Saturday, November 3, 2012

The New Hampshire Advantage: Nearly killed by Democrats?

So argues Jason Sorens at the Pileus blog:
The 2009-10 legislature, also under unified Democratic control, went on a spending and tax-hiking binge. They did this even as states like North and South Dakota were already strengthening market-friendly policies in many areas. As a result, New Hampshire will no longer be the freest state in the country — not by a long shot. ...

In the mean time, Alabama, Montana, North Dakota, Oklahoma, South Dakota, and Tennessee have all passed New Hampshire for lower taxes.
Wait a second. I wonder why that would be. Sorens had just quoted himself saying "Under unified Democratic control in 2007-8, the state saw a respectable increase in freedom. A smoking ban was enacted, but so were same-sex civil unions. Taxes, spending, and fiscal decentralization remain over a standard deviation better than average, and government debt actually went down slightly." Why the sudden about face from Democrats?

It just so happens that I was creating this graph for another project. I think it provides a clue:

Do you notice anything weird in 2009? A sudden dip caused by a financial crisis, maybe?

Given that New Hampshire was being hit by the biggest recession since the 1930's, it's understandable that legislators would increase spending (to offset a temporary increase in poverty) and raise taxes (to offset a temporary decrease in the tax base). "[S]pending and tax-hiking binge" is not the best description of those years.

But what about the other states? Didn't Alabama, Montana, North Dakota, Oklahoma, South Dakota, and Tennessee all have to deal with that as well?

Actually, not so much. Here's a helpful video of unemployment rates around the U.S.:

If you watch carefully, you can see that Montana, North Dakota and South Dakota were all less affected by the recession than New Hampshire.

So those "market-friendly policies" Sorens mentions in North and South Dakota? It all boils down to luck of the draw due to regional economic differences. They have more farms than we do, and thus don't suffer as much in financial recessions.

What about Oklahoma, Alabama and Tennessee? Alabama and Oklahoma seem to have an experience similar to New Hampshire's. Tennessee's experience looks worse. According to Sorens, Tennessee "seriously approached" New Hampshire already, so it would have taken little to push them ahead. For all we know this is random variation– regression to the mean, if you're familiar with the concept. Or perhaps Tea Party-style legislators were pushing both states in more low-tax directions. Or there could be an entirely different explanation. I don't know enough about those states to say.

In any case, the facts don't suggest the kind of orchestrated attack on economic freedom that Jason Sorens describes.

Update: A friend from Alabama tells me that the state government has resorted to spending it's trust fund, which is supposed to lower interest rates for government borrowing by guaranteeing state debts.

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