2014 Best & Worst States for Business: Texas Rides High Again

The state is justly famed for its natural beauty, exceptional universities and high-tech clusters, but consider that one of its best-known tech firms, Palo Alto-based Tesla, is looking elsewhere to build its $5 billion “gigafactory” battery plant. California’s real estate is simply too expensive; and because its taxes are higher, general costs of living are higher. As a result, wages have to be higher, as well. The state is also known for policing companies more heavily than just about any other state—and sometimes more than the federal government.

California likes to say that Texas can have all those low-wage jobs,” says Richard Fisher, CEO of the Dallas Federal Reserve, “but from 2000 to 2012, job growth percentage change by wage quartile was better in Texas.” Texas won another bragging right last February when SiteSelectionmagazine reported that it surpassed California in global technology exports in 2012.

If there is a pattern in the survey, it is that states have diverged in recent years in their experimentation with economic freedom. Those lightening the burden of government have generally improved economic growth over those insisting that state-directed spending and governance is best. Apart from their geographic locations, many states are similar; and thus, they offer a natural experiment in economic policy.

John Hood, president of the John Locke Foundation, a state policy think tank in North Carolina, points to numerous academic research studies that compare such policies over time. Writing in Reason, he cites 112 studies that examined high, overall state and local tax burdens and found that 72 of them—64 percent—showed a negative association with economic performance. Some analysts counter that isolating variables, such as high taxes, misses the point. States are better served, they argue, when they increase tax burdens to “invest” in education, infrastructure or other government programs.

Hood counters that this may seem plausible in theory but almost never works out this way. Of 43 studies testing the relationship between total state and local spending and economic growth, he says only five concluded it was positive.

Sixteen found a negative correlation and the rest were inconclusive. The problem is that states don’t invest effectively. States like Texas, Florida, Tennessee, North Carolina and South Carolina, Indiana and others have figured out that economic freedom works. Economists who create the Fraser Institute’s Economic Freedom of North America index examined state economic growth from 1981 to 2009. They found that if a state adopts fiscal and regulatory policies sufficient to improve its  economic  freedom  score  by  one  point,  it  can  expect unemployment to drop by 1.3 percentage points and labor-force participation to rise by 1.9 percentage points.

The question is why have states nearer the bottom of the ranking not acted on this insight? The answer is likely complicated, but it has much to do with power and control. There will always be leaders who have convinced themselves that they act from superior knowledge and wisdom. And such figures have their adherents. However, business leaders are not bound to indulge such delusions and neither do citizens who continue to vote with their feet and abandon such states for friendlier places.

2014 Best & Worst States for Business Links

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