Which States Recovered?

I think I find Edward Lazear’s explanation of which states recovered and which didn’t a bit too simplistic:

There are a number of ways to categorize a state’s business climate. I focused on labor policies and average tax rates. On average, I found that employment growth is twice as high in states that have a right-to-work law and minimum wages that are below average across states, and the difference is “statistically significant”—meaning that it is unlikely to have occurred by chance. GDP grows about 11/2 times faster over this period in those states.

A state’s labor policies were gauged by its minimum wage relative to other states (or the federal minimum when binding) and whether it had a right-to-work law—which generally prohibits requiring employees to pay dues to a union. Throughout most of the period from 2000 to March 2015, there were 22 right-to-work states. The proportion of a state’s GDP that is taken through taxes varies across states from a high of 12% in New York to a low of 5% in Alaska. The relevant data are available from the Labor Department, the Commerce Department’s Census Bureau and from the Tax Foundation, a nonpartisan research group.

Nevada, Utah, Texas, Arizona and North Dakota enjoyed the highest growth. All have market-oriented labor policies and all but one (Utah) have tax rates that are below average. The poorest performers: Michigan, West Virginia, Mississippi, Illinois and Ohio. Only Mississippi has market-oriented labor policies and four out of five (again excepting Mississippi) have tax rates that are above average. These results do not diverge greatly from a 2014 report for the American Legislative Exchange Council by Arthur Laffer, Stephen Moore and Jonathan Williams, “Rich States, Poor States.”

Indiana, Michigan and Wisconsin changed their right-to-work status during the past three years, although Wisconsin did so too recently to have much of an effect. The before-after comparison is striking. Before the recession, without right-to-work laws, these states averaged slightly negative employment growth that was well below the national average. After right-to-work, growth in these states was 11/2 times the national average.

I don’t think that point to the deepness of the recession in some states or their adopting market-based policies or right-to-work laws quite does it. Would North Dakota have prospered in the absence of an oil boom? How about Texas?

I think it’s possible to come up with a model for individual states’ recoveries based on the states’ dependence on different sectors without any recourse to the tax, employment, etc. policies in those states at all. Does anyone really think that the income growth in Washington, DC has to do with anything but the federal government? Or that if the financial sector had been allowed to collapse (as I thought at the time and continue to think it should have been allowed to do) that New York would have done just fine, thank you?

All things considered I think we need to conclude that the varied conditions among the states tells us that one policy size does not fit all which in turn means that micromanagement from Washington is counter-productive. On the other hand if the federal government just dropped a big block grant on Illinois I strongly suspect it would just have disappeared beneath a tsunami of public payroll expansions, pay raises, and pension increases and a few years later the state would be in no better shape than it had been before the block grant. If I knew how to solve Illinois’s problems, I’d be telling you about my brilliant solution. I think the only path forward for Illinois is to do a lot of stuff that nobody really wants to do which is why they’re avoiding doing them. I’m pretty sure that Mayor Emanuel’s second mortgage plan for the city of Chicago isn’t going to do much other than kick the can down a road of which the end is already in sight.

10 comments… add one
  • steve Link

    If right to work laws and lower taxes are the key to growth, then you should find better growth over the last 50 years in all of those states. You don’t, so it is clear that other things matter. On a national level, we had significant tax cuts on income an capital gains in the early 2000s. We ended up losing jobs during the 8 years of that administration. Tax cuts are just one of many things that can possibly influence growth, and it looks to me as though they are one of the less important things.


  • Martin Link

    “By a continuous process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method, they not only confiscate, but they confiscate arbitrarily; and while the process impoverishes many, it actually enriches some….The process engages all of the hidden forces of economic law on the side of destruction, and does it in a manner that not one man in a million can diagnose.” – John Maynard Keynes Economic Consequences of the Peace, 1920

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