Sunday, February 14, 2016

Factors in a State's Economic Performance

The John Locke Foundation in North Carolina published a study describing which states are the most "free."  Although one could easily quibble with the results they come up with (ranking states 1:50) they present some interesting data which tie together a number of issues and link them to economic performance of the state.   For example, if a state has high marginal tax rates or income taxes or property taxes, compared to their counterparts across the country - does it have an effect on comparative economic performance?  The answer seems to be yes.  But then you should not be surprised about that.

The study also looks at how states and localities spend money - which priorities are evidenced in their budgets.   They use the same model here - presenting spending categories and then amassing studies which looked into that issue.   Again, it seems to matter how states spend money.

The study shows that spending more on public safety and economic development and infrastructure have a larger effect on economic performance than spending on education or welfare.

I might part company with the Foundation on their conclusions here.  Some expenditures take a long time to show results.   So, for example, there is clear evidence from California that our investment in higher education in the 1960s and 1970s paid significant dividends to the state's economic performance in the 1990s and beyond.   We got some cutting edge research which in turn helped that state become a location for cutting edge companies.

The interaction between growth and tax policies seems to show up pretty quickly.   Ditto for vast expansions of regulatory activities.   But the relationship of public spending effects to economic performance may be a lot more complex to understand.

Charles Tiebout, who was a graduate student when he first began to think about what eventually become "A Pure Theory of Local Expenditure", understood that taxpayers can "shop" the right mix of amenities in local areas (including taxes).    For example, they may accept a higher level of taxation if they believe that other elements in society (schools for example) are much better than in other areas.

The Locke Foundation offers something to think about, even if you (as I do) question some of their rankings.

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