Home > News > “Rich States, Poor States, 6th Edition”
101 views 7 min 0 Comment

“Rich States, Poor States, 6th Edition”

- May 27, 2013

Arthur Laffer, Stephen Moore and Jonathan Williams write:

All across the nation, states are looking for ways to boost their economies and become more economically competitive. Each state confronts this task with a set of policy decisions unique to their own situation. . . .

Fortunately, the United States, with its “50 laboratories of democracy,” provides us with empirical evidence to track exactly [sic] which policies lead to economic prosperity and which fail to deliver. . . .

Armed with years of economic data and empirical evidence from each state, the authors identify which policies can truly [sic] lead a state to economic prosperity. Rich States, Poor States not only identifies these policies but also makes sound research-based conclusions about which states are poised to achieve greater economic prosperity and those that are stuck on the path to a lackluster economy.

I’m supportive of this sort of effort but I don’t think the authors help their credibility by stating their conclusions with such certainty. Can’t the American Legislative Exchange Council hire an economist or political scientist or statistician who can tell them about causal identification?

The report is pretty long and I did not read the whole thing. But it looks like what they’re doing is giving each state two rankings:

– An “economic performance rank” based on averaging the state’s ranking on three measures: growth in state GDP (in percentage terms, but not per-capita, for reasons they discuss in their report), net domestic migration (this time in absolute numbers, not percentage), and non-farm payroll employment (in percentage terms). I don’t know why the only include domestic migration, nor do I know why they exclude farm employment; the explanations are somewhere in the report, I assume.

– A policy measure (they call it an “economic outlook rank,” a “forward-looking forecast,” but it is actually a measure of existing policies), that’s an average of the state’s ranking on 15 categories, many of which involve tax rates on business and rich people. (Items 1, 2, 3, 4, 7, 11, 12, 13, 14 directly or disproportionately affect businesses and the rich; items 5 and 6 affect the general population more or less equally, I think; and I’m not so clear on 8, 9, 10, and 15.)

Their claim is that these two measures are highly correlated and that the second measure is predictive of the first. That is, reducing business regulation and cutting taxes on the rich will lead to absolute economic growth.

Or, to give it a more political spin: conservative economic policies are good for the economy, liberal economic policies are bad.

This conclusion definitely could be correct, especially in the long term. Here’s what I wrote about an earlier edition of the Laffer et al. report:

In chapter 5 of Red State, Blue State, we pointed out some patterns that might be relevant to the point made by Laffer et al. One issue is that economic performance can be defined in different ways. For example, from 1981-2004, the five richest states in per-capita income (Connecticut, New Jersey, Massachusetts, New York, and Maryland) performed poorly if you look at incomes of the 10th percentile within each state, but they performed well for the 90th percentile.

ineqscatters.png

In poor states, the poor have been doing better; in rich states, the rich have been doing better.

So it is plausible to me that the historical analysis done by Laffer et al. would show conservative policies being correlated with economic growth. They just have to ease off a bit on their causal claims, given the obvious issues of identification (really, it’s too bad they didn’t have an economist or political scientist or statistician involved in some way in the preparation of this report—we can be hired for pretty, you know!). Descriptive analysis is just fine, I do it all the time.

Also, in some places I don’t think the authors have fully worked through the implications of their arguments. For example, #1 of their “Golden Rules of Effective Taxation” is “When you tax something more you get less of it, and when you tax something less you get more of it.” But on pages 6-7, under the heading, “Tobacco Taxes Threaten the New Hampshire Advantage,” they recommend that this state continue a plan of tax competition, keeping cigarette taxes lower than that of neighboring states so that people will drive to N.H. for their smokes. Lowering cigarette taxes so people smoke more, that hardly seems like “effective taxation.” I mean, sure, there are some people who would support an increase in smoking, but this is clearly a minority position.

Finally, I was curious about this group’s stand on social issues so I went their website and searched “abortion” but all I got was this press release which didn’t give their stand on the issue. I directly googled *alec abortion* and it appears that the organization used to be strongly anti-abortion and focused on social issues, but maybe that’s not on their agenda anymore. I recalled that this organization was active recently on guns, but searches of “guns” and “rifles” on the ALEC website yielded no hits. Perhaps they’ve ditched the social issues after all that bad publicity, I don’t know.

P.S. The book even includes a picture of the famous Laffer curve! So retro. I was expecting to see some shots of bell-bottoms and Hawaiian shirts, maybe an REO soundtrack for the whole thing?