Florida Rising and New York Fading

Gaining Ground

Falling Behind

The U.S. Census Bureau has announced that Florida has surpassed New York in population to become the nation's third largest state.  Here are the top ten states in population as of July 1, 2014, according to the announcement:

1.  California          38.8
2.  Texas                27.0
3.  Florida              19.9
4.  New York           19.7
5.  Illinois               12.9
6.  Pennsylvania      12.8
7.  Ohio                  11.6
8.  Georgia             10.1
9.  North Carolina    9.9
10. Michigan            9.9

The same announcement also includes a list of the ten fastest growing states, which also includes Florida:

1.   North Dakota
2.   Nevada
3.   Texas
4.   Colorado
5.   District of Columbia
6.   Florida
7.   Arizona
8.   Utah
9.   Idaho
10. South Carolina

In 1970, New York's population of 18.25 million dwarfed Florida's 6.8 million figure. (See here for these and other figures.) Since that time, the nation's population has risen more than 50 percent. Florida's population has nearly tripled, while New York's has risen a mere 8 percent.  Moreover, in 1970, New York's GDP accounted for 10.8 percent of the nation's GDP, while Florida accounted for 3 percent.  (See here).  By 2010, the Empire State accounted for a mere 8 percent of national GDP, while Florida accounted for 5 percent.  (See here).  If this trend continues (and there is no reason to think it will not), New York's GDP will account for 5.9 percent of the nation's by 2050, while Florida's will account for more than 8 percent.  This trend will have political consequences as well, as states such as Florida gain additional clout in the House of Representatives and Electoral College at the expense of states such as New York.

It should be no surprise that Florida has surpassed the Empire State in population and is closing the gap in economic output.  The disparate fortunes of these states are a case study in the operation of competitive federalism and the concomitant protection for economic liberty.  The constitutional framework of competitive federalism allows states to vie with one another for capital and labor by adopting policies that reward individual initiative and encourage entrepreneurial activity.  As previously explained on this blog, New York has adopted various policies inhospitable to economic freedom, thereby deterring individual initiative and resulting economic opportunity.    The state's top marginal tax rate on income, 8.82 percent, is one of the highest in the nation, whereas Florida has no income tax whatsoever.  Indeed, according to this source, New York residents pay 12.8 percent of their income in various state and local taxes, the highest percentage in the nation. (Another source reports that the figure is even higher --- 14 percent.)  The Empire State's corporate tax rate of 7.1 for all corporations, large and small, is also significantly higher than Florida's. (See here)  New York also encourages labor cartels known as unions.  For instance, the state is one of a diminishing number of jurisdictions that authorize labor unions and businesses to negotiate collective bargaining agreements requiring a firm's employees to subsidize unions as a condition of working for the firm subject to the agreement, even if the employee declines to join such a union.  By contrast, Florida's constitution protects its citizens' "right to work" for the firm of their choice, free of requirements to provide financial support to organizations they oppose.

These are just a few of ways in which, compared to Florida, New York thwarts economic liberty and discourages wealth creation.  This is not to say that Florida's economic policy is optimal in all respects.  The state fixes a floor on wages that is higher than the "minimum wage" imposed by the National Government.  Moreover, the state's corporate income tax, while lower than New York's, is higher than that of many other states.

All in all, however, Florida appears to be a far more hospitable climate for free enterprise than New York. Indeed, according to a recent study by the Mercatus Center at George Mason University, New York ranks dead last among the states in "Overall Freedom," (see here), 50th in "Economic Freedom" (see here), and 47th in "Regulatory Freedom."  (see here).  By contrast, the same study ranks Florida 17th in Economic Freedom (see here), 23rd in "Overall Freedom" (see here), and 32nd in "Regulatory Freedom." (See here)  The study also reports that, on net, 9 percent of New York's population left the state between 2000 and 2011, while Florida experienced a net inflow of 7.4 percent during the same period.

In sum, economic policies have consequences.  States like New York have chosen policies that deter business formation and expansion, while Florida has opted for a different approach.  While the national government has adopted policies that subsidize and protect high tax states such as New York, such policies cannot prevent the inevitable results of competition between the states for labor and capital.  Unless New York reverses course, the "Empire State" will slowly fade into political and economic insignificance.

On the Myth of State and Local Regressive Taxation

25:1

In an Op-ed entitled "How Government Helps the One Percent" in yesterday's Washington Post, E.J. Dionne claims that state and local taxes are "regressive" and have the effect of "exacerbating inequality," unlike federal taxes which, he concedes reduce inequality by redistributing income from rich to poor.  In support of his claim about state and local taxes, Dionne cites a study by the Institute on Taxation and Economic Policy (ITEP).  The study concludes that:

"[I]n 2015 the poorest fifth of Americans will pay, on average, 10.9 percent of their incomes in state and local taxes and the middle fifth will pay 9.4 percent.  But the top 1 percent will pay states and localities only 5.4 of their incomes in taxes."

From these figures, Dionne concludes that:  "[a]t the state and local level, government is indeed engaged in redistribution --- but it's redistribution from the poor and middle class to the wealthy."

Dionne's claim echoes what has become a Progressive article of faith, namely, that state and local taxes are, "extremely regressive" or "highly regressive," because the wealthy pay a smaller proportion of their income in taxes than the poor. However, like some other Progressive articles of faith, this nostrum lacks a factual basis.  That is, any claim that state and local taxation redistributes income from poor to rich is demonstrably false, ignoring as it does the distinction between tax rates, on the one hand, and actual taxes paid, on the other.  Yes, the "top 1 percent" might experience lower effective tax rates than individuals of more modest means.  However, those in the top 1 percent also (by definition) earn far more income to which these rates are applied.  As a result, these wealthy Americans pay far more in state and local taxes than their fellow citizens of more modest means. 

A simple numerical example using Dionne's own figures will help illustrate this point. According to this study by the Congressional Budget Office, the average household in the "top 1 percent" earned $1.22 million before taxes in 2009.  By contrast, individuals in what Dionne calls the "poorest fifth of Americans" earned an average of $23,500 per year before taxes. If we apply Dionne's assumed state/local tax rates to such individuals, we learn that the "top 1 percent" paid on average $65,880 in such taxes in 2009, while the poorest fifth of Americans paid $2561 in such taxes in the same year. In other words, despite paying lower tax rates, the average household in the "top 1 percent" paid more than twenty five-fold more in state and local taxes than the average household in the bottom one fifth of the income distribution.  (2009 is the most recent year for which I was able to locate data on the average income of individuals in the top 1 percent.)

