Tuesday, June 23, 2015

Edward Lazear Says States With Free Market Policies Have Been Doing Better

See Why the Recovery Still Limps Along: A state-by-state analysis shows that market-oriented policies work. Too bad more states aren’t using them from the WSJ. Excerpts:
"Politics aside, cross-state comparisons provide a real-world experiment that helps show which economic policies work and which don’t.

Employment, state GDP, labor-law and tax data from 2000 to the present yield two strong lessons. First, a business-friendly climate—market-oriented labor policies and lower taxes—is effective in raising the growth in a state’s gross domestic product and employment. Second, states that suffered the worst employment shocks in the 2007-09 recession had the most rapid postrecession employment growth. This suggests that the weak national recovery cannot be explained by the depth of the recession."

"employment growth is twice as high in states that have a right-to-work law and minimum wages that are below average across states, and the difference is “statistically significant”—meaning that it is unlikely to have occurred by chance. GDP grows about 11/2 times faster over this period in those states."

"Nevada, Utah, Texas, Arizona and North Dakota enjoyed the highest growth. All have market-oriented labor policies and all but one (Utah) have tax rates that are below average. The poorest performers: Michigan, West Virginia, Mississippi, Illinois and Ohio. Only Mississippi has market-oriented labor policies and four out of five (again excepting Mississippi) have tax rates that are above average. These results do not diverge greatly from a 2014 report for the American Legislative Exchange Council by Arthur Laffer, Stephen Moore and Jonathan Williams, “Rich States, Poor States.”

Indiana, Michigan and Wisconsin changed their right-to-work status during the past three years, although Wisconsin did so too recently to have much of an effect. The before-after comparison is striking. Before the recession, without right-to-work laws, these states averaged slightly negative employment growth that was well below the national average. After right-to-work, growth in these states was 11/2 times the national average."

"The second result of my cross-state comparison: States that had the most severe recessions on average enjoyed the most rapid comebacks. For example, Florida’s employment growth declined 1.9 times the national average, but its employment growth in the postrecession years was 1.8 times national average. By contrast, Kansas’ employment growth declined by only 45% the national average, but its postrecession employment growth was only 41% the national average. For the nation as a whole, the correlation between the state’s loss in employment and its subsequent growth during recovery is strong. The bigger the hit, the larger the rebound."

"But as the University of Chicago’s Victor Zarnowitz pointed out decades ago, the deeper the recession the steeper the recovery. More recently, Michael Bordo and Joseph Haubrich (National Bureau of Economic Research, 2012) also found steep recoveries after financial crises."

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