New York and California are rock bottom on economic freedom — again

Dean Stansel of SMU's O’Neil Center for Global Markets and Freedom writes about California and New York scoring low on economic freedom.

By Dean Stansel

Once again, New York and California are on Santa's naughty list for their misbehavior in the realm of economic policies.

The Fraser Institute's latest annual Economic Freedom of North America (EFNA) report finds  New York ranked 50th and California 49th, based on an index of 10 variables related to government spending, taxes, and labor market freedom. California has been in the bottom five for 14 of the past 15 years. New York has been there in all 35 years of the dataset, and in last place 22 of those years. In contrast, Texas has been in the top five for 11 years in a row, and Florida has been there for 34 of the last 35 years.

 One reason this matters is that residents and businesses frequently vote with their feet in favor of economic freedom. Since the last recession ended (in 2009), population in the 10 most-free states has grown 2½ times faster than it has in the 10 least-free states. It has grown nearly 3½ times faster in just the past three years. Employment and income have also grown faster in the freer states.

Furthermore, over 230 scholarly articles by independent researchers have used the Economic Freedom data to examine economic freedom at the state level, while more than 400 articles have done the same at the national level (using its companion report that ranks countries). Most of that literature finds that economically free areas tend to experience more broadly positive outcomes, including more economic prosperity. One reason is that high levels of taxes, spending, and regulation make it harder for entrepreneurs to succeed. When businesses can't expand and hire new workers, it hurts everyone.

States that have seen the fastest economic growth, like Texas and Florida, tend to have a common focus in their economic policies: low taxes (including low or no income taxes), a fiscally conservative approach to spending, and a common-sense approach to regulation that makes it easier for entrepreneurs to be successful. States that take the opposite approach, like New York and California, tend to see much less economic prosperity and many more moving trucks leaving the state for greener pastures.

New York and California ranking at the bottom of the Economic Freedom of North America report is not an outlier. Last year's Freedom in the 50 States report, which uses an entirely different methodology, came to the exact same conclusion on economic freedom: NY 50, CA 49. This year's State Business Tax Climate Index ranked New York 49 and California 48; only New Jersey was lower.

If politicians in New York and California want their state's residents to thrive, they should follow the models of states like Texas and Florida. The first step would be to lower their income tax rates. California's are the highest in the nation and New York's are not far behind. Income taxes are particularly harmful for economic growth because they punish productive activity. It's no coincidence that Texas and Florida, to which many businesses and residents are fleeing, have no income tax at all.

New York and California also need to rein in the growth of spending. Allowing the budget to grow only as fast as population plus inflation would make a big difference. Eliminating wasteful spending on things like corporate welfare programs that put small businesses at a disadvantage would be a good place to start. Reducing excessive regulations would also help entrepreneurs be more successful, allowing them to in turn expand their businesses and hire more workers, rather than leaving the state or shrinking payrolls and laying off workers.

Taking the steps necessary to rank higher on the various measures of economic policies, like the EFNA, is a win-win for New York and California (and all other states). Politicians can take the credit for improving the economy, and residents can reap the rewards of that greater prosperity.

Sounds like a great New Year's resolution for politicians everywhere: increase economic freedom. That'll surely get you off Santa's naughty list and onto his nice list!


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