Governors matter to business leaders

John Hood Columnist

Democrats believe that their progressive policies would be best for North Carolina’s economy. Republicans believe their conservative ideas are the best recipe.

For business executives, entrepreneurs, and others who make private investment decisions, this is certainly an important debate. In modern times, most private-sector leaders have sided with the conservatives, who seek to reduce the cost of doing business by lowering taxes and regulation. After all, this policy mix is more strongly supported by empirical evidence.

But regardless of the final outcome of elections and policy debates, just the uncertainty they create appears to depress business investment. In recent years, economists have documented the effects of political uncertainty on national economic trends. Now, a new academic study in the Journal of Financial Economics suggests that business decisionmakers pay attention to state politics, as well.

Candace Jens, a professor at Tulane University, looked at half a century of state gubernatorial elections and economic data. She found that, on average, business investment in the months before election days is about five percent lower in states with gubernatorial elections than in states without them. The investment decline is even larger, about 15 percent, for companies more likely to be affected by subsequent policy changes, such as small firms doing most of their total business within the state.

What happens after the election? In states that elect new governors, business confidence and investment recovers from the dip, but typically doesn’t recover fully for at least a year. On the other hand, when incumbent governors are reelected, business investment tends to rise quickly. CEOs and investors already know pretty much what they’re going to get from the state’s executive branch, and can plan accordingly.

Jens conducted several other statistical tests to rule out other explanations. Her findings seem solid to me. But how are we to interpret them?

I’ve argued in the past that most actions that governors — and state legislatures, for that matter — can take to influence their states’ economies have to do with long-term effects, not short-term manipulations. I still believe that.

If you think more government expenditures on education, for example, would be a good investment for North Carolina, you probably don’t think that because you expect it to act as a short-run stimulus. Rather, you argue that more education spending means better teachers and upgraded classrooms helping students achieve higher proficiency. That, in turn, will make them more skilled and innovative in our labor force. But the effect comes many years after the initial expenditure, if it occurs at all.

Similarly, if you think cutting taxes or reducing regulation would be good for North Carolina’s economy, your assumption is that lowering the cost of doing business will induce more companies to invest or expand in the state, as well as induce new companies to set up shop here. But this won’t all happen overnight.

An approaching election for governor, then, creates a question mark for business leaders. They can plan around an administration they think will create new opportunities for profitable long-term investment. They can even plan around an administration they think may cause them some problems.

But until it’s clear who the governor is going to be, the smartest call may be just to defer your investment decisions until after the election. And if a new governor takes office, it may still seem wise to hold back for the first year or so, to see what policies the new administration will pursue — and how much luck it will have getting support for those policies in the state legislature.

That’s a key point. In her paper, Jens observed that while the effects of uncertainty on private investment are significant for American politics, they are quite a bit lower than the effects of political uncertainty in Europe. That’s because in parliamentary systems, legislative and executive power is often vested in the same person or team.

Our system doesn’t work that way — which, as it turns out, means that our separation of powers acts to reduce economic instability. Cool.

John Hood is chairman of the John Locke Foundation and appears on the talk show “NC SPIN.” You can follow him @JohnHoodNC.

John Hood Columnist Hood Columnist
comments powered by Disqus