Guest Blog (Peter Fisher): The Doctor is Out to Lunch – ALEC recommends wrong prescriptions for state prosperity

Peter Fisher is Research Director of the Iowa Policy Project. This is an abridged and edited version of a brief that was prepared as part of a larger research project critically examining several state economic competitiveness rankings published by national organizations. The full report will be completed and published as a book later this year.

This year marks the fifth anniversary of Rich States, Poor States: The ALEC-Laffer State Economic Competitiveness Index. First published in 2007, this report written by Dr. Arthur Laffer and others and published by the American Legislative Exchange Council (ALEC) purports to be a guide to state policies that promote economic growth. It seems an opportune time to assess how well their measure of a state’s Economic Outlook in 2007 actually performed.  Simply put, the ALEC Outlook Ranking fails to predict economic performance.

The policy prescriptions laid out in the ALEC report include reduction or abolition of progressive taxes, fewer government services, weaker or non-existent unions. To attain the highest ranking would require a state to have no individual or corporate income tax, no estate or inheritance tax, no state minimum wage, severe tax and expenditure limits and very limited public services. It also would have to be a so-called “right-to-work state”. Laffer and company have been arguing for five years that adoption of such policies is the sure-fire prescription for state growth and prosperity. The better a state ranks on their index of 15 such policies, the better its economic outlook, they say.

So how should we assess the economic performance of states and the validity of the ALEC Economic Outlook Ranking? A good place to start is with the set of performance measures that the ALEC report itself relies on: growth in state GDP (Gross Domestic Product), growth in non-farm employment, growth in per capita income, and growth in population.

On each measure, the correlation is either extremely weak or in the opposite direction of what ALEC would lead us to expect. There is virtually no correlation (0.02) between the ranking in 2007 and a state’s five-year rate of growth in GDP. On job growth, the correlation is only slightly stronger, but in the opposite direction (-0.06), meaning the lower a state was ranked on the A-L Index, the better it did in terms of job growth. Other trends were stronger but again in the opposite direction: the less “competitive” a state according to ALEC the more per capita income grew (see chart above).

It makes sense as well to judge the ALEC rankings by two other measures of the standard of living of the state’s population: median family income and the poverty rate. The ALEC report, after all, attempts to predict which states will be richer, which ones poorer.

If the states following the prescriptions of Laffer and company succeeded in generating more income for their residents than the states who failed to subscribe to their policies, they should have higher incomes and lower poverty rates. The opposite is the case. The more a state’s policies mirrored the ALEC low-tax, regressive taxation, limited government agenda, the lower the state’s per capita income and median family income throughout the period 2007-2010, and the higher the poverty rate. Not only that, but the better a state did on the ALEC Outlook Ranking, the worse it did in terms of the change in the poverty rate and the change in median family income from 2007 to 2010 — that is, poverty increased and family income decreased in the best ranking states.

What about population growth? This turns out to be the only measure on which the ALEC Outlook Ranking performs as advertised: States ranked higher in 2007 experienced greater population growth from 2007 to 2011. But population growth is not a measure of economic performance. Population change, as demographers are well aware, is driven by a wide range of factors. It may be driven in part by economic performance, in that people should be drawn to states with more job growth, and better job opportunities as reflected in higher incomes. But this is obviously not what is happening here. Clearly Laffer and company cannot draw the line of causation that they would like to: from their right-wing policies to stronger economic growth and more prosperity, which in turn cause more people to migrate to those states and/or fewer to leave.

The moral of the story is quite simple: The policy prescriptions in Rich States, Poor States do not help at all to explain why some states created more jobs than others, or why some states experienced more growth in income per person than others, over the past five years. In other words, the policies that make up the Economic Outlook Ranking are not a recipe for growth and prosperity. If anything, they are quite the opposite: They are a recipe for economic inequality, low wages, and stagnant incomes that at the same time deprive state and local governments of the revenue needed to maintain the public infrastructure and education systems that are the underpinnings of long term economic growth.

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