job to reshape the economy, which is questionable, Gillespie has offered no specifics about how he would. If anything, he wants to lean more heavily on Washington (see preceding paragraph).

Without a doubt, Ralph Northam will make a similar case in the months ahead: Vote for him, and he'lll turn Virginia's economy into a raging, steroidal growth machine, and everybody will have so much money they won't know what to do with it. It's an alluring pitch. It's also a sham.

This column originally appeared at the Richmond Times-Dispatch.

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  1. If forming better policies doesn’t cure a bad economy, then how are bad policies responsible for bad economies? If they are not, then why does reason constantly laud the positive effects of good policies and bad effects of bad ones?

    Sorry, you can’t your living arguing the merits of a particular economic policy, in reason’s case low regulation and taxes, and then also claim the government can’t cure a bad economy by adopting better policies.

    A governor can, assuming the legislature goes along, can absolutely cure economic malaise, assuming the malaise is caused by bad economic policies, which it usually is.

    1. The best thing the government can do for the economy is to get out of the way. That doesn’t guarantee good results. Only better results than if the government stayed in the way.

      1. It absolutely guarantees good results. If it didn’t, then there would be no such thing as bad policy. In order for an economic policy to be “bad”, it has to make the economy worse, which necessarily means getting rid of that policy will make the economy better.

        1. Um, no. Making things less-worse does not mean making things better. Like ace said below, the government is akin to a poison in the economy. Removing poison isn’t the same as adding an elixir. Whatever. I can see this is one of those arguments where you’ll stand up straight because you’ve got a stick up your ass. Later.

          1. Sorry, I have to agree with John: It pretty much guarantees better results than if the government is actively bogging down the economy. (On average)

            Put it this way, you’re running with 30 pounds on your back, someone takes 20 of those pounds off your back, you’re faster with more stamina now, all other things being equal, no?

            1. Sure, but sometime the damage is lasting. To take an extreme example, if the government executes millions of dirty kulaks each year, stopping that would have good effects, but recovering will take much longer than the total duration of the original bad policy.

              In a less extreme example, if Ed Gillespie fixes the occupational licensing problem he’ll probably be out of office by the time the full effects on job growth and prices for customers are really felt, because equilibrium is not achieved instantly.

              Not a reason not to do these fixes, but it’s true reformers tend to over-promise and under-deliver in terms of actual economic results.

        2. In order for an economic policy to be “bad”, it has to make the economy worse, which necessarily means getting rid of that policy will make the economy better.

          The first does half not imply the second half. Removing a “bad” policy doesn’t guarantee an economic improvement. Maybe the bad policy destroyed capital and other factors prevent it from being recreated/replaced even without the policy that led to its destruction.

          The economy is not so simple as to respond in a perfectly proportional fashion to every policy change. And nothing, absolutely nothing, in reality happens ceteris paribus.

          1. For a simple example, suppose the EPA shut down and rendered inoperable all petroleum refineries by fiat. Or the NRC decommissioned all nuclear power plants. Just rescinding those orders doesn’t change the fact that it was already nigh-impossible to build new refineries or nuclear plants. Even an intentional policy of lowering the regulatory burden doesn’t guarantee that it’s cost effective to set up new plants.

            1. Sure, but you’re comparing anecdotes with more wide ranging policies. Now, if you give a equal chance of each anecdote allowing increases in efficiency or maintaining status quo, what happens? Sure, not every policy will increase efficiency or allow proper allocation of capital, but claiming that it wouldn’t happen simply by removing barriers is to ignore history and pretty much every economy in the world.

              Sure, maybe some places the people are just lazy culturally, and their economy will never improve due to that, no matter what the government does, but I don’t think that is fair to say of American culture.

        3. There is nothing that suggests government’s ability to create must be equal to to its ability to destroy.

          1. I don’t think that is the argument. No one is saying that government is creating anything. The problem is that this article conflates government getting out of the way with government doing something.

            It’s actually very anti-libertarian. It is basically making the claim that government getting out of the way is the same as the government “doing something” in regards to policy, and that the economic outcomes of both ideas are the same, which is, quite frankly, horseshit.

