“Having a Republican Governor is associated with low Economic Growth”

The Miser Brothers as Republican Governors. Honey, we shrunk the state's prosperity but saved us a few pennies in tax dollars.

There’s a new academic study by professors from Tulane University and the Nevada state Department of Planning and Budget that’s sure to become the source of some very hot political debate.  I didn’t bury the lead.  It’s up there in the banner header, however, I’m sure you want to know the supporting evidence and tests.  There’s a brief overview of this study at The Atlantic written by Richard Florida who is the Director of the Martin Prosperity Institute at the University of Toronto

The basic research question for the authors was “What factors influence state economic growth?”.  Basically, the authors look at a state’s fiscal policy and regress it against various policy choices and factors.  Then, they run some Monte Carlo simulations to see what happens under various scenarios. It’s complex statistics but their findings  are somewhat intuitive to me for years as well as true to my experience working with the state of Nebraska as a consultant to its Economic Development Department. However, this is a solid academic study with oodles of data.  It’s the kind of study that will be talked about for some time in economic circles.

This is what I learned from my time dealing with people in state governments whose jobs are attracting and retaining companies.  Businesses tend to relocate to states with good public services and low cost, employees that come from good educational systems.  They look for decent public school systems and state universities that do research in their area.  They want good state recreational facilities and even professional sports teams and cultural venues.  Omaha used to lose out to all kinds of places over things like lack of recreational facilities and cultural venues all the time.  It lost two fortune 100 companies and possible new ones over no recreational facilities or sports venues.  They offered hugely attractive tax packages and ready to build land but they always lost out on the same reason that makes me not want to live there.  There’s really very few things to do there and you don’t spend your life at work.

If you haven’t figured out that all of those things people and corporations seek basically come from public tax dollars, you must be a Republican.  A state’s tax giveaways and tax rates aren’t as high up on the list of things attractive to business as most die-hard Republicans want you to believe.  That’s pretty much what this study shows.

A new study by Tulane’s James Alm and Janet Rogers of Nevada’s Department of Budget and Planning (h/t Ryan Avent, whose deadpan tweet noted that it was likely to spark a “lively discussion”) takes a close look at the effects of tax and spending policies at the state level.  Entitled  “Do State Fiscal Policies Affect State Economic Growth?”, it examines  50 years of data  (from 1947 to 1997),  tracking  the effects of state tax policies, spending policies, and political orientation on economic growth. Looking at the different policy approaches and strategies that have been pursued at the level of states and cities and comparing their results provides a useful lens through which to examine pressing national issues. Alm’s and Rogers’ main findings are certainly interesting; “lively” is quite likely an understatement for the sort of debate their findings should inspire.

There are two major take-aways. First, a “state’s fiscal policies have a measurable relationship with per capita income growth, although not always in the expected direction.” Tax impacts, they report, are “quite variable”; “expenditure impacts are more consistent.”

This particular statement is right up there in the author’s abstract.

Of some interest, there is moderately strong evidence that a states political orientation has consistent and measurable effects on economic growth; perhaps surprisingly, a more \conservative” political orientation is associated with lower rates of economic growth.

Wow. Austerity doesn’t work.  Not only does it NOT work, it’s detrimental to the state’s economic well being and future.  Again this should be pretty intuitive.  If you have a business, you need customers with paychecks. The higher the paycheck, the more they customer spends on nonessentials which  many business sell.  Also, you need good, happy, creative employees.  If you rely on professional people, these folks like good restaurants, entertainment, schools, and sports venues.   Every  one needs good transportation infrastructure like well maintained roads and airports.  Again, a lot of this must be provided by government for a variety of reasons having to do with the nature of public goods.

Their conclusion is pretty damning to current policy prescriptions.

… there is strong evidence that a state’s political orientation, as indicated by whether the governor is Republican or Democrat, whether the state has enacted tax and expenditure limitation legislation, and whether the state frequently elects a governor of the same party as the incumbent, have consistent, measurable, and significant effects on economic growth.  Perhaps surprisingly, having a Republican governor is associated with lower rates of growth.

I’m not the least bit surprised. This is good old fashioned, no-nonsense Keynesian results. Also, growth rates compound over time like interest compounds your savings account.  If the rates of growth are low during one administration, the state will fall farther and farther behind so one or two administrations of bad fiscal policy means that slow growth compounds over time and makes the results more noticeable as you go along.  This seems to be how they capture some of their significant differences.

That trend brings us back to the extremely low growth we had during the Dubya years and the paltry recovery we have now.  Traditional fiscal policy always tells us that the multiplying effects of tax cuts are less strong than increases in government spending because the first round of government spending gets spent 100 percent and because it usually is targeted at infrastructure or other types of spending that has long reaching impact.  Yes, you can actually see economic benefit from building football stadiums or airports.   When you give money to rich people or even business in tax rebates or tax cuts, there’s no way of controlling where it goes  or where  it’s spent.  That degrades the impact of  the stimulus as well as leads to lost revenues.  And, at the moment, those tax cuts at the state level are being coupled with excuses to raid basic government services like public education.  The result is basically a drain on the state’s capacity to grow as well as no stimulation to the economy.

Anyway,  I imagine the Cato Institute or the Heritage Institute will try to rush out some distorted studies of their own shortly depending on how much circulation this gets.  I would like to add that the state of Nevada is not exactly Massachusetts and even though Tulane is referred to as the Harvard of the South, it’s still Louisiana.  Let’s hope this does stir up some debate and that this study attracts attention in all the right places.