Tag Archives: Jason Sorens

New York’s Population Challenge

Last week at City Journal, Aaron Renn explored the New York region’s loss of domestic residents since 2000. He demonstrates that one of the world’s economic powerhouses is falling victim to the trend of domestic outmigration that New York state is seeing. Between 2000 and 2010, the New YOrk region lost 2 million domestic residents and they took with them billions of dollars of income. In Freedom in the 50 States, Will Ruger and Jason Sorens rank New York as the country’s least-free state based on its regulatory and tax regimes. They point to its tax burden — the highest in the nation —  and indebtedness as a factors contributing to the state losing 9-percent of its domestic population on net since 2000. Renn also posits that high tax rates are a leading cause for residents leaving New York City, many of them moving to Sun Belt states.

While the New York City region is only maintaining a positive population growth rate through births and international immigration, it’s far from the case that no one is willing to suffer its high tax rates in exchange for the city’s economic dynamism and cultural amenities. Rather the city’s exorbitant rental rates demonstrate that millions of people are willing to pay a premium to live in the region in spite of city and state policies that hamper economic development.  The vacancy rate for apartments is below 2-percent, well under many estimates for the natural vacancy rate. While lower taxes at the state and municipal levels in the New York region would reduce the flow of domestic outmigration at the margin, they would also increase competition for the city’s coveted apartments.

Are New York City’s amenities so desirable that its policymakers don’t need to worry about losing more residents to other states than they’re gaining? Its own not-so-distant history indicates that even the Big Apple is susceptible to the ravages of population loss. From 1950 to 1980, the city’s population fell from 7.9 million to 7 million, with most of that loss occurring in the 1970s. This time period corresponded with sharp increases in crime and the city’s famous default. These are predictable consequences of urban population decline, particularly in indebted cities where a decrease in tax base equates with inability to meet obligations to creditors .

While pursuing policy reforms designed to boost the state’s competitive standing to attract businesses and residents is a key piece of ensuring the city does not fall prey to population exodus, perhaps most importantly, city policymakers should examine their land use restrictions that limit would-be residents from moving to the city. Over the past decade, New York’s housing stock has grown only 5.3% in the face of the highest rental rates in the country for much of this time period. Historic preservation, density restrictions, and an onerous review process prevent the city’s housing stock from growing to meet demand.

Renn points out that most of New York’s domestic inmigration comes from midwestern cities and college towns across the country. Presumably many of these new residents are early in their careers and are on the margin of being able to afford New York rents. If New York housing were more attainable, more American young people would select the city as the starting place for their careers and it would attract more of the foreign immigrants essential to maintaining the city’s diversity and innovation. Ed Glaeser explains that those states that are successfully attracting more residents, like Texas and Georgia, are also those in which developers are able to build more housing with fewer restrictions. By allowing more housing in New York City and the surrounding areas, policymakers would both protect their tax base and help to maintain the city as a center of innovation and economic growth. In their effort to retain citizens — and particularly high-income retirees — New York City and New York state policymakers will need to revisit their punishing tax schemes. But at least as importantly they should focus on allowing those residents who would like to move to the city for economic and cultural opportunities to be able to afford to do so.

 

 

 

 

Freedom in the 50 States and Migration

In last month’s publication of Freedom in the 50 StatesWill Ruger and Jason Sorens point to net domestic migration as an indicator that Americans demonstrate their preferences for more libertarian states by where they choose to live. They explain, ”

In each case, the bivariate relationship between freedom and migration is positive. However, it is strongest for fiscal freedom and weakest for personal freedom.”

The authors go on to use regression analysis to control for some of the other variables that likely cause people to move from one state to another:

We also try a regression specification including state cost of living from 2000, as estimated by political scientists William D. Berry, Richard C. Fording and Russell L. Hanson.7 This is an index variable linked to a value of 10 for the national average in 2007, the last date for which a value is available. There is some concern that this variable is endogenous to freedom. For instance, it correlates with the Wharton land-use regulation variable at r = 0.67, implying that strict land-use regulation drives up the cost of living. It also correlates with fiscal freedom at −0.35, perhaps implying that taxation can also drive up cost of living.

