Tag Archives: William Ruger

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.

What Caused the State Budget Gaps?

I know the conventional answer: the recession. And surely there is validity to the conventional answer. The recession was the proximate cause: it sent revenues in a free fall at the same time that it put extra demands on the states’ welfare systems.

But the budget gaps were pretty different from state to state. For example, California faced a 2010 budget gap that was 65 percent of its General Fund while North Dakota faced no budget gap at all. Might differences in state policy and differences in state institutions explain the vast difference in gap size? This was the motivation for my recent working paper, State Budget Gaps and State Budget Growth.

In it, I conclude that large gaps were the result of rapid growth in per capita spending, a lack of economic freedom, and weak balanced budget rules.

To arrive at this conclusion, I performed a series of statistical tests, focusing on the size of state budget gaps, measured as a share of state general funds. In these tests, I controlled for various factors that might influence the size of a state’s gap (its population, income level, demographic makeup, etc.). After controlling for these factors, I was able to estimate the impact of certain policy choices and institutions on the size of states’ budget gaps. In particular, I focused on:

  • Budget size relative to state income,
  • Growth in per capita spending in the two decades preceding the recession,
  • Levels of economic freedom, and
  • Stringency of state balanced budget requirements.

I found that states that spent a large share of state income—and have done so for many decades—had smaller (percentage) deficits. This may be because states grow accustomed to making their budgets balance or it may be because the same factors that permit steady revenue streams also permit large budgets. But this doesn’t mean policymakers should go on spending sprees and expect smaller budget gaps. In fact, a spending spree is likely to make a state’s budget gap worse. Other factors being equal, states whose per capita spending increased the most in the two decades preceding the recession had budget gaps that were nearly 20 percentage points larger than states whose per capita spending increased the least. Since the median state’s budget gap was 23 percent of its general fund, going from the slowest to the fastest-growing state can make a huge difference.

Economic freedom (characterized by low taxes and minimal regulation) makes an even greater difference. Using Jason Sorens and William Ruger’s measure of economic freedom, I found that other factors being equal, the most-economically free states tended to have budget gaps that were 25 percentage points smaller than the least-free states.

Lastly, states with weak balanced budget requirements had larger budget gaps. While every state but Vermont is required to balance its budget, some requirements are weaker than others. It turns out that those states with weak balanced budget requirements encountered larger deficits to begin with: theirs were 8 to 10 percentage points larger than those with strong balanced budget requirements.

So what caused the budget gaps? Policy makers may be all-too-happy to pin the blame on the recession. But my research suggests that policy choices in the decades preceding the recession made a big difference. Rapid growth in per capita spending, a lack of economic freedom, and weak balanced budget rules caused the gaps. The recession just exposed these underlying problems.