An Inquiry Into the Nature and Causes of the Wealth of States: How Taxes, Energy, and Worker Freedom Change Everything
By Arthur B. Laffer, Stephen Moore, Rex A. Sinquefield, and Travis H. Brown
(Wiley, 368 pages, $29.95)
We move around. About half of Americans live in a state other than the one in which they were born. It might be painful to pick up stakes and head to a new town, in a new state, but sometimes the emotional costs of staying put exceed the costs of relocating. And so we move. It’s like a game of checkers, where someone shakes up the board, and half the pieces stay where they were and half move over to a new square.
For the economist, the relocation decision offers a fascinating insight into the differences between attractive and repellent environments. If every state were exactly the same—same economy, same laws, same weather—the relocation decision wouldn’t tell us anything of interest. People would still move, but there wouldn’t be any discernible trends. We’d see the same number of people moving from Cuba to Florida as vice versa. But what if people systematically prefer one kind of jurisdiction over another when they move?
That’s an insight which powered Frederick Jackson Turner’s Frontier Thesis in 1893. To attract people, argued Turner, Western states offered greater freedom and social equality, with the result that people moved West to escape from the socially rigid, hierarchical, and undemocratic societies of the East. Losing people to competition from the West, Eastern states democratized in turn, and this effect worked all the way back to Europe, which had lost immigrants to America. The frontier, then, was the font of what we think of as the idea of America and the touchstone that explained modernity and the rise of the free world.
That overstates things a little, but as a partial explanation for relocation decisions it’s a fascinating insight, one that informs an important new book by Arthur Laffer, Stephen Moore, Rex Sinquefield, and Travis Brown, An Inquiry Into the Nature and Causes of the Wealth of States. The title, borrowed from Adam Smith’s Wealth of Nations, promises a revolutionary reinterpretation of what makes American states wealthy and, remarkably, the authors deliver on their promise. What they find, in brief, is that low-tax states deliver more wealth without sacrificing the social services that tax revenues are supposed to fund. They also find that people move in massive numbers from high- to low-tax states.
When you think about it, that’s pretty remarkable. Of course, you’d expect taxpayers systematically to prefer low-tax states. But then what about the recipients of welfare and state goodies, Mitt Romney’s 47 percent of takers? They’d be more likely to move from low-welfare (and low-tax) states to high-welfare (and high-tax) states. They might not be quite so mobile as the 53 percent of taxpayers, but they move around too. In sum, fiscal and welfare policies are like an auction in which states bid for different kinds of migrants. If you like welfare move to California or Illinois; if you like low taxes move to Texas or Nevada. For Republican and Democrat politicians, this works out very nicely, as they trade off the voters who hate them for voters who like them. That’s how political policies may be understood: a long-term strategy to prorogue the electorate and elect a new set of voters.
There’s only one problem with this, if you’re a Democrat. It’s the one Margaret Thatcher identified: “The problem with socialism is that eventually you run out of other people’s money.” That’s why, if you’re a Democrat, you hate federalism and state competition and want everything run out of Washington. We’ve already seen a federal bailout of Detroit, and it’s not going to end there.
In the meantime, Laffer et al. have assembled an empirically rich mountain of evidence that shows state competition is benign, that states compete for people, and that they do better when they win the competition. The authors match the burden of state taxes against state population growth and state tax revenues, and report that on net people move to low-tax states. They then find that high-tax states are more likely to run budget deficits and to have weaker economies.
What is most interesting about the book is the finding that low taxes don’t come at the expense of poor social services. That’s the claim that John Kenneth Galbraith made when he complained of “private wealth and public squalor”: When a city starves the fisc with low taxes, it can’t afford the public works that make it an attractive place to live. As a matter of common observation, however, high taxes drive out residents and can reduce a city to the burned out hull that is today’s Detroit. The tax revenues too often go to the unionized public workers on the take—the schoolteachers, firefighters and cops—and can bring great cities such as San Diego to the point of insolvency. That counts as social justice if you write editorials for the Washington Post, but it’s not the kind of social service that makes a city livable.
Liberals castigate jurisdictional competition as a “race to the bottom” won by states that tax too little and don’t spend enough on public services. Laffer et al. argue convincingly that what we’re seeing is really a race to the top won by states with low taxes and attractive social services. The high-tax states pay their unionized public employees a lot more money, but that doesn’t translate into better highways, police services, and student test results. Econometricians with their environmental and demographic variables need to pay more attention to these questions, but Laffer et al. have very usefully introduced them as research items. In addition, at a time when the federal government’s demand-side fiscal stimulus (grow the economy by printing and giving away more money) has produced the most anemic of recoveries, it’s heartening to see the supply-siders return to the fray with a convincing argument that what states need to grow are fiscal policies that encourage private individuals to invest.