Finally, we also try including growth in personal income from 2000 to 2007 from the Bureau of Economic Analysis, adjusted for change in state cost of living from Berry, Fording, and Hanson. This variable is even more clearly endogenous to economic freedom, as well as to migration (more workers means more personal income). Nevertheless, we want to put the hypothesis that freedom attracts people to the strictest reasonable tests.

With this more in-depth analysis, the authors find that the three types of freedom they study — fiscal, regulatory, and personal — are all positively associated with net migration (PDF p. 97). In particular, the relationship between land use regulation and migration strikes me as an interesting one. States with the strictest land use regulations prevent in-migration by disallowing new housing development. According to Census data, New York City grew by about 2-percent between 2000 to 2010, including natural growth and foreign immigration. This is a significant slowdown from the 1990s. While the Big Apple wouldn’t be expected to attract new residents through libertarian policies, it does offer many economic and cultural opportunities that people might value. Ed Glaeser explains that by preventing new development, city- and state-level restrictions have prevented more people from being able to move to New York City:

The high prices that persist in New York City suggest that the demand for city living isn’t falling. Case-Shiller data, which captures the metropolitan area rather than the city, shows that the New York area’s prices have risen by 67 percent since 2000 (32 percent in real terms), more than any metropolitan area in the sample except Los Angeles.

But the combination of economic strength and high prices need not lead to population growth if an area doesn’t build many more units. In that case, high housing demand leads only to higher prices — not more people.

[…]

The Bloomberg administration has worked hard to allow more building, but the recent Census numbers seem to suggest that a combination of slow growth and continuing high prices implies that New York’s barriers to building, such as a complex zoning code and ever more Historic Preservation Districts, are still shutting out families that would like to move to the city.

This is just one city-level example, but New York City demonstrates that locations with the strictest land use regulations are not just discouraging in-migration with policies that limit residents’ freedom, they are also preventing people from moving to their jurisdictions by restricting growth in housing stock.

Third Edition of Freedom in the 50 States

Today the Mercatus Center released the third edition of Freedom in the 50 States by Will Ruger and Jason Sorens. In this new edition, the authors score states on over 200 policy variables. Additionally, they have collected data from 2001 to measure how states’ freedom rankings have changed over the past decade. While several organizations publish state freedom rankingsFreedom in the 50 States is the only one that measures both economic and personal freedoms.

Ruger and Sorens have implemented a new methodology for measuring freedom. While previously the authors developed a subjective weighting system in which they sought to determine how significantly policies limited the freedom of how many people, in this edition they have use a victim-cost method, assigning a dollar value to each variable that restricts freedom measuring the cost of restricting freedom for potential victims. The authors’ cost calculations are designed to measure the value of the states’ freedom for the average resident. Since individuals measure the cost of policies differently, readers can put their own price on each freedom variable on the website to find the states that best match their subjective policy preference.

In addition to an overall freedom ranking, Freedom in the 50 States includes a breakdown of states’ Fiscal Policy Ranking, Regulatory Ranking, and Personal Freedom Ranking. On the overall freedom ranking, North Dakota comes in first followed by South Dakota, Tennessee, New Hampshire, and Oklahoma.  At the bottom of the ranking, New York ranks worst by a significant margin, with rent control and burdensome insurance regulations dragging down its regulatory freedom score. New York is behind California at 49th, then New Jersey, Hawaii, and Rhode Island.

The authors note that residents respond to the costs of freedom-reducing policies by voting with their feet. Between 2000 and 2011, New York lost 9% of its population to out-migration. In addition to all types of freedom being associated with domestic migration, the authors find that regulatory freedom in particular is associated with states’ growth in personal income. They conclude:

Freedom is not the only determinant of personal satisfaction and fulfillment, but as our analysis of migration patterns shows, it makes a tangible difference for people’s decisions about where to live. Moreover, we fully expect people in the freer states to develop and benefit from the kinds of institutions (such as symphonies and museums) and amenities (such as better restaurants and cultural attractions) seen in some of the older cities on the coasts.

