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The Blue State Model Has Failed

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The defining economic truth of the last decade has been the want of sustained growth. Progressives and classical liberals agree that economic growth is a good thing, but they differ profoundly in how to best to achieve it. The only way to spur growth is to undo the structural barriers to gains from trade by pruning the law books of taxes and regulations that block these transactions in the futile effort to achieve redistribution. The combination of lower administrative costs, greater legal certainty, and improved private returns fueled American growth in earlier times, and will revive it today.

Evidently, this message has not registered with progressive thinkers Jacob Hacker and Paul Pierson, professors at Yale and Berkeley respectively. In their New York Times column, “The Path to Prosperity Is Blue,” they criticize the Republican obsession to “cut and extract.” They deride that position for claiming, “Cut taxes and business regulations, including pesky restrictions on the extraction of natural resources, and the economy will boom.”

But this caricature displays confusion about many basic economic and political matters. The first is the appropriate role of regulation. Regulating extractive industries is always a complicated story, given the need to control against the pollution that can flow from the extraction and use of any raw materials. But the dangers in question are not confined only to coal and natural gas—they also include risks from such “clean” sources like solar and wind energy whose supposedly pollution-free technology can still incinerate birds or hack them to bits. The correct recipe for growth in extraction industries starts with increasing total useful output per unit of pollution, which is best achieved by combining effective controls on the demand side with controls directed toward limiting pollution and kindred ills on the supply side. “Keep it in the ground” does neither.

Hacker and Pierson are equally misguided on taxation. They make the argument that blue states dominate in all key areas, such as median household income, life expectancy and birth, high taxation of the top one percent, patent rates, and bachelor degrees. They attribute this to the amount of money that these states are prepared to spend on education in order to provide the human capital needed for general expansion. Sure, no one can quibble with the need for human capital formation. But that is a good reason to attack the public school monopoly by encouraging charter schools that can supply a better education at a fraction of the cost.  Hacker and Pierson, though, believe that any such declines in expenditures should be treated with suspicion, for they care more about how much money is spent than about how well it is spent. The success or failure of any education system, public or private, depends on injecting competition into it.

Hacker and Pierson make the methodological mistake of dwelling on static figures, like overall education and wealth levels, instead of trying to identify measures of economic growth. In particular, they take issue with Stephen Moore, one of Donald Trump’s economic advisors, for looking to measures such as “job growth or a state economic size” as indices of economic health. Their triumphant rebuttal of Moore’s approach is to claim that he should be an unabashed devotee of India because its huge economy creates millions of jobs each year.

Yet absolute size is exactly what growth measures should ignore. A better measure of a state’s prosperity is population changes—or how people vote with their feet. Do they move into a state or do they move away from it? This is the best objective indicator of the relative health of rival states.  By Hacker and Pierson’s logic, the advantages that the blue states have in terms of education, for example, should lure people into them. But as it turns out, the migration is in the opposite direction—to states like Texas, which have friendly business climates, and away from progressive bastions like New York. Just compare the changes inelectoral votes in the two states to get a sense of the relative migration: In 1950, New York had 45 and Texas had 24, while in 2010, New York had 29 and Texas had 38.

Countless anecdotes illustrate the basic difficulty with the blue-growth thesis. Take Vermont, known not only for Bernie Sanders, but also for its string of ill-conceivable left-wing initiatives. Vermont has had virtually no growth in population during the last five years. But as journalist Geoffrey Norman has pointed out, the state’s high income and educational level did not insulate it from the fiscal reversals of its unaffordable single-payer program for medical services, which the Democrats are now flirting with at the national level in the wake of the breakdown in the health care exchanges under the Affordable Care Act. When one sees, as he reports, more “for sale” signs than political signs, it is a tacit admission that many people think that exit is the best option for a state system beyond repair. The very rich, especially rich retirees, may stay in the state, but ordinary people seeking job and business opportunities will leave in increasing numbers. Ironically, their exodus could increase average income within blue states and reduce it elsewhere—and the Hacker/Pierson measures ignore this effect.

A similar tale of woe applies to blue Massachusetts, which has benefited mightily from the technology hub located around the great universities in the Boston area. But even in Massachusetts, you get what you pay for, and the state is now in the business of purchasing its version of gender equity at the expense of wealth. Last week, Massachusetts unanimously passed yet another variation of pay-equity statutes, signed by its Republican governor Charlie Baker. The legislation forbids employers from asking prospective hires their salary history while still allowing workers to freely talk about wages and other compensation among themselves.

Under standard economic models, this statute is a business absurdity, for it is widely agreed that imperfect information is an impediment to gains from trade. The lack of ability to get key information will have the unfortunate effect of slowing down job mobility for all workers, and it will lead to a new cycle of senseless regulations that will have to take into account the job applicant who wants to offer his or her salary history to the employer to substantiate a request for a higher wage.

So why do this? The explanation offered by Karyn Polito, Massachusetts’ Lieutenant Governor, is that the measure will help overcome the gender gap in employment under which women earn 82 percent of men in the state and 79 percent of men nationwide. But it is ridiculous for Polito or anyone else to defend this law as a pro-growth measure, let alone one that could grow the economy by the size of the supposed wage gap, or $2.1 trillion annually. At best the increased wages are a transfer payment that has no impact on growth. But the reality is likely to prove far worse. Employers respond to incentives. Some will reconfigure their workforces; others will contract their operations; and others will just shut down. The added administrative costs are pure dead-weight losses. Never judge a law by its intended consequences.

The rich irony, of course, is that the defenders of the Massachusetts law offer no coherent theory to explain why or how mandated ignorance can promote the stated goal of workplace parity. Just after the legislation was enacted, the Wall Street Journal ran yet another story about how sophisticated personnel managers at successful businesses like Google were “overhauling” their pay practices to eliminate any perceived gender discrimination in the workplace. And why not? The firm that does not adequately pay for services will lose its best workers to competitors that do. So Google has thrown a wrinkle into the analysis when it says, perhaps for strategic reasons, that it asks about salary history only as a way to figure out the salaries competitors pay. But suppose the company uses it for other purposes. Why assume that that hurts women? The net effect of the Massachusetts statute is to make it harder for these firms to set accurate salaries and benefits for employees.

This same story plays out over and over again. The regulation of labor markets is regarded as the path to growth in rich blue states that are determined to undermine their own competitive advantage. The harm done by excessive regulation, taxes, and public expenditures plays itself out time and again in liberal bastions like Massachusetts, Vermont, California, Connecticut, Illinois, and New York. But as conventional progressive wisdom spreads to Washington, its implications will be dire: Jobs will disappear and wages will fall. One common response is that all a business needs to survive is a level playing field. Wrong. If that level field has the wrong institutional arrangements, it magnifies error. We are not far from the day when we shall have to modify the sage remark of John F. Kennedy that a rising tide will raise all ships. A rising tide of taxation and regulation will sink all ships if the progressive vision of Hacker and Pierson takes hold at a national level.

This article was reprinted with permission from the Hoover Institution.