Prologue

[S]cience needs much more in the way of prior hypothesis and theory than most [researchers are] willing to admit; there is no way to boil down a mass of raw data into a theory unless we are prepared to take a leap of faith by suggesting (and then testing) some generative mechanism for it.

—Philip Ball, Curiosity

Prior to diving into the substance of this book, we wish to recognize the enormous contribution to state economics by Dartmouth Professor Colin Campbell. Professor Campbell, now in his 90s, pioneered the analysis of the consequences of different state economic policies and the resulting differences in actual performance metrics. His paper “A Comparative Study of the Fiscal Systems of New Hampshire and Vermont, 1940–1974,”1 coauthored with his wife Rosemary Campbell, went from policy choices all the way to the provision of public services. For many, many years, both the content of his work and its conclusions were seemingly lost to state policy makers. We intend to rectify this serious oversight.

We also wish to point out our frequent borrowing of context and quotes from the wonderful book, Curiosity, by Philip Ball.2 Nearly every quote at the beginning of each chapter in this book has been drawn from Curiosity. If we fail to cite Ball at every instance where appropriate, we beg him please to forgive us. His work is incredible. And, last, we discovered an absolutely superb analysis by Dr. Thomas R. Dye3 of the nine states that introduced the state income tax, starting with Michigan and Nebraska in 1967, after having already written our Chapter 1. We started our analysis with West Virginia (1961) followed by Indiana (1963), which were not included by Dye. Dye’s conclusions and ours were, as you would suspect, essentially the same.

When it comes to cross-border movements, the study of international economics usually takes as a given that both labor and capital are relatively immobile. By the very definition, international cross-border movements of land don’t happen. But, as we all know from reading European and world history, even land changes hands from time to time. There’s always the story of the man whose farm was part of a land repatriation from Russia to Poland, reversing the Russian annexation that had occurred after World War II. The farmer was quoted as saying, “Thank God, we won’t have to suffer those long Russian winters anymore!”

Within the confines of the specific assumptions, international economics develops and expands the role that incentives have on trade, growth, production, and consumption in both static and dynamic terms, as well as how government policies and natural endowments affect the various economies of the world. International economics has been an anchor tenant for government policies from time immemorial. Trade in goods and services appears to have been an enormously powerful force for the evolution of modern economies from the very first time modern humans appeared on planet Earth. And trade still is an enormously powerful force that attracts a disproportionate amount of attention from governments large and small, near and far.

The United States was built on a clear understanding of the benefits of the free flow of goods, services, and people among the states, of Ricardo’s “gains from trade” and Adam Smith’s notion of specialization that leads to “comparative advantage.” The ideal of total and complete free trade was written into our very foundation papers. The Commerce Clause of the U.S. Constitution has been interpreted to prohibit excessive impediments to the free trade in goods, services, and even labor among the states of the United States. And under the Privileges and Immunities Clause, people are entitled to migrate and resettle into any state without limitation; they need only abide by the laws and regulations of their new home, just as longtime residents do.4

But total uninhibited free trade in goods, services, and labor, as exists among the 50 states of the United States, brings us to an extreme variant of international economics—a corner solution, so to speak. Now the only truly immobile factor of production is land itself. Some forms of fixed capital too may be immobile for the period of their useful lives, but, in due course, even buildings can in a sense slip across state borders, as is witnessed by the decline and fall of Detroit, Michigan, and the expansion and rise of Dallas, Texas. It may take time, but it does happen. Recently we concluded a study on the impact that California’s aggressive tax and regulatory policies have had on the extensive infrastructure that Chevron has invested and operates in California.5 The bottom line of that study was that once the capital is in place and impossible to disassemble and move, the capital itself is helpless to oppose complete expropriation by state government, whether implemented explicitly or implicitly through taxation and regulation.

The economics of the various states of the United States are unique. And the measures of their relative successes and failures are equally unique. In international economics, where populations and labor are essentially immobile, arbitrage across national boundaries occurs through trade in goods and services and through changes in the terms of trade (inflation-adjusted exchange rates). In the case of international economics where populations are immobile, measures of success or failure include income per capita, unemployment, and other measures of the standard of living. When labor is freely and, relatively speaking, costlessly mobile across state boundaries, however, as is the case in the United States, measures such as income per capita or unemployment rates no longer pertain. Any measure of prosperity where the number of people is in the denominator, such as income per capita or the unemployment rate, makes little or no sense when people can move to where income or jobs are located, or the jobs and income can move to where the people are located.

In the case of the 50 U.S. states, increases in income per capita, for example, can occur when a state attracts income over its borders faster than it attracts people or when a state repels people faster than it repels income. While income per capita may increase in both cases, the welfare implications are diametrically opposed. Measures of movement of the factors of production, income, goods, and people are the appropriate metrics for measuring welfare when it comes to each of the 50 states of the United States, not income per capita or unemployment rates.6 We revisit this principle at several points in the book simply because the point is essential to understanding state economics. Do not use measures standardized by population to evaluate the efficacy of state and local economic policies.

State and local governments have almost unlimited powers to tax, spend, regulate, and oversee as long as their voters choose to permit them to do so and as long as the Commerce Clause of the Constitution and the Privileges and Immunities Clause of the Constitution are not violated. And, with the powerful presence of those clauses, people, goods, and services also have their constitutionally given rights to locate when and where they wish.

Given the trivial differences in language as spoken in the various states, the existence of a common currency, and the fairly similar social customs of the various state populations, as well as the contiguous nature of all save two of our states, in-migration and out-migration are as painless and costless as possible. The economic integration of the 50 states truly is as close to a perfect economic union as can be conceived. As such, the central theme of this book is simply to answer the following and related questions: Do state and local government economic policies redistribute income, or do they redistribute people?

One of the most immoral acts any government can perpetrate on its citizenry is to enact policies that have the effect of destroying the production base from whence all benefits flow.

The chapters of this book are all intended to provide different perspectives on the role played by state and local governments in creating and preserving state prosperity and well-being. Like different vantage points when viewing a sculpture, no one perspective contains the whole truth, but when taken all together, these chapters will comprise a complete rendition of how economic policies impact a state’s economy. The mark of genuine science is that its explanations remove the mysteries of policies. Clarity and common sense, supported by direct evidence, are allies of a democratic electorate. Arcane descriptions and excessive complications only dress things up to misdirect the electorate into transferring control to an unworthy elite.

If you look carefully at the differences among the states with respect to taxes, school choice, right-to-work laws, minimum wage, and cultural factors as well, not only does it appear that the blue states are getting bluer, but also that the red states are getting redder. As interesting as the increasing polarization of the states is the drift in the overall spectrum toward red states.

Who could ever have imagined a day when Michigan, the home of the United Auto Workers union and the Teamsters, would become a right-to-work state? And while Wisconsin may not be the headquarters of the auto industry and its unions, it has long been regarded as the political epicenter of the progressive labor...