[…]

These things take time, but the same kind of dynamic freedom enjoyed in Chicago or New York in the 19th century — that led to their rise — might propel places in the middle of the country to be a bit more hip to those with urbane tastes.

New Research on Freedom and Entrepreneurship

Here are a few findings from my recent paper with Joshua Hall and John Pulito titled “Freedom and Entrepreneurship: New Evidence from the 50 States”

  • Humans are entrepreneurial by nature. We desire to improve our material well-being, which drives us to innovate, often through new business creation. Despite the ever-present tendency toward entrepreneurship, public policy can have a significant impact on the incentives for entrepreneurial activity. Economists often call these incentives the “rules of the game.”
  • When making the decision to take on a new business, entrepreneurs must weigh the risks against the potential payout. Policy makers have the power to raise the cost of starting a new business by raising taxes or increasing regulatory costs, and they have the power to lower the cost by pursuing stable and consistent public policy initiatives consistent with economic freedom, such as low, broad-based taxes and prudent regulation.
  • Previous research has demonstrated that “rules of the game” favoring lower taxes and limited regulation—as measured by economic freedom indices—encourage entrepreneurship. Studies have found similar results both in comparisons across the states and in comparisons across countries. “Freedom and Entrepreneurship: New Evidence from the 50 States” uses an index of freedom, the Mercatus Center at George Mason University’s Freedom in the 50 States by Will Ruger and Jason Sorens. The study confirms earlier results: economic freedom permits higher levels of entrepreneurship, as measured by the creation of new businesses.
  • Freedom in the 50 States includes measures of both economic and personal freedom. Personal freedom had not previously been studied as a factor in the entrepreneurship level, and this study found that it did not in fact have a significant impact on business creation. Only economic freedom appears to have a positive impact on entrepreneurship, although personal freedom is of course important for other reasons.
  • This additional evidence that economic freedom is correlated with entrepreneurship should encourage policy makers to pursue changes that increase their states’ economic freedom. The evidence suggests that by increasing economic freedom, policy makers have significant power to improve their states’ climate for new business creation. For example, if policy makers in Ohio— which currently ranks 32nd in the Freedom in the 50 States’ Economic Freedom index—increased the state’s ranking to the level of Nevada, which ranks 23rd, Ohio residents could expect to see a 33 percent increase in new business creation. Lower tax rates, lower regulatory burdens, and lower barriers to trade can all encourage citizens to pursue their drive toward entrepreneurship.

Click here to read the paper in its entirety.

Economic Freedom In Decline

Today, the Fraser Institute released the 2011 version of the Economic Freedom of the World report. Authored by James Gwartney of Florida State University, Robert Lawson of Southern Methodist University, and Joshua Hall of Beloit College, the index is an annual measure of economic freedom. Drawing on 42 data points gathered from each of 141 countries, it assigns each nation an economic freedom score. The score reflects the degree to which citizens in the nation enjoy economic freedom as characterized by “personal choice, voluntary exchange coordinated by markets, freedom to enter and compete in markets, and protection of persons and their property from aggression by others.”

Chapter 3 of the new report features an essay by Jean-Pierre Chauffour, lead economist of the World Bank’s Middle East and North Africa Region. In Figure 3.1, reproduced below, Chauffour shows the relationship between economic freedom and the log of per capita income (adjusting for purchasing power parity).

But economic freedom seems to be about more than just per capita income. Readers of Neighborhood Effects know that scores of peer-reviewed studies have examined the relationship between economic freedom and all sorts of measures of well being. The overwhelming evidence is that economic freedom is positively related to things humans like (per capita income of the poor, life expectancy, access to clean water, etc.) and negative related to things humans don’t like (poverty, child labor, etc.). Some of the most sophisticated studies have even tried to disentangle cause and effect.

So where do we stand? The data are lagged, so this year’s report now calculates economic freedom through 2009. There are some bright spots. For example:

The chain-linked summary ratings of Uganda, Zambia, Nicaragua, Albania, and Peru have improved by three or more points since 1990.