To be sure, the mere fact that the top 1 percent pay on average twenty-five fold more in state and local taxes than the poorest fifth of Americans does not necessarily establish that states and localities are redistributing income from rich to poor.  Dionne's point would still survive scrutiny if states spent more than $65,880 on services provided to the top 1 percent, and less than $2561 on services provided to those in the lowest fifth of the income distribution.  Such spending patterns would, when combined with the taxes paid by each group, demonstrate the sort of redistribution from poor to rich that Dionne decries. However, neither Dionne nor the ITEP study he cites provides any evidence that, for instance, states and localities lavish more than $65,880 on the average member of the top 1 percent each year.  Nor can this blogger imagine what sort of programs would result in such skewed expenditures. Moreover, publicly-available data demonstrate that states and localities spend significantly more than $2561 per person on services provided to individuals in the poorest fifth.

Indeed, Medicaid alone seems to account for transfers to the poorest fifth that approach the amount these individuals pay in state and local taxes.  According this report by the National Association of State Budget Officers ("NASBO"), Medicaid covered 60 million people in 2009, a cohort roughly equivalent to Dionne's "poorest fifth."  (The U.S. Population in 2009 was 307 million.)  The same study concludes that states spent $132,540,000  on  Medicaid in 2009, an amount equal to $2209 per Medicaid recipient.  Of course, Medicaid is not the only program that confers benefits on individuals in the "poorest fifth."  States and localities also spend significant resources on: (1) other forms of public assistance, (2) K-12 education, (3) police protection, (4) fire protection, (5) roads, (6) public transportation, and (7) higher education.  Indeed, according to the NASBO report cited above, states and localities spent just over $280 Billion on K-12 education in 2009, or $912 per person.   States spent another $145 billion, or $472 per person, on higher education.  It may well be that individuals in the poorest fifth received less than a pro-rata share ($1384) of such expenditures.   Nonetheless, even if we assume that the poorest fifth receive the equivalent of $500 annually from this source, state and local expenditures on such individuals would substantially exceed the $2561 that the average individual in the poorest fifth of the income distribution pays in state and local taxes.

In short, any claim that states and localities are redistributing income from rich to poor is apparently false.  Instead, state and local taxation and the spending programs that such taxation supports redistribute income from rich to poor and are in this sense "progressive."  It may well be that the national government's policies are even more progressive, given the relative ease with which wealthy individuals may "exit" states that impose high taxes.  The threat of such exit, which drives competitive federalism, discourages redistributionist policies.   (It is, of course, more difficult for such individuals to exit the United States as a whole.)  Perhaps Dionne believes that state and local systems are not progressive enough.  Perhaps he is correct, but he should ground such an argument in data that reflect the actual impact of state and local systems.

Some might reply that Dionne and this blogger have erred in defining as "regressive" those systems, and only those systems, that redistribute income from poor to rich.  Instead, this argument might continue, a tax system is regressive whenever the poor pay higher tax rates than the rich.  However, such a definition of "regressive" would, by ignoring the uses that states make of tax revenue, rob the term of any useful meaning in policy debates.  After all, a tax system could be "regressive" in this sense even if the State spent every penny of tax revenue on transfer payments to the poor, thereby substantially reducing inequality. Such an approach would also label as "progressive" any system in which the rich paid higher tax rates than the poor, even if states spend all tax revenue on programs aimed solely at the rich.  Any useful definition of "regressive" or "progressive" should account for the actual distributional effect of the policies that scholars and pundits are evaluating. 

Americans Voting With Their Feet for Red State Cities

Lone Star Juggernaut

The Census Bureau has released a report of the 15 fastest growing US cities with populations of 50,000 or more.  Here is the list.

1.    San Marcos, Texas
2.    Frisco, Texas

3.    South Jordan, Utah
4.    Cedar Park, Texas
5.    Lehi City, Utah
6.    Goodyear, Arizona
7.    Georgetown,  Texas
8.    Gaithersburg, Maryland
9.    Mount Pleasant, South Carolina
10.  Meridian, Idaho
11.  Odessa, Texas
12.  Gilbert, Arizona
13.  McKinney, Texas
14.  Franklin, Tennessee
15.  Pearland, Texas

Seven such cities are in Texas, and fourteen of fifteen are in so-called "red" states, that is, states that voted for Mitt Romney in 2012 and John McCain in 2008.  This concentration of fast-growing cities in such red states is not surprising.  After all, as previously explained on this blog, the Nation has to some extent embraced a constitutional system of competitive federalism, whereby individual states are free to embrace different philosophies of regulation and taxation.  Because individuals are free to travel between the states, jurisdictions that offer environments conducive to the creation of economic opportunity will attract individuals and capital, while those that impose undue regulatory burdens and taxation will deter in-migration and encourage their citizens to migrate elsewhere.  Indeed, previous posts on this blog have identified various policies, such as minimum wages (see here and here), high income taxes and associated over-spending (see here and here), and statutes authorizing so-called "closed shop" collective bargaining agreements (see here and here), that deter wealth-creating economic activity, stultifying economic growth and opportunity.   By contrast, of the red states represented in this list, only one (Arizona) has a minimum wage that exceeds the federal minimum.   (See here)  Two have no minimum wage at all.   Moreover, all such states are so-called "right to work" states that prevent unions from negotiating collective bargaining agreements that require employees to financially support a union against their will.  It is thus no surprise that cities from red states dominate this list, as they have dominated similar lists in the past.  Removal of federal policies that distort and dampen such competition, discussed here and here, would bolster such rivalry and further discipline those states that adopt policies that hamper growth and opportunity.  

Is Our Economic Freedom Slipping Away, and Can Competitive Federalism Reverse the Slide?

Free

Less Free

Somewhere In Between

The Heritage Foundation recently released its annual "Index of Economic Freedom" for 2014, developed in partnership with the Wall Street Journal.  (See here).  Authors of the index measure each country's performance in ten different variables grouped into four different categories.  Here are the four different categories along with the variables assigned to each category.

1. Rule of Law (Property Rights and Freedom from Corruption);

2.  Limited Government (Fiscal Freedom and Government Spending);

3.  Regulatory Efficiency  (Business Freedom, Labor Freedom and Monetary Freedom);

4.  Open Markets   (Trade freedom, Investment Freedom and Financial Freedom)

Here are the top fifteen, along with their scores on the index in question.

