Arthur Laffer, known for the “Laffer Curve,” and Stephen Moore, a Cato Institute scholar, published a study last year, “Rich States, Poor States,” that asks exactly the kinds of questions we explore here on the Bacon’s Rebellion blog. What are the public policy variables that affect states’ long-term economic growth — and how does Virginia fare?
I have only now come across this study. Although its data is a year older than we’d like, “Rich States, Poor States,” covers a recent 10-year period (1997 to 2006), so its conclusions are still informative for purposes of long-term analysis.
Laffer and Moore pick three criteria for tracking a state’s economic performance: per capita income, net in-migration, and job creation. We have oft-touted the virtues of “per capita income” as a metric for economic well-being. The usefulness of “job creation” as a measure of economic vitality needs no elaboration.
I find the net in-migration number the most interesting because the data is less widely reported and it’s a forward-looking indicator. Domestic migration is the best single indicator there is of the flow of human capital. For the most part, domestic migrants are better educated and earn more money than those who stay behind. They enrich the human capital of the regions and states where they end up. If you’re trying to build up your creative class, domestic in-migration is a good measure of how you’re doing.
Anyway, according to Laffer and Moore, between the 1Q of 1997 and the 1Q of 2006, Virginia recorded:
- per capita income growth of 56.4 percent (7th best in the country)
- job growth of 18.8 percent (12th best in the country), and
- net domestic in-migration of 162,653 (12th best in the country)
Add it all up, and Virginia had the 4th strongest economic performance nationally over that period. (Arizona was 3rd, Florida was 2nd, and Texas was 1st.)
What contributed to that strong performance? Laffer and Moore focus mainly on state tax and regulatory policies. They don’t provide a composite score for each state, but here’s how Virginia ranks for individual variables (with state rank in parenthesis):
Top marginal personal income tax rate: 5.75%…. (23)
Top marginal income tax rate: 6.0%…. (15)
Personal income tax progressivity (change in tax liability per $1,000 in income): $6.42…. (22)
Property tax burden (per $1,000 of personal income): $29.85…. (20)
Sales tax burden (per $1,000 of personal income): $15.00…. (9)
Remaining tax burden (per $1,000 of personal income): $21.35…. (33)
Estate/inheritance tax: No…. (1, tie)
Recent legislated tax changes (2005 and 2006, per $1,000 of personal income): -0.37…. (14)
Debt service as % of total tax revenue: 7.8%…. (17)
Public employees per 10,000 population (FTE): 563.4… (28)
State liability system survey (tort litigation treatment, judicial impartiality): 66.9…. (12)
State minimum wage (federal floor is $5.85): $5.85…. (1, tie)
Average workers comp costs (per $100 of payrol): $1.52…. (3)
Right to work state? Yes…. (1, tied)
Number of tax expenditure limits: least/worst…. (23, tied)
Education freedom index score (vouchers, ease of private/home schooling): 1.47…. (42)
My main quibble with the Laffer/Moore analysis is that it chooses states as the unit of analysis rather than metropolitan regions. Breaking down the performance data by region would permit a finer-grained analysis. Here in Virginia, there is enormous variability between the performance of Charlottesville or Northern Virginia and, say, Danville.
While tax/regulatory policy clearly is a major determinant, it is not the only one. Human capital — and the capacity for upgrading human capital, i.e. education and training — is another one. The existence of strong industry clusters is another. Human settlement patterns are yet another. Still, while the Laffer/Moore analysis doesn’t explain everything, it explains a lot.