Fed pick is wrong about state
If you happened to check out the latest ranking of states for their “economic outlook” published last week by the right- wing political group ALEC, you would be excused for concluding that California is deep in an economic hole and digging itself deeper.
ALEC, the American Legislative Exchange Council, has updated these rankings every year or so since 2008. They’re prepared by economist Arthur Laffer, Heritage Foundation fellow Stephen Moore and Jonathan Williams, ALEC’s chief economist, under the title “Rich States, Poor States.”
We’ve examined “Rich States, Poor States” in the past and found its ability to actually predict states’ economic growth prospects to be essentially nil. But this year’s edition is especially notable because of Moore’s role, since he’s been nominated by President Trump for a seat on the Federal Reserve Board, one of the nation’s premier economic policy bodies. “Rich States, Poor States” probably shouldn’t be seen as a feather in his policymaking cap.
The rankings are based on 15 “policy variables” such as tax rates, anti- union policies and the minimum wage. In the latest edition, the 12th, California ranks 47th overall in its economic outlook.
Among the components of this figure are the state’s top marginal income tax rate of 13.30%, tops in the nation ( rank: 50th), its steep tax progressivity ( rank: 50th) and its high minimum wage of $ 12 an hour ( rank: 48th). California also gets a black mark for not being a right- to- work — that is, anti- union — state. On the plus side, it doesn’t levy an estate tax. But that’s the only silver lining Laffer, Moore and Williams could find in a jungle of negatives.
Indeed, California has been ALEC’s whipping boy since the rankings first appeared in 2008. In all but one of the 12 editions of “Rich States, Poor States,” California has ranked 43rd or below — including 47th six times and 46th twice. The state’s high point came in 2012, when it ranked 38th.
Under the circumstances, then, one has to wonder why in recent years California has turned in the most consistently glittering economic performance in the nation. Its growth in real (inflation-adjusted) gross domestic product since the 2009 recession has handily outstripped that of several states with top-flight ALEC rankings, such as Utah (ALEC’s No. 1), Nevada (4), Indiana (5), North Carolina (6), Tennessee (7), Florida (8) and that veritable laboratory of tea party taxcutting, Kansas (27).
One might almost think that the ALEC rankings are based not on actual economic potential, but on adherence to right-wing shibboleths such as favoring the wealthy and suppressing the income of rank-and-file workers.
Moore told me by email, “I’m not at all optimistic about the economic future of California, but I hope I’m wrong.” He didn’t address my questions about the mismatch between the ALEC rankings he coauthored and the facts on the ground, but noted that “California has lost almost one million net residents to the rest of the nation over the last decade,” adding, “People don’t leave places that are prosperous.”
Yet that’s just another example of beside-the-point reasoning that permeates the ALEC rankings, since California manifestly is prosperous, even if its wealth is not evenly distributed. Moore’s figures derive from a census analysis for 2007 to 2016, not the last decade. In any event the net loss of 1 million residents over a decade is minuscule, considering that California’s population is 39 million. The bulk of the outmigration is among residents without bachelor’s degrees. California has experienced net gains in population among people with graduate degrees and income of more than $110,000.
Laffer, the rankings’ chief author, says he isn’t discouraged by the empirical figures on growth. “California is so magical,” he told me (he should know — he got his economics doctorate from Stanford and taught at USC for eight years before hanging out his shingle as an economic consultant in Nashville). “It’s got so much going for it that can’t be measured in terms of policy variables. I think California grows in spite of its policies.”
An original promoter of Proposition 13, Laffer asserts that the tax-cutting initiative spurred the state’s growth for years, and that even now it would be growing faster if it didn’t saddle itself with high taxes and tolerance for unions.
Yet there’s still reason to ask why the “pro-growth” policies that are advocated by the ALEC team don’t reliably translate into growth. And the evidence is strong that they don’t. That was the conclusion of economist Menzie Chinn of the University of Wisconsin, who in 2015 went hunting for some correlation between states’ economic growth and their rankings in “Rich States, Poor States,” and found none.
If anything, Chinn wrote, there was a negative correlation. As his home state of Wisconsin rose in the ALEC rankings — from 33rd in 2008 to 17th in 2014 (a period that overlapped the election of tea party favorite Scott Walker as governor) — Chinn noticed that the state’s growth rate fell relative to the rest of the country.
“This is not the direction that ALEC-Laffer-MooreWilliams posit,” Chinn observed. “Hence, the ALEC economic outlook ranking is, in my assessment, a manifestation of faith-based economics.”
That’s true of many, if not most, business climate rankings purveyed by business lobbies. They tend to give states demerits for regulations, for the “cost of doing business” (generally taxes and wages and government generosity) and for their cost of living.
Yet many of these categories aren’t drags on a state’s business climate, but reflections of its appeal. Sure, California is an expensive place to live, but that’s because it’s a desirable place to live. The state with the lowest cost of living is Mississippi, but who wants to live there? Yes, there are lots of regulations in California, but that’s because some of the features that draw people in, such as its natural beauty and its climate, need safeguarding.
Some factors measured by ALEC and other business groups have a narrow allure to executives and the rich, but no relationship with broader measures of the quality of life. Laffer and Moore, in their 2014 book “The Wealth of States,” reported on research findings that “industry is strongly attracted to states with … relatively little union activity.”
No kidding? Chief executives naturally gravitate toward states where their employees have no voice in workplace policies or the ability to bargain collectively for higher wages. Is this necessarily an unalloyed blessing for anyone but management? Does it ensure a well-financed public sphere, including good schools, clean air and clean water? Hardly.
The most confounding case is Kansas, which for a time was a beacon of ALECfriendly policymaking. That was during the tenure of Republican Gov. Sam Brownback, who came into office in 2011 intent on creating a low-tax nirvana that would turbocharge economic growth.
It didn’t happen. Laffer maintains that the reason was partially a pushback by an anti-Brownback cabal in the state Legislature that obstructed his tax plan. But in reality, Brownback’s policies blew such a hole in the state budget that the courts had to order higher spending on schools and other expenses. The state, moreover, was left without adequate resources to manage a rural recession. By 2017, the state’s growth rate was down to 0.2%; the U.S. average that year was 2.2%.
None of this guarantees that California will continue to outpace the nation in economic growth. The state faces not a few head winds, including a lack of affordable housing and an excessive reliance on capital gains taxes. But these aren’t factors in the ALEC rankings, which are focused almost exclusively on policies that enable the rich to get richer while the working class struggles. Is that a formula for growth? Judging from California’s record, the answer is no.