1) Hong Kong:         90.1

2)  Singapore:         89.4

3)  Australia:           82.0

4)  Switzerland:        81.6

5)  New Zealand:      81.2

6)  Canada:              80.2

7)  Chile:                 79.7

8)  Mauritius:           76.5

9)  Ireland:               76.2

10) Denmark            76.1

11) Estonia               75.9

12)  USA                   75.5

13) Bahrain               75.1

14)  UK                     74.9

15)  Netherlands        74.2

The United States, which ranked number 6 in 2009, fell out of the top ten this year, continuing a slide that began several years ago.  (See here for the 2013 rankings, here for the 2011 rankings, and here for the 2009 rankings.)  The US now ranks 12, with a score of 75.5.

It should be noted that such national rankings can be imperfect proxies for the extent of economic freedom that individual citizens enjoy in political systems, like the United States (and Canada), characterized by competitive federalism.  By limiting the power of a national government and devolving power to individual states or provinces, federalism may result in varying degrees of economic freedom throughout a nation, as states embrace and implement different philosophies on taxes, spending and regulation.

Take the category of limited government, which the Index equates with low government spending and low taxes.  While the US national government taxes and spends more per capita than any individual state, there are significant differences between the states on these variables, differences with important implications for economic freedom as measured by the Heritage index.    In California, for instance, the top income tax rate is over 13 percent.  By contrast, some states (Washington, Nevada, South Dakota and Florida) have no income tax at all, and some states (New Hampshire and Tennessee), only levy income taxes on so-called "unearned" income, i.e., interest and dividends.  (For a visual representation of how top tax rates differ between the states, see here.)  Of course, the gap between top income tax rates can overstate the difference in tax burdens between various states, as some states might rely more heavily upon sales taxes than others, for instance.   Still, no one doubts that, as previously explained on this blog, states like California generally tax and spend more per capita than states with lower top income tax rates.

The category of regulatory efficiency, which includes labor freedom, provides another example.    As previously explained on this blog, Federal Labor Law once allowed companies and unions to agree to compel individuals to provide financial support for unions they do not wish to join as a condition of pursuing their chosen vocation.  Fortunately, the 1947 Taft-Hartley Act allows states to opt out of this law by declaring themselves "Right to Work" states.   Moreover, while federal law sets a minimum wage applicable to most employees in the United States, several states mandate even higher wages, further reducing the liberty of employers and employees to strike bargains in their mutual best interest.   As a result, the extent of "labor freedom" differs significantly from state to state.    Some states (e.g. Georgia, Louisiana and Tennessee) have no minimum wage at all and have declared themselves "Right to Work" states, thus maximizing labor freedom to the extent possible given federal law.  (See here for a summary of minimum wage laws in the 50 states and here for a list of Right to Work states.)    Other states, e.g., New York and California, have imposed minimum wages that are higher than the Federal minimum and also declined to recognize their citizens' right to decline to support a union.  Some states are "in between," having declared themselves "Right to Work" states while still imposing a minimum wage.  Virginia is one example of such a state.  The Commonwealth is a Right to Work state but also imposes a minimum wage on employers not subject to federal law (with numerous exceptions) equal to the federal minimum.  Ditto for South Dakota.

It therefore appears that the extent of economic freedom varies significantly among various American states. Indeed, some have attempted to document this variation, albeit with somewhat different metrics than those employed by the Heritage Foundation Index.  For instance, the Mercatus Foundation affiliated with George Mason University has published the results of a study of "Freedom in the 50 States."  The report assesses various aspects of freedom on a state-by-state basis, including "economic freedom," "regulatory policy," "tax burden," and "fiscal policy."  It is no surprise that states like California and New York do quite poorly in these measures.  New York (whose flag is pictured above), for instance, is tied for last in economic freedom, 48th in regulatory policy and tied for last in both tax burden and fiscal policy.  By contrast, states like South Dakota, Virginia, and Tennessee perform very well on all such metrics.

As a result, the Heritage Index  likely overstates the extent of economic freedom enjoyed by Americans who live in states such as California and New York, while understating the extent of such freedom in states like Virginia, South Dakota and Tennessee, to name a few.

Some may wonder why, if economic freedom is so valuable, states such as California and New York are able to maintain their freedom-reducing policies in the face of competition from states such as Virginia, South Dakota and Tennessee.  Put another way, why has competitive federalism not prevented America's slide from 6th to 12th in the Heritage survey?  The answer is simple.   Competitive federalism requires limits on the scope of national power and an appropriate division of responsibility between states and the national government.  Where, by contrast, the national government exceeds its authority, imposing uniform solutions to local problems, states face distorted incentives, thereby undermining to some extent the operation of competitive federalism and unduly restricting economic freedom.

Take the minimum wage as an example.  Absent a national minimum wage, states would internalize the benefits of deregulating wage rates, attracting businesses that create jobs and individuals who want them.  However, in the United States, the national government has imposed a minimum wage that governs purely local businesses, so long as they generate sales of $500,000 annually, produce goods or services for interstate commerce, or handle, sell or work on goods that have moved in interstate commerce.  (See here for a description of the reach of the national minimum wage.)  Thus, a state that eliminates its own minimum wage will impact only a fraction of actual or potential business within its boundaries.  By contrast, states that maintain minimum wages equal to or slightly higher than the national minimum wage will risk losing very few employers to other states.   In the same way, the National Labor Relations Act, which authorizes the formation of labor cartels known as unions in purely local commerce, presumably preempts state laws that would treat such collective bargaining as unlawful price fixing.  Here again, national law discourages would-be state efforts to remove restraints --- in this case private restraints --- from the labor market so as to attract capital and productive citizens from other states. 

Federal tax policy also distorts competitive federalism.  In particular, the federal tax code allows citizens to deduct state taxes from their federal taxable income, thereby offsetting, in part, the impact of increased state income taxes.  As my colleague Nate Oman has explained, this provision allows states to export a portion of their costs to other states.  Moreover, as previously explained on this blog, the ability to export such costs insulates high tax states from the rigors of interstate rivalry.  After all, citizens in states such as California receive all of the benefits of new state spending while only paying part of the cost.  As a result, these citizens are less likely to exit such states despite what appear to be oppressive tax policies.  By contrast, states that reduce their taxes internalize only a portion of the benefits of doing so, as their citizens must pay higher federal taxes as a result.  Thus, when it comes to fiscal policy, the national government has distorted the "rules of the game" in a way that advantages high tax states vis a vis those that exercise fiscal restraint, thereby biasing the results of interstate competition against economic freedom as measured by the Heritage Foundation Index.