There is also some bad news:

 ….In contrast, the summary ratings of Venezuela, Zimbabwe, United States, and Malaysia fell by eight tenths of a point or more between 1990 and 2009, causing their rankings to slip.

In fact, those countries that slipped the most since 2000 were: Argentina, Iceland, Ireland, the United States, and Venezuela.

To see just how far the U.S. has fallen, consider the graph below. The first phase shows the U.S. (chain-linked) economic freedom score from 1970 through 2000. It is slow and steady progress the whole way. The second phase shows the U.S. score from 2000 onward. It is a dramatic and precipitous drop. Notice, by the way, that the ascendant periods lasts through three presidents of two different parties. The descent also seems to have persisted irrespective of the party in office. It seems that the policies that impact economic freedom are not strongly related to partisanship.

Mercatus has its own state-level measure of economic freedom, developed by Jason Sorens of the University of Buffalo (SUNY) and William Ruger of Texas State University.

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Addendum: Here is Arnold Kling on the report. Here is David Henderson. Here is Mark Steyn. Here is Robert Lawson.

Do Politicians Regulate When They Can’t Spend?

That is the question Noel Johnson, Steven Yamarik, and I examine in our latest Mercatus Working Paper: Pick Your Poison.

Relying on data from 48 states covering the years 1970 through 2009, we look at the relationship between fiscal rules, fiscal outcomes, and regulatory outcomes.  The specific fiscal rule that we examine is a so-called “no-carry” rule, present in about half of the states.  It forbids legislatures from carrying a deficit over from one year to the next.  A number of previous studies have examined the impact of these rules (some of which I have blogged on in the past) and generally find that they restrain spending and taxation. We ask whether politicians constrained by these rules attempt to attract votes by engaging in active regulatory policy instead.  We tackle this question in three stages:

1.      First, we quantify the different spending and taxing outcomes that obtain when one or the other party gains control of both the executive and the legislative branches of state government.  After controlling for a number of other factors that have been shown to impact fiscal outcomes, we find that Democrats tend to raise individual income taxes by about $66 per capita when they are in control, while Republicans tend to lower overall taxes by $265 per capita and income taxes by $99 per capita.  Republicans also reduce total spending by about $353 per capita, education spending by about $135 per capita, and welfare spending by about $113 per capita (all figures are in 2009 dollars).

2.      Next, we show that when states have rules that restrict the legislature’s ability to carry a deficit into the next year, most of these partisan differences in fiscal policy disappear.  (There are exceptions, however; Democrats continue to increase individual income taxes and Republicans continue to reduce total taxation).

3.      Lastly, we look at the impact of these fiscal rules on regulatory behavior and find that they actually seem to be associated with more partisan regulatory outcomes.  In particular, Democrats appear to be more-likely to raise the minimum wage when no-carry rules restrict their ability to spend and tax more.  They are also less-likely to adopt right-to-work statutes (i.e., they are more-likely to favor a closed union shop than they otherwise would be).  Among Republicans, fiscal no-carry provisions tend to enhance their likelihood of adopting right-to-work statutes outlawing closed union shops.  We corroborate these results using Jason Sorens’s and William Ruger’s measure of paternalistic regulations.  These are regulations that are not easily justified on economic grounds.  They include things such as home schooling regulations, alcohol regulations, marriage and civil union laws, gun laws, and marijuana laws.  We find that, here too, the no-carry provisions seem to make Democrats more-likely to regulate and Republicans less-likely to regulate.

As we write in the paper:

Our results suggest political actors will use whatever policy instruments are available to them to achieve their ends.  If they are constrained along one dimension, they will substitute into more-partisan activities along the other dimension.

The implication for those who are trying to restrain spending is this: Institutions such as strict balanced budget requirements can be useful tools to restrain the fiscal size of government, but they may lead to an expansion in the regulatory state.

Thanks to my excellent coauthors, I learned a lot in researching and writing this piece.  It is still a working paper, so we would be grateful for any comments readers might have.