Surprise! ‘Pro-business’ policies hurt state economic growth

Conservative economic pundits just love to justify “business-friendly” policies to state governments as keys to job growth, which after all is the whole ballgame in economic policy-making.

As Menzie Chinn of the University of Wisconsin has now shown, the problem is that pro-business policies don’t really contribute to economic growth. They just make the rich richer, which is not the same thing at all.

The big cheese in the “business-friendly” policy field is the American Legislative Exchange Council, a nonprofit think tank funded by big business and the Koch brothers (among others), which periodically publishes its ALEC-Laffer State Economic Index. The Laffer is Art Laffer, that mainstay of conservative economics. The latest edition of the index is out this year.

The index measures 15 state policy “variables,” such as top marginal income tax rates, property taxes, public employees per capita, state minimum wage, right-to-work law, and whether there’s an estate tax. You can guess what a state has to do to rank high in all these factors and therefore shine in the index--low taxes, small government, anti-union policies, no estate tax are virtual requirements.

But does a high ALEC ranking translate into high growth? That’s the question Chinn asked. He started by measuring private nonfarm job growth in four states--California, Wisconsin, Kansas, and Minnesota--dating to January 2011, when all four got new governors. Scott Walker of Wisconsin and Sam Brownback of Kansas were extremely ALEC-friendly, Jerry Brown of California and Mark Dayton of Minnesota were not.

Here’s what he found, in a nutshell: “Kansas and Wisconsin, ranked 15th and 17th in terms of the ALEC-Laffer Economic Outlook Rankings, are doing equally badly relative to US employment growth. In contrast, Minnesota (ranked 46th) is outperforming the United States and those two states...What about California? It is ranked 47th by ALEC-Laffer, and yet is doing the best in terms of employment amongst the four states.” Chinn’s graph of the four states’ job growth accompanies this post.

As he observes, the most radical pro-ALEC governor is Walker, whose tax-cutting and anti-union zeal has propelled him into the race for the GOP Presidential nomination for 2016. His state’s economic performance has been dismal, as ALEC’s own figures show. Walker predicted that his policies would result in job growth of 250,000; so far he’s fallen short by more than 94,000.

What’s worst about these ALEC policies, Chinn reports, is that the relentless budget-cutting they require leave crucial state services, particularly education, gasping for breath. That’s a formula for long-term decline, not growth.

Indeed, when Chinn mapped the ALEC rankings for all 50 states against their economic growth, he found that, if anything, a higher index score correlates with a worse economic performance. That won’t come as a surprise to anyone who has followed the ALEC follies over time: The Iowa Policy Project found the same negative correlation in 2012.

Say this for the ALEC-Laffer Index: It’s a consistently accurate predictor of economic growth, but in a bad way. Any state’s voters whose governors and legislators follow the ALEC path need to ask the eternal question: Whose interests are they serving?