To be sure, basic principles of political economy teach us that states lack the appropriate incentives to address economic activity that produces significant and direct harmful or beneficial impacts on more than one state.  We should not, for instance, rely upon individual states to pass upon mergers between interstate railroads or set the rates for interstate carriage of goods.  See Northern Securities Co. v. United States, 193 U.S. 197 (1904) (holding that merger to monopoly between interstate railroads violated the Sherman Act regardless of the transaction's legality under state law); Wabash, St. Louis and Pacific Railway Co. v. Illinois, 118 U.S. 557 (1886) (voiding one state's attempt to regulate interstate railroad rates).  However, as the examples discussed in the previous paragraph demonstrate, much national legislation greatly exceeds this justification, regulating private conduct that produces few if any interstate spillovers or subsidizing purely local spending.    (For instance, it's not clear how low market wages in, say, Virginia produce harmful "spillovers" into other states.)   Unfortunately, the Supreme Court has often upheld such legislation, giving undue deference to the political branches' determination that the regulated conduct has significant impact negative impact in more than one state.  Until the national government confines its legislation to those activities beyond the regulatory competence of individual states, competitive federalism will not realize its potential to promote the economic freedom of the nation's citizens.     

How Michigan Abetted Labor Cartels and Hastened Detroit's Downfall

Paved the Way for Detroit's Demise

Trying to Turn Things Around

In 1940, Detroit was the nation's fourth largest city.   By 1950, it had the highest per capita income of any major U.S. city.  With a current population of 701,000, the city now ranks 18th in the country, behind Charlotte, N.C. (17th),  Fort Worth, Texas (16th), Austin, Texas (14th), and Jacksonville, Florida (11th), none of which was in the top 20 until 1990 or more recently.   Last week the city sought to initiate what would be the largest municipal bankruptcy in the nation's history. 

Many pundits argue (see here and here, for instance), with some force, that Detroit's redistributive economic policies are a significant cause of the city's current economic woes and resulting inability to pay its bills.  At the same time, the State of Michigan also bears some responsibility for the city's plight.   For more than half a century, the Wolverine state encouraged the formation of labor cartels, also known as unions.  By design, such cartels exercise market power and artificially raise the price of the most important input in most enterprises, that is, human labor.  By raising the cost of doing business, in Detroit and other parts of Michigan, such cartels presumably encouraged some firms to move all or part of their operations elsewhere and deterred other firms from locating in Michigan in the first place.  It is thus no surprise that, as previously discussed on this blog, states like Michigan have stagnant or declining populations, while states such as Texas, North Carolina and Florida that discourage labor cartels are booming and attracting immigration from other states.

There was a time, of course, that states had no role in setting national labor policy.  The 1935 National Labor Relations Act ("NLRA"), also known as the Wagner Act after its chief proponent, Senator Robert F. Wagner of New York, pictured above, set uniform national labor policy.  The NLRA empowered employees to form labor cartels and prevented private enterprises from firing employees who participated.  Moreover, the NLRA did more than simply facilitate “collective bargaining.”  Instead, the Act also empowered unions and firms to negotiate so-called “union security agreements.”  As previously explained on this blog, such agreements authorized firms to force their non-union employees to pay dues to the union, with the stipulation that employees who refused would be fired.  Thus, the NLRA authorized unions to fill their coffers by taxing non-union employees, thereby further increasing the effective cost of hiring such individuals, who would of course demand higher wages to offset such compelled dues.   Presumably the prospect of  obtaining such additional dues from non-union members encouraged the formation of unions in the first place, by, for instance, reducing the cost per union member of cartel formation and subsequent "collective bargaining."

The Supreme Court upheld the NLRA in 1937, claiming that forcing firms to employ union members against their will would facilitate labor peace and thus minimize disruptions to interstate commerce.  See NLRB v. Jones and Laughlin Steel, 301 U.S. 1 (1937).    On the contrary, the number of strike days doubled between 1936 and 1937, with the automobile industry, headquartered in Detroit, experiencing more than its share of labor strife.  Moreover, and as previously explained on this blog, policies like the NLRA that artificially increased wages lengthened the Great Depression by interfering with equilibrium in labor markets and encouraging unemployment.     Responding to further such strife after World War II, Congress overwhelming enacted the Taft-Hartley Act in 1947.  As previously explained on this blog,  the Act empowered states to protect non-union employees from coercive “union security agreements” by opting to become what are colloquially known as “right to work” states.  Several states, including Texas, Florida and North Carolina, have long opted for "right to work" status, with the result that labor cartels are far less prevalent in such states than in others.

Late last year, Michigan finally became a "right to work" state, at the behest of Governor Rick Snyder, also pictured above.  Before that the state, like others in the "rust belt," declined to protect non-union employees, doubling down on the sort of pro-union policies that produced the labor strife the Taft-Hartley Act was designed to mitigate.  Indeed, Michigan once went so far as to empower public employee unions to coerce non-members to provide financial support for a union's political activities, until the Supreme Court declared this practice unconstitutional.  See Abood v. Detroit Board of Education, 431 U.S. 209 (1977). 

In the short run such pro-cartel policies made perfect sense for Michigan and many of its citizens.  During the 1940s and 1950s, the “Big Three” automakers dominated the automobile industry, with no sign of effective challenge in sight. See James M. Rubenstein, Making and Selling Cars: Innovation and Change in the U.S. Automotive Industry, 188 (2001) (reporting that the Big Three's combined market share was 94 percent in 1954, 1955 and 1959).    So long as unions negotiated for similar wage increases from each such firm, each of the Big Three could simply pass along such higher costs to consumers, the vast majority of whom were citizens of other states.  Indeed, one suspects that Detroit and surrounding suburbs derived much of their 1950s and 1960s prosperity from this combination of tight oligopoly and cartel-induced above-market wages, nearly all at the expense of citizens in other states and foreign countries.  To that extent, Detroit's vaunted prosperity during the middle of the 20th Century was in part an illusion, bought at the expense of millions of other Americans who paid excessive prices for the city's main export.  Over the long run, of course, market entry, encouraged by free trade, undermined Detroit's grip on the American auto market, so much so that General Motors could not survive without an ill-advised federal bailout and Chrysler is now a subsidiary of Fiat and thus no longer an American company, let alone a Detroit firm.  It is thus no surprise that the state still suffers an unemployment rate of 8.7 percent, significantly higher than the national average.

