John Hood: Lower taxes, less regulation lead to economic growth

1 Comment | Leave a Comment

RALEIGH — Are you ready for some good news?

For 20 years, the Wall Street Journal and the Washington-based Heritage Foundation have produced international indexes of economic freedom. Countries that adopt fiscal restraint and free trade, protect the rights of contract and property ownership, and avoid excessive taxes or regulations earn high scores on the index. Countries where governments abuse their power earn low scores.

According to the latest study, the average amount of economic freedom is higher today than at any time in the past two decades. Hundreds of millions of people live in countries in Latin America, Eastern Europe, Africa, and Asia that have liberalized their economies over the past 20 years. That’s one reason why global poverty has experienced one of the largest declines in human history during the period.

Not every country has gotten freer, of course. Some countries such as North Korea and Iran have remained repressed during the entire period. Others that previously had high or improving scores on the index are now experiencing backslides. The bad news is that the United States is one of them. Once a reliable leader of the pack, we have now fallen out of the top 10 countries in economic freedom, thanks to fiscal recklessness, recent increases in tax and regulatory burdens, and other encroachments on free enterprise.

While Washington (maybe) gets its act together, state and local governments will have to take the lead in helping to reverse the trend. As it happens, there are economic freedom indexes for states as well as for countries. North Carolina ranks in the middle of the pack according to some of the indexes, and a bit better than that on others. Recent decisions in Raleigh to reform and reduce taxes while reining in counterproductive regulation will help. In the coming years, lawmakers need to protect these gains in economic freedom and build on them.

Why? Because even at the state level, there is compelling evidence linking economic freedom to measures of economic progress such as job creation, business starts, and income growth.

Last year, I conducted a literature survey of all recent studies published in academic or professional journals that examined the relationship between government policies and state economic performance. From 1992 to 2013, there were 31 studies of economic freedom indexes. In 24 of them (77 percent), higher economic-freedom scores were associated with higher economic performance after adjusting for other factors. In the remaining seven studies, there was no statistically significant relationship. Not a single study found that higher economic freedom — which primarily means lower taxes, spending, and regulatory burdens — was statistically associated with lower economic growth.

A 2012 paper in the International Journal of Economics and Finance, for example, found that states with higher economic freedom tend to attract higher levels of investment from foreign firms, which then leads to more economic growth. A 2007 study in the Southern Economic Journal found that states attract another form of valuable capital, people, to the extent they embrace economic freedom.

And a 2013 paper in Contemporary Economic Policy found that higher state rankings on the Fraser Institute’s Economic Freedom of North America index was associated with lower unemployment and higher labor-force participation.

The argument here is not for anarchism. When governments perform their core services efficiently and effectively, economies benefit. Moreover, America still outranks most countries in the world in economic freedom, while North Carolina is hardly California when it comes to limitations on free enterprise. But by making wise fiscal and regulatory decisions, we can expand both freedom and prosperity.

Or so say two decades of social science and practical experience.


Uh, Mr. Hood, you said...

"Economic Freedom" 12 times in your article. I'd say economic freedom is working just fine for North Dakota railroads that transport heavy crude, sometimes successfully. Economic freedom is also working just fine in Pennsylvania gas well country where drinking water burns and earthquakes happen for no apparent reason other than economic freedom. Economic freedom is working just fine in the gulf of mexico where oil still slimes the coast and continues to depress the entire regional economy from BP's recent big economic freedom adventure. Economic freedom is working really fine in Oklahoma where 38 earthquakes are reported in the past month, also in gas well country. And look how well economic freedom is working in West Virginia where 300,000 people graciously stopped drinking water to accommodate the economic freedom of their local economically free chemical storage facility. Since it's clear that "economic freedom" is your euphemism for deregulation and fewer regulations, I have to question your position. Regulations usually don't spring out of thin air. They come into being because of tragedies. We like to think that regulations are preventive, and written before tragedy. But the truth is that industry lobbies prevent reasonable regulation at the front end, in time to prevent tragedies, so regulation after tragedy is the only option. Much like what is about to happen with fracking right here, where our delightful legislature doesn't care what the frackers are pumping into our drinking water as long the state earns a bit of revenue. For instance, businesses generally haven't chained their fire doors closed from the inside since the Triangle Shirt-Waist fire in New York City. Except for right here in North Carolina that gives the horrific example of the Hamlet chicken plant fire in 1991 killed 25 and injured 55 BEHIND LOCKED FIRE DOORS. Those folks didn't even have the choice between jumping or burning. Now THAT's ECONOMIC FREEDOM AT WORK. So, please, Mr. Hood, speak plainly and save your right wing snake oil. Don't you think it's finally time to unchain the fire doors? Your life, and my life, just might depend on controlling "economic freedom." So says 229 years of American history. Respectfully Submitted, Force 12

Add comment

Login or register to post comments