Look both ways: a famous forecaster and a top policy adviser discuss where the economy has been and where it's going.

• Author: Martin, Edward
• Position: ECONOMIC OUTLOOK - James Smith

James Smith is director of the Center for Business Forecasting at the Kenan Institute of Private Enterprise at UNC Chapel Hill and chief economist for the national Society of Industrial and Office Realtors. He was a consultant to the President's Council of Economic Advisers during the Reagan administration. Dan Gerlach is senior policy adviser for fiscal affairs to Gov. Mike Easley. He was director of the nonprofit North Carolina Budget and Tax Center and taught at N.C. State University before joining Easley's staff in 2001.

BNC: Characterize 2004 and the year ahead.

GERLACH: In 2004, we saw the state with an above-average recovery in terms of adding jobs. We've seen the underlying strength of our service sector, not just in retail but in the business-, financial- and professional-services sectors. We expect to see that trend continue.

SMITH: North Carolina is back in business. With our high proportion of manufacturing jobs, we went down ahead of the recession and then bounced back more rapidly. Now we've got to fix our horrible K-12 education system--our No.1 problem--namely with a statewide voucher system.

GERLACH: I disagree on K-12. Our system is quite strong, especially in our early grades. We're one of the nation's leaders. Clearly, we can't rest on our laurels because the dropout rate is a problem, and the governor is very interested in keeping young people in middle school and high school. We see a higher proportion of our high-school seniors going to college than ever before. Problem is, not enough students make it that far. That'll be a focus of the governor's second term.

What impact will Easley's victory and Democrats controlling both the state Senate and House have on our economy?

GERLACH: It shows North Carolinians agree with the governor that education and economic development will create a more prosperous state. We saw that in the overwhelming vote to bring Dell here. [After the election, legislators approved a record $243 million incentives package for the Texas computer maker to build a plant in the Triad.]

SMITH: Well, Dan still has his job, which was predictable. But the trick is, can they get North Carolina back on its normal post-World War II track of growing more rapidly than the national average, which has occurred in the last 12-to-14 months. In the last five years, we've slipped from the second- or third-largest economy, as measured by personal income, in the South to the fourth. Not a good direction.

Will we hear more about a lottery?

GERLACH: Yes. It puts us at a competitive disadvantage when everybody around us has one. We need more money for education. We're growing so quickly we're out stripping our facilities. It's safe to say the governor will continue to talk about the need for a lottery.

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SMITH: Lotteries are for losers. It's an immoral approach that says poor people are so dumb they willingly allow themselves to be taken to the cleaners. Lottery players are overwhelmingly poor, with low education and low language skills. They couldn't calculate odds if they had to, and it's rare to find a lottery that pays out more than 50% of the proceeds. In Las Vegas they pay 98%. If our good, honest Tar Heel workers want to go to Virginia or South Carolina, let them.

What do Bush's re-election and Republican Richard Burr winning a U.S. Senate seat mean for the state?

GERLACH: It's too early to tell. But a first step is, we need some kind of relief on the expiration of textile quotas in January. Hopefully, Senator Burr is communicating that to the president.

SMITH: We've ripped off consumers for 30...