None of this is to say that Michigan could have maintained the complete preeminence of the Big Three by becoming a "Right to Work" state in, say, the 1950s.  Some erosion of Detroit's share of automobile production was predictable no matter what.  Still, by resisting labor cartels much sooner than it did, the state could have checked the power of some unions and prevented the emergence of others.  In this way Michigan could have made Detroit and the rest of the state more hospitable to private investment and resulting economic opportunity, countering the inevitable reduction in the Big Three's share of world-wide automobile production.  Perhaps the financial ruin of the state's largest city will encourage additional efforts to remove undue regulatory burdens and resist the imposition of new ones.   Those who hope to encourage economic growth in Michigan can start by defeating proposals to raise the state's minimum wage to a rate nearly 50 percent above the federal minimum.  Otherwise, the downfall of Detroit may prove a harbinger of the entire state's economic future. 

Happy Birthday Crandall v. Nevada

    
     Previous posts on this blog have extolled the virtues of competitive federalism. (See here, here and here, for instance.)  By diffusing the power to spend, tax and regulate among rival jurisdictions, a federal system forces states to compete among themselves to attract and retain productive citizens and business enterprises.  Like competition in a free market, such rivalry can induce states to supply an optimal mix of fiscal and regulatory policies.

    At the same time, the existence of numerous nominally-independent states does not thereby assure a well-functioning system of competitive federalism.  Instead, as this blog has previously explained, undue expansion of central political authority can interfere with competitive federalism, by distorting or removing the incentives that states possess to offer an optimal mix of fiscal and regulatory policies.  For instance, a prior post on this blog explained that federal labor laws that penalize a firm for opening a new factory in so-called "right to work" states can distort the incentives that states might other have to offer business-friendly labor policies.  Also, a more recent post explained that high federal income taxes, combined with the ability to deduct state taxes from one's federal taxable income, can allow high tax states to export the cost of even higher taxes to citizens in other states, thereby attenuating the threat that citizens subject to onerous tax and spending policies will migrate to other states and weaken the discipline of competitive federalism.

      The federal government is not the sole threat to competitive federalism, however; states themselves can adopt policies that undermine federalism.  For instance, if states refuse to recognize shareholders' decision to avail themselves of a particular state's corporate law, then competition between the states for corporate charters will not result in a "race to the top" and efficient corporate law.  Moreover, if states prevent their citizens from migrating to other states, then such states may avoid the negative consequences of adopting, say, confiscatory taxation or unduly burdensome regulation, thereby conscripting their citizens to endure suboptimal economic policies.

      Happily for the American system, the Supreme Court put an end to such conscription 145 years ago today, in Crandall v. Nevada, 73 U.S. 35 (1868).  In Crandall, the Court evaluated a Nevada statute that imposed a tax upon railroads and other modes of interstate transportation of $1 per passenger carried from Nevada to another state.  The Court unanimously invalidated the tax, holding that, in a federal system, individual states cannot discourage their citizens from exiting the state to, for instance, travel to the nation's capital or other organs of the national government.  Two concurring justices embraced a more convincing rationale, namely, that the statute in question contravened the dormant component of the Constitution's Commerce Clause, by deterring the free movement of citizens between states, for whatever purpose.  Just five years later, in the Slaughterhouse Cases, the Supreme Court reaffirmed this result, opining that the Privileges and Immunities Clause of the newly-adopted 14th Amendment protected certain rights of national citizenship, including the right of a citizen to travel from one state to another.  In so doing, the Court revived the protection for this right originally found in the Articles of Confederation, which provided that "the people of each State shall have free ingress and redress to and from any other State." 

     It should be clear that Crandall is a fundamental if underappreciated cornerstone of this nation's system of competitive federalism.  Without this cornerstone, states could effectively imprison their own citizens, foisting upon them various forms of economic and other oppression.  Markets cannot function effectively if firms or otehr market actors can force customers or suppliers to deal with them, and the "market" in which states in a federal system compete is no exception.

Let's End the Subsidy for High Tax States

Exporting Costs

Previous posts (here, here and here) on this blog have discussed the fiscal debacle also known as "California."  Despite some of the highest income tax rates in the nation, the state runs perpetual budget deficits and is piling up more debt each year.  As a result, the state's bond rating of "A" is second to last among American states and equal to that of nations such as Malaysia and Slovenia.  Moreover, this rating is far lower than that of numerous corporations who, unlike California, do not possess the power of coercive taxation.  By contrast, states such as Virginia, Indiana and Utah all maintain AAA ratings, higher even than the ratings of the United States and France, for instance. 

To be sure, some attribute California's fiscal woes to Proposition 13, which placed limits on state property taxes, a major source of revenue for localities.  However, as previously explained on this blog, despite Proposition 13, California still raises significantly more tax revenue per resident than Virginia, Utah and Indiana, for instance.  Indeed, the per resident tax gap between California and these other states is likely higher now, given California's most recent tax increase, advocated by Governor Jerry Brown (pictured above) and adopted by a referendum known as "Proposition 30," which will raise an additional $6 billion annually.

In a nation based upon competitive federalism, states are free to adopt their own fiscal policies, increasing or decreasing taxes and/or spending as they wish.  Such policies are part of the package of background rules that different states, in competition with one another, offer citizens and businesses.  For instance, a state might adopt a high tax/high spending strategy as a means of investing in infrastructure that attracts private enterprise and thus employment, hoping that industry (and employees), will view the extra infrastructure as sufficiently valuable to justify such tax rates.  Other states might adopt a low tax/modest infrastructure approach, hoping that potential firms and workers will overlook infrastructure shortcomings because they can retain a larger share of their earnings and paychecks.   Of course, taxes and spending are just one element of the regulatory package that states offer potential citizens and private enterprise.  As previously argued on this blog, so-called right to work laws and the absence of minimum wage laws can also make a state more attractive to private investment, though of course some continue to claim that, say, compelled unionization actually enhances economic welfare.  Competitive federalism allows each state polity to set its own course on these matters, with competition for citizens and investment rewarding those states that adopt the optimal mix of such policies, so long as such policies relate to matters with no external effects.

At the same time, competitive federalism does not exist in a vacuum, but itself depends upon a set a background rules that channel such competition toward efficient results.  To take but one example, longstanding Supreme Court precedent protects the right of citizens to travel between states.   See Crandall v. Nevada, 73 U.S. 35 (1868).     As a result, citizens who are not satisfied with their home state's policies can exit and move to states that offer more friendly environments.   Indeed, as previously explained on this blog, Americans have been fleeing states with high taxes and onerous regulatory environments over the past several years, moving to states like Texas, Florida, Utah, South Carolina, Nevada and Georgia, all of which have relatively low taxes and business-friendly regulatory environments.  These states impose a competitive constraint upon states that, like California, regularly increase taxes, spending and various regulatory burdens. 

