By Dr. Arthur Laffer and Stephen Moore
Excerpt from Investor’s Business Daily:
Clinton seeks a classic “blue state” model of economic revival — more government spending, higher tax rates on the rich and increased regulations — while Trump would follow a “red state” course — pretty close to the opposite of Clinton’s policies. On this, there’s a lot we can learn from the experience of the states over the last few decades.
Two years ago the two of us with Rex Sinquefield and Travis Brown wrote the “Wealth of States,” which showed states with low tax rates, less regulation, and right-to-work laws have much higher rates of job and income growth.
Red states on average are a magnet for people and incomes, whereas blue states — most notably, New York and California — lose out in the internal migration game.
Now, obviously, the use of political labels such as “red” and “blue” is inferior to addressing economic policy differences head-on. We have worked over the years with some very good pro-growth Democratic governors like Evan Bayh of Indiana, and against some very misguided Republican governors like Bob McDonnell of Virginia, who raised taxes more than any leader in the commonwealth’s history.
Party is not a substitute for good policy.
That said, red states are bleeding blue states dry. There are always exceptions, but, using net tax returns, about 215 tax filings a day leave the nine states with the highest tax rates and arrive in the nine states with zero income-tax rates.
Some blue areas — like San Francisco — are booming, while some red states — like Mississippi — still have low standards of living. But the general trend of decline in blue regions and the rapid rise of red regions is unmistakable.
One point needs to be emphasized: Commentators often talk about income per capita or median income as if they were good measures of economic performance. They aren’t. Lower tax rates attract people and income, and higher tax rates universally repel both. Sometimes income is more sensitive to taxes than population, sometimes it’s not.
Nevada, for example, has had very rapid income growth but even faster population growth. It’s a home-run state, yet its growth of income per capita is low. West Virginia, meanwhile, has been losing people faster than it’s been losing income — the worst state in both categories. Yet, looking at income per capita, it looks as if they’re doing well. They aren’t.
As our friend, former Texas Gov. Rick Perry, loves to point out, and census data confirm, the Lone Star state (with no income tax) created more jobs from 2007-2014 than the other 49 states combined. If you think big government and high taxes are a path to prosperity, how do you explain that one?
Even with the oil recession, Texas is still doing fine.
For Hillary Clinton and others who are trying to argue that more taxes and government spending are going to revitalize the U.S. economy, the superior performance of low tax-and-spend states is, to say the least, embarrassing.
So now state government apologists are scrambling to invent statistics that show that blue states are doing better. Not long ago, the New York Times published a long article that concluded: “And despite what you may have heard, blue states are generally doing better.”
How did they come to this remarkable conclusion?
They examined four variables. Life expectancy at birth, percentage of college graduates, median income (an inappropriate income per capita-type number), and number of patents per 1,000 people (what?). Did they analyze how people vote with their feet? No. Or how income migrates? No.
To find which states are going in the right and wrong directions, you have to look at how things are changing. This same editorial unwittingly admitted our main thesis: “The gap between today’s red and blue states was enormous for much of the 20th century. It then narrowed substantially.” It also mentioned that red states “embrace cut and extract,” which means pro-growth laissez-faire policies such as right-to-work laws, drilling for oil and tax cuts.
Unfortunately, the writers didn’t connect the dots.
Meanwhile, the blue states were once prosperous, and taxes and spending were less onerous than they are now.
Our favorite example is New Jersey. Just 51 years ago, the Garden State had neither an income tax nor a sales tax. It balanced its budget every year. It was one of the richest states and attracted in-migration from everywhere.
Eight years ago, when ultrablue Democrat Jon Corzine was governor, New Jersey had some of the highest tax rates in the nation and perpetual budget deficits. A new study by Pew Research ranked the state’s public pension system as third worst in terms of its assets-to-liabilities ratio (42%).
In 2014, New Jersey paid its public employees an average $68,412, second only to California, and employed 53.17 full-time public employees per 1,000 population, vs. the U.S. average of 50.13. Due in part to New Jersey’s high tax burden, it lost 365,000 net tax filings and over $24.7 billion in net adjusted gross income to other states from 1992 through 2012.
But the New York Times analysis is trying to tell you that the rest of the country should be more like … Newark.
The same is true of Connecticut. The Yankee State was once one of the most prosperous places on the planet, and until 1991 it had no income tax. Its other key attribute was its proximity to high-tax, anti-business New York. But over the last 25 years, Connecticut has been in a free-fall as it has raised its income tax four times, leading to towering deficits.
The joke now in Connecticut is: Will the last person in the state please turn out the lights? As Connecticut depopulates, there may come a time when one super-rich person is left living in a Greenwich mansion who is highly educated and with three patents to his name, and the Times can say: Look how prosperous and highly educated Connecticut is.
By the way, a 2014 poll found that 49% of Connecticut residents say they want to leave the state — second only to Illinois at 50%. The exodus is on: 156,057 people have left Connecticut since 1992, taking $9.5 billion in income with them. As people in Fort Lauderdale and Naples, Fla., will tell you, it seems like every third person here is from Connecticut.
Our view is that the best measure of where the future is happening is to look at where people and businesses are moving to and where they are leaving — voting with their feet. In the day, East Germans fled to West Germany, not the other way around. This rapid migration, more than any distorted statistic that the USSR could cook up, was evidence that free-market capitalism was superior to communism.
This is just as true today when comparing “red” states with “blue” states. And the excuses are just as lame.
Our point is very simple: If red states are inferior to blue states, why do people flee these blue workers paradises?
Why are all the jobs relocating to Florida, Tennessee, Texas and the Carolinas? We recently asked Paul Krugman and his jaw-dropping answer was that the South is booming today because of air conditioning. If this were true, all we need to do to help Haiti, the Congo and Burma is to send them lots of air conditioners. Oh, and also increase taxes.
The Times was right that Hillary Clinton is proposing a blue state model of tax the rich, increase regulation, suppress energy development and spend, spend, spend.
Donald Trump’s plan is pretty much a red state plan: Cut tax rates, drill for American energy, and stop entangling businesses with reams of rules and red tape.
It really does come down to whether we want America to look more like Connecticut and Illinois or more like Florida and Texas.