            1. Which is a notion I agree with.

              One has to be careful that they do not lazily take up the premises of economic interventionists.

    2. Has it ever occurred to you that not every one who works at, or gets published by Reason (such as the case of Hinkle, who does not actually work for them) agrees on everything?

    3. You can lead a horse to water but you cannot make him drink. You can set up government policies leave the market free but so much of what makes up economics are not things that government can control that growth may not occur under ideal government. Government is very good at being destructive to prosperity, it is not good at building prosperity.

    4. One thing everyone needs to remember is that it construction and destruction are not symmetrical.

      Put another way, it is always easier to destroy something than build it. Give me the keys to your car, and I can totally wreck it in 10 seconds with little effort and no understanding of how to build a car. But it would take an assembly line of trained auto workers a few days to build it.

      Likewise, a toddler can burn down a house before he can talk, but it takes a crew of skilled construction workers months to build the same house.

      Thus, you cannot say that Reason is wrong for claiming that a politician’s claims to enact good policies will lead to good outcomes because it also says that bad policies will lead to bad outcomes. Achieving good outcomes is always harder and requires more skill than achieving bad outcomes.

  2. Government can only cause economic problems, not solve them.

    If someone were to poison me and then stop poisoning me one day, I wouldn’t call them a “doctor” for solving my problem.

    1. But wouldn’t it be irresponsible of you to get the guy to stop poisoning you if you didn’t have a plan to replace the poison with another toxin?

      1. I mean, that’s sadly one way of looking at it… I highly doubt most people would suggest that strategy if they were the one being poisoned, though.

        1. Nicotine patches, codine therapy for heroin addicts, chemotherapy, most drugs have undesirable side-effects and so-on.

          Heck, even aspirin. Replacing a headache with a minor toxin.

          Treating a “bad” thing with something that’s better, but still “bad” is actually common practice. Because often times going from “bad” to “nothing” or “good” isn’t an option.

          Not sure why you guys are acting like it’s a weird foreign thought.

  3. Governors can absolutely transform economies for ill.

  4. This seems a bit of a rhetorical ploy. If the alternative is statism, a governor who opens markets to free enterprise certainly will have transformed the economy. Getting out of the way and letting people achieve is a policy. Yes, the public are the people who own the success. But, the governor can fairly take ownership of the policy that enabled that success.

    1. If you wanna get all libertarian theory, a government (governor) could improve the economy by say, building roads and providing some measure of security.. this is what you might call ‘low hanging fruit’ in a primitive, agrarian economy with low population density.

      Having a system where people in disparate geographical locations can easily and safely move goods from place to place, and engage in trade– without having to scrabble over land and rivers– this can help increase trade.

      That’s something which may not have existed in the absence of government, which can come into existence through the action of a government which could have a positive impact on the economy and well-being of the people.

      1. Right, and government is damned close to inept even when it goes for the low hanging fruit. Which, economically, is a big reason we’re libertarians.

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  8. This cuts both ways, incidentally: Gov. Terry McAuliffe is forever announcing economic-development deals to bring a hundred jobs here and 200 jobs there. Which is nice. But in a state with a civilian labor force of more than 4 million people, such projects are of minuscule significance. (One small irony: Most of those projects probably will go on-line after McAuliffe leaves office, to the political benefit of his successor?just as Virginia’s economy during McAuliffe’s tenure received many minuscule boosts from deals put together by McAuliffe’s predecessor.)
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    Gillespie is specific about ways in which he can use the federal government to Virginia’s advantage?e.g., by making “sure Norfolk remains the biggest Naval base in the world” and getting “more of our federal transportation dollars back into Virginia.” But keeping naval facilities big merely maintains the status quo. And there are only so many more federal transportation funds to capture: The Federal Highway Administration’s formulas already guarantee no state receives “less than 95 cents of every dollar it contributed to the Highway Account of the Highway Trust Fund.” This is marginal stuff, not transformational.

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