Against this background, a December Op-ed in the Los Angeles Times argued for the retention of a tax loophole that distorts competition between the states.   In particular, the Op-Ed defended the ability of wealthy individuals to deduct state taxes from their income subject to federal taxation.  According to the Op-Ed, removal of the loophole would threaten the finances of states, like California, that choose high tax and high spending models of governance.  As a result, the essay concludes that Congress should reject proposals to limit the amount of state taxes that individuals can deduct.

Hopefully Congress will, in fact, threaten California's finances in this manner.   After all, as my colleague Nate Oman recently explained, the ability to deduct state taxes from one's federal taxable income allows states to externalize a portion of their costs to the rest of the nation.  Assuming a federal tax rate of 35 percent (the top rate on most Americans), increasing state taxes by $1 Billion per year will reduce federal tax receipts by $350,000,000 thereby imposing a net tax increase on individuals of only $650,000,000.   If the national government wishes to maintain the same level of spending, it must make up the difference somehow, either by increasing federal taxes by $350,000,000 on all Americans and/or borrowing and incurring even more debt.  Citizens of the tax-raising state in question will pay only a fraction of the cost of such new federal taxes or borrowing. 

The deductibility of state taxes does more than allow for the sort of externalization just described.  It also weakens the competitive constraint imposed by the ability of citizens to exit jurisdictions that adopt unjustified taxes and onerous regulatory policies.  Given Crandall v. Nevada, citizens will remain within their respective states so long as they receive private benefits from the state that exceed the private costs the state imposes upon them.  However, the deductibility of state income taxes will cause private costs to diverge downward from actual costs, with the result that citizens will sometimes remain in a state that adopts a suboptimal mix of taxes and spending.  Such citizens may even choose affirmatively to export costs to other states, as Californians did when they voted for proposition 30.    Indeed, these distorted incentives may help explain why competitive federalism has resulted in a ten-fold increase in state spending since 1950, double the rate of increase in private spending during the same period.  Like markets, governments too fail when the people who direct them face distorted incentives.

President Obama's Strange Critique of Michigan's Right to Work Law

 Wolverine Fiercely Protecting the Right to Work (Finally)

Michigan has the nation's highest rate of unionization and one of the nation's highest rates of unemployment.  Many in the state and elsewhere believe that this correlation is not accidental, that is, that the state's union-friendly environment unduly raises wages and other labor-related costs and deters business investment and resulting employment opportunities.  See George J. Stigler, The Theory of Price, 279 (4th Ed. 1987) ("The labor union is for the labor market the equivalent of the cartel for the product market.").   (See this previous post discussing some data on the question.)  Indeed, as previously discussed on this blog, Michigan and other union-friendly states are losing population to states such as Texas, Florida, Georgia, Nevada, South Carolina and Utah, as businesses and the jobs they create migrate to states with tax and regulatory environments that are more friendly to productive economic activity. 

Just yesterday the Michigan Legislature added the Wolverine state to the growing list of states known as "right to work states."   In so doing, Michigan followed the lead of Indiana, which passed similar legislation in February of this year.  To precise, the legislature banned so-called "closed shop agreements," and "agency shop agreements."  Such provisions in collective bargaining agreements require a firm's employees to join a union (closed shop agreements) or, in the alternative, to pay dues to support the union's collective bargaining activities (agency shop agreements).  As a result of such legislation, Michigan workers may now choose to work wherever they wish, free of any compulsion to support unions they oppose.  Governor Rick Snyder signed the legislation into law last evening.

Support for Michigan's right to work legislation was not unanimous, with some on the Progressive Left decrying the legislation.  Chief among the detractors was President Obama, who flew to Detroit to denounce the pending legislation earlier this week, in a speech otherwise devoted to fiscal policy.  The Huffington Post reported the President's remarks as follows:

"And by the way, what we shouldn't do -- I've just got to say this -- what we shouldn't be doing is trying to take away your rights to bargain for better wages and working conditions," he added to loud applause from the audience. "We shouldn't be doing that. The so-called 'right-to-work' laws -- they don't have to do with economics, they have everything to do with politics. What they're really talking about is giving you the right to work for less money."

President Obama's attempted and failed intervention in Michigan politics is perplexing on several levels.  For one thing, the Taft-Hartley Act, which authorizes states to ban closed shop and agency shop agreements is the Supreme Law of the Land and expresses national policy of the subject.  As previously explained on this blog, that policy encourages states to decide for themselves whether compelled support for unions will enhance growth and economic opportunity within their borders.  As President, Mr. Obama must, according to Article II of the Constitution, "take care that [Taft-Hartley] is faithfully executed."       President Obama may well believe Taft-Hartley was a bad idea.  Moreover, he is perfectly free to introduce legislation repealing Taft-Hartley if he wishes.  Absent such a repeal, however, he should embrace the legislation and respect Michigan's choice.

Moreover, the President's account of the Michigan legislation is, simply put, false.  The legislation in no way limits "rights to bargain for better wages and working conditions."  On the contrary, the legislation leaves each and every Michigan worker perfectly free to affiliate with a union and thus bargain collectively for higher wages and better conditions.  All the legislation does is prevent unions and the firms with which they bargain from compelling individuals to subsidize a union as a condition of pursuing his or her chosen vocation.

Finally, the President's claim that "right-to-work" legislation  is about "politics" and not "economics" does not withstand even cursory scrutiny.  According to economists who have studied the question, rampant unionization of American industry during the mid-late 1930s hampered economic recovery and lengthened and deepened the Great Depression.  (See here and here for previous discussions of these data.)  To put a finer point on it, federal imposition of labor cartels distorted the allocation of the nation's resources and reduced employment, as many predicted at the time.  Millions of Americans became poorer as a result.  While coercive imposition of trade unions on American business raises the wages of some workers, other workers and, ultimately society at large,  suffer. 

Update (4:50 PM, December 12):  Over at CNN, William Bennett has penned an Op-Ed praising Michigan's choice of Right-to-Work status.  In so doing, Bennett echoes some of the arguments made above.  In particular, Bennett offers an effective rebuttal of President Obama's claim that right to work laws are all about politics and not about economics.  According to Bennett:

"[C]ontrary to President Obama's thinking, right-to-work laws are directly related to economics. Right-to-work laws give employers the freedom to hire non-union workers and negotiate contracts with more than one party. For this reason, right-to-work states are more attractive to private business than non-right-to-work, and could increase private-sector wages.  For example, on CNBC's annual list of the best states for business, nine of the top 10 states are right-to-work states. It's no coincidence that foreign automobile manufacturers often build new plants in right-to-work states like Tennessee and Alabama, rather than Detroit -- the "Motor City."  Perhaps Michigan's new right-to-work status will unlock employers from burdensome union contracts and attract new private enterprise to Detroit, which is predicted to go bankrupt by the end of this year. After all, Gov. Scott Walker's union reforms in neighboring Wisconsin helped eliminate the state's budget shortfall."

 

California Exercising Freedom to Fail

No Longer a Land Worth Finding

In a recent Op-Ed in the Wall Street Journal, former Florida Governor Jeb Bush reminded us that true freedom includes the freedom to fail.  As he put it:

"We have to make it easier for people to do the things that allow them to rise. We have to let them compete. We need to let people fight for business. We need to let people take risks. We need to let people fail. We need to let people suffer the consequences of bad decisions. And we need to let people enjoy the fruits of good decisions, even good luck. That is what economic freedom looks like. Freedom to succeed as well as to fail, freedom to do something or nothing."

Bush, of course, was referring to the economic freedom of individuals and the businesses they own and create to compete in a free market.  But similar considerations apply to states in a system premised upon competitive federalism.   In such a system, states are free to make fiscal and regulatory decisions, so long as those decisions do not interfere with the authority of other states.  (For instance, Virginia is free to raise taxes on its own citizens; it may not raise taxes on citizens of New York.)  This freedom also empowers states to compete with one another for citizens and investment capital.  Thus, a state that offers an attractive mix of fiscal policy and regulation will presumably attract individuals and investment capital, while those that offer unattractive fiscal and regulatory policies will see individuals and capital flee.

Just as individual economic freedom must include the freedom to fail, so too must competitive federalism include the freedom of states to fail if they embrace detrimental fiscal and regulatory policies.  Like individuals, states should suffer the consequences of their actions. 

California seems to be exercising this freedom to fail with a vengeance.   According to Bloomberg News, California Governor Jerry Brown has proposed yet another significant increase in state spending, at a time when the State is already running a large deficit and holds an "A-" credit rating from Standard and Poors.  This rating is significantly lower than that held by Virginia (AAA), Indiana (AAA), the United States of America, (AA+),   France (AA+), Japan (AA-), and Chile (A+), to take but a few examples.   Sovereigns sharing California's credit rating include Botswana, Malaysia, and Malta.   (Go here for a comprehensive list of nations and their credit ratings.)  Indeed, according to this source, California is tied for last among American states with Lousiana when it comes to S & P's rating of its debt.  Brown would finance part of this new spending with yet another increase in state income taxes, raising the rate on individuals earning over $250,000 per year a full percentage point, to 10.3 percent. 

California already has the third highest income tax rates in the nation, behind Hawaii and Oregon, both of which stand at 11 percent.  Its sales taxes are also among the highest in the nation.  At the same time, the state imposes burdensome regulations on business that inhibit job creation and economic opportunity.  It's little wonder, then, that California currently suffers from an unemployment rate over 11 percent, compared to a national average of 8.5 percent.  Nor is it surprising that the state has recently seen a net outflow of citizens, as more and more Californians leave the Golden State for states like Texas.  While those who found California cried out "Eureka" ("I have found it"), more and more are crying "let's get out of here."  Hopefully Americans will resist calls by some to force citizens in more responsible states to bail California out.

Higher Minimum Wages Won't Stimulate the Economy

Ptolomey:  Thought Sun Revolved Around the Earth

CNN Money: Thinks Higher Minimum Wages Increase GDP

A recent story on CNN Money reports that several states are about to raise their minimum wages.  The story repeats as "news" (and not opinion) the oft-made claim that raising the minimum wage will stimulate the economy and thus increase Gross Domestic Product.

According to the story:

"What's more, the increases could be a mini-boost for the economy.  The expected rise in consumer spending as a result of the wage increases would add $366 million to the nation's gross domestic product and lead to the creation of more than 3,000 full-time jobs."

and 

"Increasing minimum wage is a key form of local stimulus," said Paul Sonn, legal co-director at NELP. "It helps front-line workers whose wages have been stagnant and falling by putting more money into the pockets of low income families who then spend the money at local businesses."

Both economic theory and empirical evidence have long falsified such claims.  Take theory first.  Yes, raising wages by coercive fiat will increase the income of some workers.  At the same time, such increases will reduce the income of other workers to zero, by inducing firms to eliminate their jobs and also to hire fewer workers in the future.  Wages, after all, are the price of a particular input --- labor --- and increasing the price of one input, whether that input is steel, labor or electricity, will cause firms to substitute to other inputs and thus reduce their purchases of the now more expensive input.  Moreover, to the extent that firms continue to employ some of the more expensive input, their costs will rise, thereby reducing their output, further reducing their use of the input in question.  Thus, raising the minimum wage above market levels will cause firms to employ less labor, by reducing their output and using less labor per unit of remaining output than before the increase.

Now consider the empirics.  As a nation, we have already experimented with using artificially-inflated wages  as a tool for increasing GDP and thus stabilizing the macroeconomy.   As previously explained on this blog (go here and here), legislation passed during the New Deal artificially raised wages, purportedly as a method of enhancing the "purchasing power" of employees and thus stimulating the macroeconomy.  The legislation did not, however, have its intended effect.  Instead, artificially high wages choked off economic recovery by increasing firms' costs, reducing their output and fostering unemployment, as workers expended resources searching for those scarce jobs that remained.  Indeed, according to one study, reported here, New Deal policies that artificially raised wages deepened the Depression and prolonged it by seven years.

The story also helps illustrate the downside of over-reaching Federal regulation.   As the story notes, there is also a federal minimum wage, currently equal to $7.25 per hour.  (There is an exception for the first 90 days of employment for juveniles --- $4.25 per hour --- so long as employment of the juvenile does not displace an adult worker.)    That wage edict applies to any employee working in interstate commerce or working for a firm, no matter how local, with $500,000 in gross sales.   Thus, federal law creates a wage floor, even in those states (and there are five) with no minimum wage whatsoever or those with minimum wages lower than that set by the national government.   As a result, states that wish to compete with other states for labor and capital by eliminating their minimum wages or, for instance, adopting differential wages for youth greater than 90 days, will find such a policy thwarted by the "one-size fits all" federal floor on wages, a floor that applies equally in Manhattan, New York and Moscow, Idaho.  Competitive federalism suffers when the national government asserts a regulatory monopoly over matters properly left to the states.

Competitive Federalism Punishing California

Economic Dynamo

Not So Much

A recent Op-ed by George Will adduces additional evidence vindicating a fundamental choice by those who framed and ratified the Constitution, namely, the decision to limit the power of the National Government and thus to divide regulatory authority between the National Government and the States.  According to James Madison's Federalist 51, this division of power between the central and various state governments, along with the separation of powers between judicial, executive and legislative branches at the national level, ensures that a "double security arises for the rights of the people."  Madison apparently recognized that competition between states for productive citizens and capital would deter a state from infringing on the rights of its citizens who, if dissatisfied with their state's laws, could move to other states.  Thus arose a system of competitive federalism, whereby each state can attempt to attract labor and capital by offering regulatory regimes and thus institutional frameworks most conducive to free market wealth creation and job creation. 

California has not been doing well in this competitive struggle as of late.  Once considered a land of opportunity, the state experienced a net outflow of citizens in 2008.  The state's unemployment rate currently stands at over 11 percent, one of the highest in the nation.  Will's Op-ed calls attention to part of California's problem, namely, a plethora of unduly burdensome regulations that inhibit the creation and expansion of businesses and thus job creation.  Will focuses on the plight of CKE, Inc., which owns the Hardees and Carl's Jr. fast food chains.  Each such restaurant creates 25 jobs, Will reports.  According to Will, these and other "California restaurants are governed by 57 categories of regulations."  Moreover, Will goes on to explain that:

"CKE has about 720 California restaurants, in which 84 percent of the managers are minorities and 67 percent are women. CKE has, however, all but stopped building restaurants in this state because approvals and permits for establishing them can take up to two years, compared to as little as six weeks in Texas, and the cost to build one is $100,000 more than in Texas, where CKE is planning to open 300 new restaurants this decade."

Simply put, California has apparently made it all but impossible to open a new restaurant, while Texas facilitates the creation of these businesses and the jobs they bring.  That is to say, California stands in the way of voluntary arrangements that improve the welfare of consumers who would voluntarily patronize new restaurants and the employees who would work there.  If California were to replicate similar regulatory strategies with respect to other industries, many California residents would have little choice but to move elsewhere to locate employment, and residents of other states would decline to immigrate to California in the first place.  It's not much of a stretch to surmise that a portion of California's high unemployment rate results from these sorts of regulations.

Of course, some regulation is critical to a well-functioning free market and the welfare of a polity's citizens.   No state would or should win the struggle for labor and capital contemplated by our constitutional design  by embracing the state of nature as its regulatory philosophy.  Even the most ardent libertarians properly endorse "police power" regulation that implements the ancient principle "Sic utere tuo ut alienum non laedas," viz. "use what is yours so as not to injure another's."  States that leave their citizens at the mercy of predatory commercial tactics, such as the sale of impure food or fraud will lose citizens and investment just as surely as those that impose unduly burdensome regulations that prevent market entry or otherwise interfere with bona fide economic liberty.  There is, however, no indication that, say, delaying market entry by two years is necessary to protect the public from such predatory behavior.  Instead, such permit requirements function as a barrier to entry, plain and simple, protecting incumbent firms and limiting consumer choice.

Unfortunately, the system of competitive federalism that is punishing California and rewarding Texas is not self-enforcing but is instead constantly under attack.  As federal regulatory power expands, the space for competition between states contracts, rendering such regulatory competition a less effective tool for enhancing the welfare of citizens.  If, say, the central government imposes one model of "health insurance reform," on every citizen in the nation, then states cannot compete with each other to provide reforms that meet the needs of their own citizens.  Moreover, if the national solution is suboptimal, citizens can only avoid the resulting reform by emigrating to another country, hardly a plausible option for most people.  Unfortunately, proponents of the most recent "health care reform," overlooked this downside of  a "one-sized fits all" centralized plan.

More Evidence that Compelled Support for Unions Thwarts Job Creation

Not so friendly to job creation and wages

Mr. Republican. Fought Trade Union Excesses and Bolstered Competitive Federalism

A recent study by the National Institute for Labor Research concludes that Right-to-Work states experience higher employment growth, enhanced economic growth and enhanced wages compared to those states that allow unionized firms to require all their employees to pay union dues, even if the employee declines to join a union. As previously explained on this blog, the Taft-Hartley Act of 1947 empowers states to become Right-to-Work states, thereby opting out of provisions in the 1935 National Labor Relations Act that originally allowed firms to compel employees, under threat of termination, to pay such dues against their wishes. Thus, the Act helps facilitate competitive federalism, whereby states offer different menus of background regulatory and tax policy in their efforts to woo industry that is free to locate in any of 50 states and numerous foreign countries. Co-authored by Ohio Senator Robert Taft (also known as "Mr. Republican"), pictured above, the statute followed a Republican landslide in 1948. Strangely, many of the Law's opponents referred to it as the "slave labor law," a bizarre appellation given the Act's effort to enhance the autonomy of individual employees and protect all employees against union excesses.   Maybe "Johnny Friendly," the fictional leader of a corrupt union, portrayed in "On the Waterfront" by Lee Cobb (pictured above) would have characterized the law in this way!

In particular, the study finds that:

1) Between 2000 and 2010, private sector employmnt in Right-to-Work states rose .3 percent, while it fell by over 5 percent in other states.

2) During the same period, real manufacturing GDP grew over 18 percent in Right-to-Work states but just over 8 percent in other states.

3) During the same period, the compensation of employees in the private sector rose 11.3 percent in Right-to-Work states, while compensation of employees in other states rose only 0.7 percent.

Of course, the study does not by itself establish that a state's embrace of Right-to-Work status will thereby, other things being equal, enhance economic growth and job creation. For one thing, right to work status may correlate with other variables that encourage economic growth, such as a political culture within a state hostile to over-regulation and burdensome taxation. (Indeed, the study finds that the average "tax freedom day" in Right-to-Work states is April 6, compared to April 14 in other states.) If so, then superior economic growth may be the result of an overall regulatory and tax environment conducive to economic growth, of which Right-to-Work status is merely one element. Moreover, large economic events unrelated to labor regulation and trade unionism that affect a few states who happen to fall into one category or the other could produce employment effects that coincidentally correlate with Right-to-Work status. The results are nonetheless interesting and reflect the sort of empirical work necessary to test competing hypotheses about the impact of Right-to-Work status.